Financial organizations understand the requirement to develop fee revenue sources to supplement net interest revenue. This month we look at whether the existence of diversified fee income sources can be linked to high performing institutions.
Previously, we analyzed the clear differentiation between two populations of financial institutions reporting higher than 2.25% return on assets pretax, versus a second population reporting less than 1.00% return on assets pre-tax. Twenty eight organizations of $2B-$20B in Total Assets were chosen and split evenly between the two income performance metrics using FDIC Call Reporting from December 31, 2014. Our analysis concluded that both groups demonstrated a surprisingly similar net interest margin, even though the financial performance of the higher earning group more than doubled the return reported from the lower group.
Non-Interest Income diversification has been a historic differentiator between organizations. Those that had robust Trust organizations, Mortgage or other subsidiaries or specialized business lines often held a profit differential over organizations without such areas of specialization. Our initial thesis was that income diversification, or lack thereof, would help explain the earnings differential between these two groups of institutions.