1 Critical Lesson from Wells Fargo & Company (WFC) and U.S. Bancorp (USB)’s Earnings

This, in turn, is the crux of my point — that is, despite falling NIMs, both of these lenders reported record earnings. How could this be so? The answer, to get back to the reason fees matter, is because noninterest income effectively served as a hedge. As borrowers refinanced into lower yielding loans, the fees they paid to do so offset the deficit. There’s revenue either way, in other words. The only difference is where it shows up on the income statement — up top, as net interest income, or down below, as noninterest income.

With this in mind, one of the things you should always look for in a bank is if its revenue sources are evenly distributed between those that are positively affected by declining interest rates and those that are not. Wells Fargo fits this category, as does US Bancorp, as does New York Community Bank, which charges prepayment penalties to hedge its portfolio of multifamily mortgages. Indeed, this is one of the main reasons I’m such a huge fan of the latter, as it’s effectively entrenched its operations from attacks from all directions.

Bank fees get a bad wrap
At the end of the day, saying that bank fees are a good thing won’t win you any friends. However, if you invest in banks, it’s critical to understand their central importance to a bank’s business model. Indeed, I would go so far as to say that you should never invest in a bank that doesn’t generate roughly half of its revenue from noninterest dependent sources. That’s a lesson you can take to the bank.

The article 1 Critical Lesson from Wells Fargo and (NYSE:WFC) US Bancorp’s Earnings originally appeared on Fool.com.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.