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Noninterest income in the Ninth District

The roles of community and credit card banks

January 1, 2000


Ron J. Feldman Assistant Vice President
Jason Schmidt Senior Financial Economist
Noninterest income in the Ninth District

As detailed in the last fedgazette, noninterest income moved from a supporting to a primary source of bank revenue on a national basis. Specifically, the share of net revenue attributable to noninterest income has grown from 20 percent to 42 percent over the last 20 years. This trend not only helped buoy bank profits, but also offered banks the ability to diversify their sources of revenue and thus potentially reduce risk (go to and click on the October 1999 fedgazette for "Noninterest income: A potential for profits, risk reduction and some exaggerated claims").

An open question concerns the role of noninterest income in the Ninth District. Our analysis indicates that a few credit card banks play a disproportionate role in noninterest income generation—especially in the Ninth District, but also for the nation. In fact, eliminating these 13 banks from our Ninth District population of approximately 920 banks reveals less impressive use of noninterest income for the rest of the primarily small banks in the district. In part, this outcome reflects strong loan growth in the district. At the same time, the reliance of these banks on income from lending increases their exposure to a downturn in the profitability of traditional lending.

Growth of noninterest income in the Ninth District mirrors the nation

Overall, banks within the Ninth District have experienced similar changes to the rest of the nation with respect to the growth of noninterest income over the past 30 years. During the 1960s and 1970s, district banks had average interest income and noninterest income growth between 10 percent and 13 percent a year on average. Since then growth rates have diverged, just as they did for the rest of the nation, with noninterest income accelerating at roughly twice the rate of net interest income (See graph).

Chart: Average Growth Rate per Decade

Noninterest income—not the same at all banks

A closer inspection shows the higher levels of noninterest income have not been shared equally by all banks across the district. A handful of institutions in South Dakota that specialize in credit card lending have been the primary engines of growth for noninterest income in the Ninth District.

Credit card banks

A select number of banks in the district have focused their business activities primarily on credit card lending (see the October 1997 fedgazette for a general discussion of these banks in "Credit card banking in the Ninth District"). We find that these credit card banks produce a disproportionate share of the total amount of noninterest income. Specifically, there are 13 such banks in the Ninth District and while their combined assets account for only 9 percent of assets for all banks, they generated roughly half of the $5.1 billion of Ninth District noninterest income produced through the first three quarters of 1999 (See graph). This same type of concentration exists for the nation but not on the same level as in the district. The other 59 credit card banks in the country accounted for 4 percent of banking assets and 21 percent of the noninterest income.

Chart: Credit Card Bank Share of Noninterest Income

Noncredit card banks locally use less noninterest income

The effect of credit card banks on noninterest income production within the Ninth District is quite pronounced. Analyzing the percentage of net revenue generated from noninterest sources for Ninth District banks without including credit card banks leads to a substantial drop in the figures (from 42 percent to 30 percent, see graph ). By way of comparison, eliminating credit card banks at the national level results in slightly lower noninterest income revenue shares for the remaining commercial, noncredit card banks (from 42 percent to 39 percent).

Chart: Noninterest Income Share of Net Revenue

Segmenting out credit card banks also provides a different perspective on noninterest income performance for the majority of banks in the district. While noninterest income has still increased over the last 15 years at local banks, it has done so at a much slower rate, as well as having fallen significantly below the national average.

The relatively low use of noninterest income for noncredit card banks could reflect the Ninth District's predominance of smaller, community banks. As described in the previous fedgazette, small banks (those with assets less than $100 million) have registered comparatively lower levels of noninterest income. For example, small banks within the Ninth District rely on noninterest income for only 15 percent of their revenue, while large banks depend on noninterest income for over 30 percent of their revenue. Moreover, local small banks have witnessed very little change in their ability to generate noninterest income over the past two decades even when compared to other small banks. While small banks nationwide have seen noninterest income steadily rise during this period from 15 percent of revenue to 24 percent, small banks in the district have experienced almost no growth in their noninterest income levels.

The difficulty that local small banks face in generating noninterest income could reflect a limited ability to raise revenue from new fee-oriented services. Indeed, noninterest income at small banks locally is still composed primarily of service charges on deposit accounts as opposed to fee income from activities like the sale of insurance or annuities. While fee income has risen over the past decade at Ninth District small banks, it has advanced much faster in the rest of the nation.

The strong loan growth in the district is one reason Ninth District banks show less use of noninterest income when measured as a percent of revenue. Over the last five years total loans have grown well over twice the national average. As a result, interest income has managed to largely keep pace with the advances in noninterest income during this period. This trend may reflect the relatively higher reliance of banks within the Ninth District on small business and agricultural loans in conjunction with strong loan demand.