How To Boost The Bottom Line While Really Trying

Interest on loans drive the income train, but other revenue streams are steaming along.

 
 

Top-Level Takeaways

  • Lending dominates the revenue stream and is growing more diverse.
  • Fees can contribute to a credit union's revenue and still be fair to members.

Income at America’s credit unions form a kind of four-legged stool, with one of the legs a lot longer than the others.

Lending accounts for nearly two-thirds of the movement’s income. Add in investments, and net interest income totals 72.8% of the movement’s $5.5 billion in annualized revenue. Meanwhile, non-interest income ― fee income plus other operating income ― currently accounts for 27.3% of the take.

But this balance might soon be shifting. 

“The key to growing revenue and profitability is to diversify non-interest income,” says Tim Smith, CFO at Workers’ Credit Union ($1.6B, Fitchburg, MA). “No doubt our bank and non-bank competitors will continue to squeeze net interest margins, and regulations will continue to whittle away at our fees. Diversification is really the only defense.”

Smith says NII at Workers' comes from six or seven significant sources and that it’s hard to pick one or two as the most important. Here’s what others say about their most important revenue streams and how to enhance them.

In total, U.S. credit unions reported $5,487,551 in income in the second quarter of 2017.

Net Loan Income

“Everything we do here at the credit union is based around the fact we need to loan money to members,” says Faye Crocker, CEO at HopeSouth Federal Credit Union ($19.7M, Abbeville, SC). “That’s our core purpose. If we’re not doing that, I’m not sure why we’re doing anything.”

HopeSouth has an average loan yield of 10.35% ― more than twice the national average of 4.51% ― a result of its commitment to keeping 30% to 35% of its lending in D and E paper.

Faye Crocker, CEO, HopeSouth Credit Union

“We decided about five years ago that we weren’t focused enough on all our members, and this is how we did something about that,” Crocker says. “We can afford to lend to all members if we price ourselves right.”

For example, the credit union helped a member who had made a 50% down payment for a used car loan at 36% at a local lot. “He had no credit history, but we refinanced his loan at 18%,” Crocker says.

 

 

 

This approach has helped HopeSouth consistently post well-above average ROA, including 2.20% in the second quarter of 2017, sixth-highest among credit unions with $20 million to $50 million in assets, according to data from Callahan & Associates.

Also read: How High-Risk Lending Reaps Rewards

Meanwhile, member business lending has been a growing revenue stream for Purdue Federal Credit Union ($1.1B, West Lafayette, IN). CFO Brian Musser says the credit union increased commercial loans by 30% in 2015 and 15% in 2016.Approximately 90% of that is in real estate.Brian_Musser_Purdue_FCU_250

Brian Musser, CFO, Purdue FCU

“We’re in a college town and are doing a booming business with people investing in housing rental properties,” Musser says.

The NCUA recently changed the MBL rule to allow properties of up to four units not count against the MBL cap of 12.75%, but Purdue FCU is LICU-designated so it can make more business loans.

Musser says Purdue FCU's total loan portfolio is 23% MBLs, which also account for 16.6% of the credit union’s total assets. A commercial lending specialist the credit union hired from a local bank has helped spur the growth with his own contacts and experience, and the credit union now is turning attention to improving deposit and other business services products.

Also read: Bank On Business With Mobile RDC

Investment Income

Credit unions can play it safe and make some serious bucks for the budget by engaging in some creative but low-risk investments.

Kane County Teachers Credit Union ($225.7M, Elgin, IL) is insured through ASI, which recently won the right to access the Federal Home Loan Bank. KCT uses the FHLB’s liquidity and funding services for investment arbitrage. That includes fixed rate and put-able advance borrowing at a spread of roughly 20 to 23 basis points that currently is generating $10,000 to $13,000 a month.

KCT also is using the legal ability to pre-fund the costs of its benefits program by investing in life insurance companies’ investment products. CEO Mike Lee says that alone should generate approximately 2.90% return on his investment.

“We’re not looking for home runs,” says the former corporate credit union executive. “We’re looking for singles and doubles. It’s swinging for the fence that gets credit unions in trouble.”

Mike Lee, President/CEO, Kane County Teachers Credit Union

Musser, the 26-year CFO at Purdue Federal, also uses his credit union’s mortgage portfolio to boost income with swap transactions that experienced derivative specialists handle at the credit union’s investment advisor.

That helps offset the interest rate risk the credit union has taken on by holding more of its mortgages in its own portfolio instead of selling them, not an inconsequential decision at a financial cooperative that boasts more than 25% of its local market’s first mortgage business.

