Big banks and big fees go hand in hand, according to the annual bank fee survey released by the Federal Reserve last week. The survey of 1,000 financial institutions found that large banks with branches in more than one state charged more for services than smaller single-state banks.

The country’s large commercial banks have turned to non-interest income, including fees for financial planning, insurance sales and stock brokerages, to boost the bottom line. FleetBoston Financial’s non-interest income rose to 55 percent of the company’s total revenue in the second quarter of this year, up from 51 percent in the same quarter of 1999. The $181.3 billion-asset company completed its acquisition of BankBoston in October 1999.

The majority of banks retain the business model of loaning out deposits and profiting from the interest margin spread.

“The typical bank at this stage still gets 80 percent or more of its income from the traditional spread,” said Arnold Danielson, chairman of Danielson Assoc. in Rockville, Md. With almost 60 percent of its revenue from non-interest income, Fleet draws more income from this area than BankAmerica and FirstUnion, he said.

The majority of Massachusetts banks have a much smaller percentage of non-interest income and rely primarily on the net interest margin spread to stay in the black.

“I think that most of the community banks are not focusing on fee income,” said John J. McCarthy, chairman of the Massachusetts Bankers Association. “They’re still making an honest effort to make their money on the net interest margin spread.”

New laws allowing banks to enter other businesses like insurance sales and brokerage services have led some banks to enter ventures and derive fee income. But small community institutions would probably not generate much fee income from such businesses because the volume would be too low, McCarthy said.

“They’re also sensitive to making sure they have affordable products for their constituency,” McCarthy said.

According to the Federal Reserve study, the number of institutions offering free checking has decreased. Only 10.8 percent of institutions polled offered free checking in 1999, down from 17.3 percent the year before.

At the same time, more savings and loans offered free checking accounts. In 1999, 30 percent of savings and loans offered the product, up from 23.4 percent in 1998.

The Federal Reserve report showed that larger banks charge more for routine fees like bounced-check fees and stop-payment orders. The group of single-state banks charged an average of $17.04 for a bounced check, while the larger banks charged an average of $21.80. While the smaller banks charged an average of $14.50 for stop-payment orders, their larger counterparts charged an average of $20.10.

Community banks often market their lower fee options, but the increased cost of doing business may drive them to raise fees as well. In the 1990s, deposits grew by 2 percent and portfolio loans grew by 4 to 5 percent, Danielson said.

“Unless you’re going to somehow run ahead of the crowd, which isn’t easy to do, you have to go into other businesses or accept the low growth rate,” Danielson said. “To exist five years from now you have to get at least 30 or 40 percent of revenue from other places.”

Fee income
Citizens Bank is a good example. The Providence, R.I.-based bank has undergone rapid growth in the last year, posting assets of $30.2 billion at the end of June compared to $19.8 billion at the same time in 1999. During the last year, Citizens Bank of Massachusetts acquired USTrust of Boston and the banking business of State Street Bank & Trust Co. It operates in Rhode Island, Massachusetts, Connecticut and New Hampshire.

The bank’s non-interest income jumped 67 percent, by $70.6 million, during the first half of this year. The increase is tied to the acquisition of USTrust and State Street, as well as strong growth in international and cash management revenue and other fee-based businesses. Citizens reported operating earnings of $136.2 million for the six months ended June 30, up 12 percent from $121.5 million for the same period of 1999.

Banknorth Group of Portland, Maine operates banks in Maine, Massachusetts, New Hampshire, Vermont and New York. The holding company’s subsidiaries include an insurance company, an investment management firm, and a trust and money management company. Banknorth, formerly Peoples Heritage Financial Group, had assets of $18.5 billion at the end of the second quarter. It recorded operating earnings of $57.7 million.

Banknorth’s non-interest income increased 12 percent in the second quarter, led by a 22 percent rise in customer service fees. The bank’s non-interest income, excluding securities losses, increased to 27 percent of total income in the quarter, compared to 25 percent the year before. Banknorth’s non-interest income is mainly composed of fee income.

Banknorth saw loan growth and improved asset quality in the second quarter, said Chairman, President and Chief Executive Officer William J. Ryan.

“Low cost demand deposits, primarily checking accounts, also rose sharply,” Ryan said.

FirstFed America Bancorp of Swansea has branches in southeastern Massachusetts and Rhode Island. In the second quarter of 2000, FirstFed reported that non-interest income increased 37.9 percent to $2 million from April 1 to June 30, from $1.4 million the year before. But instead of receiving the income from fees, most of the increase came from a $492,000 sale of mortgage loans. FirstFed’s assets totaled $1.6 billion in the second quarter.

By contrast, Somerville-based Central Bancorp received most of its gains in net interest income. The co-operative bank has eight branches in Greater Boston. Central Bancorp’s net income jumped from $479,000 in the second quarter of 1999 to $765,000 this year, primarily tied to an increase in interest income from mortgage loans.

“We’re very pleased with the improved performance during the first quarter of this fiscal year, especially in regard to the increased mortgage lending activity,” said President and Chief Executive Officer John D. Doherty.

McCarthy, president of the $85 million-asset Wakefield Co-operative Bank, predicts that even banks like his will come to rely more on fee income in the future as the cost of business increases. Regulation and small interest rate margin make it harder to attain the profitability banks achieved in the past, he said.

Ipswich Bank, a state-chartered stock bank with $295 million in assets and eight branches, saw its retail banking fees rise in the second quarter as it launched a marketing campaign to target customers impacted by bank mergers. More than 1,200 new checking accounts were opened in the second quarter, bringing retail banking fees to $422,000 compared to $378,000 in the second quarter of 1999.

However, the gain in retail banking fees was offset in a drop in mortgage banking revenues, and the bank’s non-interest income fell to $479,000 in the second quarter from $666,000 the year before.

Although the Federal Reserve study shows that some small banks are resisting raising fees, McCarthy said raising fees is inevitable as customers demand more convenience from their banks.

“It’s really meant to pass through some of that cost that we incur to offer enhanced products and better services,” he said.