Service Income Critical to Credit Unions’ Survival

A shrinking net interest margin is putting the squeeze on earnings. What is the impact on overall credit union ROA?


Service, or non-interest, income continues to play an increasingly important role in strengthening credit union’s ROA. Although ROA remained constant at 0.92% in the first quarter of 2005 it has trended downward over the past decade and is currently near a 10 year low. In contrast, non-interest income as a percent of average assets reached 1.11% in the first quarter, up from 1.03% a year ago.

As the spread between net interest margin and operating expenses closed to only eight basis points at March 2005, credit unions relied more heavily on service income to remain profitable. Margins continue to shrink in large part because short-term interest rates are rising while long-term rates remain constant, effectively capping the rates credit unions can charge in loans or receive in investments. As interest expenses climb and interest income stagnates, the net interest margin fell to 3.25% at March 2005.

The Credit Union Business Model
    December-94 December-04 March-05
Interest Income 6.88% 4.74% 4.74%
Interest Expense 3.01% 1.42% 1.49%
Net Interest Margin 3.87% 3.32% 3.25%
-Provision for Loan Loss 0.23% 0.35% 0.33%
-Operating Expense 3.05% 3.21% 3.17%
+Service Income 0.67% 1.13% 1.11%
+Other Operating Income/(Expense) (0.02%) 0.03% 0.06%
Return on Assets 1.28% 0.92% 0.92%

According to Callahan & Associates’ 2004 Non-Interest Income Survey, interchange income continues to represent the largest category of non-interest income, with credit and debit card income comprising 14% and 16% respectively. The increasing popularity of courtesy pay is also elevating service income. Courtesy pay and non-sufficient funds (NSF) fees accounted for almost 28% of non-interest income in 2004, up from 19% in 2003.

Service income for all commercial banks totaled approximately $40.5 billion at the end of the first quarter according to the FDIC, accounting for 0.56% of total assets. Credit union service income accounts for approximately $7.4 billion, or 1.11% of total assets however.




July 18, 2005


  • Very interesting! The article really highlights the tighter margins that credit unions are facing and how they need to find other ways to improve their bottom line. This new writer intrigues me! --Joe James, Senior Industry Analyst
  • I really like the descriptor "Service Income" for fees & other transactional based income, though I like my term a smidge better "Behavior modification fees" Carolyn Warden CCUE