How effective has your bank been at generating fee income? The American Bankers Association's latest study on community bank competitiveness provides some useful benchmarks.

Some 61% of the banks surveyed reported that noninterest income, as a percentage of total revenue, is greater than it was three years ago. Only 14% of the banks reported that their noninterest income share had fallen during the period.

Interestingly, banks are building fee businesses at a time when the largest traditional source of noninterest income - fees from deposit accounts - is waning. Last year, fees from deposit accounts comprised 50.5% of noninterest income, down 7 percentage points from 1997.

The study, performed last year and limited to banks with less than $1 billion of assets, suggests that the drop may be due in part to reduced reliance on deposits as a funding source.

By contrast, virtually all other fee categories - from mortgage servicing and personal trust to investment and retail insurance - grew over the past year. Mortgages, for instance, jumped to nearly 20% of noninterest income, from about 15% a year earlier. (See chart.) That is an encouraging sign at a time when small banks are being squeezed on their loan margins.

The challenge ahead, say bankers, is to come up with the right formula for competing effectively for insurance and investment fees against large nonbanks.

Ultimately, says Joe Williams, chief executive officer with American Heritage Bank, El Reno, Okla., small banks may want to integrate these new products within the bank sales structure. "But until that day comes, there will be mistakes made thinking you can compete in those services using untrained bank employees," he says.

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