Musser says Purdue Federal has added approximately $1.5 million to its coffers since it got permission from the NCUA to do derivative trading. He also says the credit union has begun hedging interest rate locks through its advisor and expects to add 3 basis points to ROA doing that. That’s in addition to the increased income from recently raising by 5 percentage points to 40% the level of fixed home mortgages on its balance sheet.

Also read: Dollars Rolls Liven Up Investments At Ent Credit Union

No doubt our bank and non-bank competitors will continue to squeeze our net interest margins, and regulations will continue to whittle away at our fees. Diversification is really the only defense.

Tim Smith, CFO, Workers’ Credit Union

Fee Income

Fee income generates mixed feelings in the movement. Overdraft charges and excessive withdrawal penalties, even non-network ATM fees, are sometimes called punitive. But others argue that they’re necessary to keep the doors open, especially in high-transaction environments. 

“We have three tellers and do 6,000 to 8,000 transactions through our lobby every month, and we’re a $19 million credit union,” says Crocker at HopeSouth.  “That’s the way they do it, and we have to be there to accommodate that.”

HopeSouth serves a primarily low-income field of membership, and members commonly come in nearly daily for $20 withdrawals. The credit union's fees compare favorably to the other options in the community ― a page on the credit union’s website lays it out ― and the credit union works to price the fees fairly for members who don’t qualify for the accounts that offer free transactions.

We’re not really looking for home runs. We’re looking for singles and doubles. It’s swinging for the fence that gets credit unions in trouble.

Mike Lee, President/CEO, KCT Credit Union

“It’s important you price fairly, but you also can’t afford to not have those services pay for themselves,” Crocker says.

Also, HopeSouth’s fee income percentage of total income is not that much higher the national average of all credit unions: 14.0% to 12.9%, respectively, in the second quarter this year. Meanwhile, its percentage from investments, 2.5%, is sharply lower than the national average of 8.9%. 

“We focus on fee income,” Crocker says. “We’re definitely not focused on investment income.”

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Other Operating Income

HopeSouth also stresses products that generate other operating income, a constellation that includes GAP insurance, gains from mortgage sales, loan participations, and debit and credit interchange income.

A bright star for Crocker’s credit union are sales of GAP, credit disability and credit life insurance.

“These are particularly valuable to low income members,” Crocker says. “These are people who if they’re out of work usually don’t have savings. We don't push these products, but we do try to make sure our borrowers understand their value.”

HopeSouth adds value to the deal by offering the insurance products at savings that can mean paying $300 at the credit union compared with $1,000 for the coverage at an auto dealer, Crocker says.

Approximately 40% of the credit union’s borrowers buy GAP and credit disability products. Credit life penetration exceeds 50%.

Also read: How 4 Credit Unions Achieved Member Insurance And Investment Success

High penetration also explains high interchange income at Purdue FCU.

The 73,000-member cooperative boasts the highest credit card penetration among the nation’s community chartered credit unions as of the second quarter. That rate ― 50.14% ― nearly triples the average of 17.40% for all credit unions nationally.

The Indiana credit union’s share draft penetration rate of 72.39% is 40th among community charters and sharply higher than the 56.72% average for all U.S. credit unions. CFO Musser says the penetration of debit cards to share accounts is approximately 90%.

The result is 2016 interchange income of $3.77 million on the debit side and $4.88 million on credit card accounts. And the cause is some robust offerings, such as the credit union’s My Member Perks program. Created in-house and launched in 2013, the program has returned $13 million to members so far based on engagement across the product spectrum.

Meanwhile, selling insurance across all lines also is growing in popularity and at the bottom line for many credit unions. That includes small, SEG-based cooperatives like Simplot Employees Credit Union ($20.3M, Caldwell, ID).

“We provide our members with cost-effective insurance that saves them money on products that would be purchasing anyway, like life, auto, and home insurance,” says Val Brooks, the Idaho credit union’s CEO. “Most of our other products and services just pay for themselves and for our ability to offer them to members without charging fees.”

 

Aug. 28, 2017


Comments

 
 
 
  • Good information, except the suggestion that a credit union purchase life insurance as an investment vehicle. While BOLI offers higher yields than traditional Part 703 investments, it is an unnecessary product for credit unions. The primary economic benefit of BOLI is tax-deferred cash value accumulation. As tax exempt entities, credit unions would be better served investing directly in the very same general account assets found in BOLI contracts and avoid BOLI fees, illiquidity, insuring employees, and all the other hazards of buying BOLI.
    Anonymous
     
     
     
  • Thank you for your sharing your insight and input.
    Marc Rapport