INCOME PICTURE: Will the New Banking Law Change the Traditional Mix?

Article excerpt

The good news on the income front in this year's survey is that community banks' noninterest income, as a percentage of total income, is generally as good as or better than it was in last year's survey. Exhibit 39 shows both the national trend and the trend by various bank categories.

While performance was strong, indications are that there is still much room for enhancement. Most banks don't have a target for the ratio of noninterest income to total revenue. And, as in the case of the efficiency ratio, where there are targets, they are often missed.

The larger the hank's asset size, the higher actual performance, measured by this ratio, reached. The national average came to 15.6%, with the ratio by size coming in as follows: under $100 million, 14%; $100-$200 million, 15.1%; and over $200 million, 19.4%.

Community banks continued to tune their product mixes. Notable among the rankings in Exhibit 41, opposite page, top, are those of insurance and brokerage products. Next year's survey, with banks freed of many impediments to expansion, will likely show still more aggressive changes.

Will banks grow their own or go the acquisition route?

As Exhibit 40, this page, shows, there has been strong interest in partnering with nonbanking firms over the last year, prior to passage of the new legislation. Nearly one out of four banks had started new partnerships this year. Partnerships with banks, on the other hand, were formed much less frequently last year, and typically involved more traditional products. Indeed, business loans dominated the bank-with-bank partnership mix.

As Exhibit 42 on the bottom of this page shows, last year community banks weren't major buyers of anything. Other banks' branches dominated this collection, with acquisitions of such nontraditional operations as investment advisors, broker-dealers, and insurance agencies representing relatively infrequent deals.

Whether the new banking law and the resulting regulations will change this pattern is something for next year's survey.

                   How did 1999 noninterest income, as a
                 percent of total income, compare to 1998?
                Under $100 million $101-$200 million $201 million & up
Lower     18.2%       15.7%              23.7%             18.1%
Higher    51.4%       48.4%              48.9%             61.9%
Unchanged 30.4%       85.9%              27.5%             19.9%
The average ratio of noninterest income to total revenue was 15.6%. Only
18% of community banks set a target for this ratio and of these,
85% missed it. …