Roger L. Fitzsimonds, the chairman of Firstar Corp., remembers when fee income didn't count for much in commercial banking.

In 1964, when Capt. Fitzsimonds left the Army to join the management training program at First Wisconsin National Bank, Lyndon Johnson was President, "I Want To Hold Your Hand" was a hit song, and banking's most important benchmark was the spread between borrowing and lending.

"It was a whole different world back then," mused Mr. Fitzsimonds, referring to a year when noninterest income composed 17% of the bank industry's revenues.

How times have changed. In 1996, 36.5% of banking industry revenues came from noninterest sources, mainly in the form of much-coveted fees, according to the Federal Deposit Insurance Corp.

Some institutions that have emphasized certain fee-based specialties, such as Bankers Trust New York Corp., J.P. Morgan & Co., and Mellon Bank Corp., get more than 60% of their revenues that way.

Fees, once seen as a dependable offset to the cyclical nature of lending without requiring too much of a capital commitment, have emerged as a sizable component of business, part of the industry's core.

This is particularly true at larger banks, which benefit from being a wider variety of fee-oriented businesses. At those with less than $100 million of assets, 20% of income is noninterest.

When Mr. Fitzsimonds started his apprenticeship 33 years ago, most fees were derived from traditional products such as trust services and checking and savings accounts.

But today they come from a much wider range of businesses, most of which have flowered since the Milwaukee-based banker entered the industry: mortgage servicing, credit cards, securities underwriting, back-office processing, mutual fund management, and securities brokerage.

Fee growth drove better-than-expected earnings results in the first quarter this year at several leading banking companies, including Norwest Corp., First Chicago NBD Corp., and SunTrust Banks Inc.

At Firstar, 10%-plus fee growth from trust, investment management, and credit cards in the first quarter easily outshined a 1.5% jump in net interest income.

Many bankers expect fee income will continue to outstrip interest growth for years to come, providing an increasing share of "stable" earnings that might help elevate share prices.

Richard M. Kovacevich, chairman of Norwest in Minneapolis, said income is income-he doesn't have a particular bias toward one kind. But his company, and much of the industry, is evolving in ways that should make fees increasingly important.

"Though we try to grow everything, fees will increase as a total percentage of our revenue base," Mr. Kovacevich said recently. "I believe that the marketplace today is a more fee-based system than it is interest rate driven. Securitization and mortgage servicing are almost 100% fee businesses."

Added L. Phillip Humann, president of Atlanta-based SunTrust, "Fee income clearly has a life of its own."

Bankers and consultants offer plenty of reasons why the fee component will get bigger. For one, legal barriers that historically prevented banks from businesses such as securities underwriting and insurance sales are falling by the wayside.

"Look at what Bankers Trust has done by buying Alex. Brown & Sons," said Charles Forbes, a principal with Earnings Performance Group, a Short Hills, N.J.-based consulting firm. "It's sure to drive more fee income and Bankers Trust wouldn't have been allowed to do this a year ago."

At the same time, fee-oriented businesses such as trust and mutual fund management are being fueled by the retirement assets of the Baby Boom generation.

And banks are looking to create new fee streams. Though Pittsburgh-based Mellon is a leader in the mutual fund and money management business, Steven G. Elliott, chief financial officer, is eyeing a new area: pension benefits design and administration.

Recently, Mellon announced it was acquiring Buck Consultants, a Connecticut-based pension administrator for major corporations.

"One of the key growth areas is total benefits outsourcing," says Mr. Elliott. "If you are the human resource director of a large corporation, you are looking to outsource this business."

While First Chicago NBD generates most of its fees from credit cards, trust and money management, and deposit accounts, the bank sees insurance sales as a major growth area for the bank.

"In 1996 we had $54 million in insurance income," said a spokesman. "By 2000 we would like to have $200 million."

Though fees are clearly where the growth is, some bankers and analysts are dubious of all the breathless discussion about them. They caution that not all fees are created equal.

"Mortgage banking is an example of a business that generates fee income but it doesn't generate higher multiples for the stock," said Thomas Brown, an analyst with Donaldson, Lufkin & Jenrette.

On the other hand, Keefe, Bruyette & Woods analyst David Berry said processing businesses are "characterized by relationships that are hard to budge" and therefore provide more stable and valuable earnings streams.

Mellon's stock price is a lesson in the limitations of fee income as a driver of shareholder value. While the bank is a fee behemoth, its shares trade at 16.4 times trailing earnings-on par with the S&P regional bank index-rather than ahead of it.

"The market gets concerns if it thinks a company paid too much for its fee income," said Mr. Brown, referring to Mellon's controversial acquisition of Dreyfus Corp.

Moreover, said William Spinard, a consultant with Price Waterhouse, "for whatever reason, the market puts banks in a very narrow P/E range whether they are fee-oriented or not."

But a Mellon spokesman pointed out that his bank's multiple has climbed from 12 times earnings in December 1995, signaling that "the market has recognized a change in our business mix."

Terrence A. Larsen, chairman of Philadelphia-based CoreStates Financial Corp., has become less enamored of fees over the years.

"We go where we think we can provide value and make money," he said. "Some years it will be fee businesses and some years it won't be."

While fee-income proponents point to the fact that these businesses generally draw far less capital than loans do per dollar of income, Mr. Larsen asserted that "capital isn't a scarce commodity today, and we don't see it being scarce in the foreseeable future."

Indeed, Furash & Co. research last year on bank profitability showed that the median proportion of noninterest income to total revenue among its list of top-performing banks of all sizes was actually lower than for the entire universe of commercial banks.

Said Mr. Spinard, who helped prepare when he was a Furash consultant: "The best institutions are able to locate high-margin, at times high-risk, loan niches to score their returns."

But that fact isn't keeping bankers like Mr. Fitzsimonds and other bankers from beating the drum for more fees.

"There is a stability of income that we like," he said.

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