The credit union industry has seen dynamic shifts in its income composition over the past decade. Amidst persistent economic uncertainties and regulatory changes, these institutions have had to devise new strategies to drive profitability in a fluid environment.
Despite the turbulent waters, cooperatives remain well positioned to respond to their members' needs. During 2013, credit unions generated $50.3 billion in total income, up 36.2% from ten years ago.
Prior to the Great Recession, the industry's interest income — which includes both net loan income and investment income — had consistently increased and by 2008 represented over 80% of total income.
Net loan income peaked in 2008, with credit unions across the nation earning $36.7 billion — an annual increase of 4.7% — from lending activities alone. From 2005 to 2007, this metric increased at a double-digit rate. During the same period, investment income also grew at least 18.8% annually and topped $8.9 billion as of December 2007, according to Callahan & Associates' Peer-to-Peer analytics.
Non-interest income, namely fee income and other operating income, comprised less than a fifth of the industry's income until 2008. However, it has begun to play an increasingly integral role following the recession.
Within the last five years, the percent of non-interest to total income leapt up by nearly 10 percentage points to 28.9% as of December 2013. And today, non-interest income earned by credit unions stands at $14.5 billion, up 35.9% from five years ago.
Interest rates hit historically low levels following a series of quantitative easing policies from the Federal Reserve, which were first started in December 2008. And as a result, loans and investment yields have decreased considerably over the same timeframe.
With depressed yields, net loan income and investment income at credit unions has trended downward since 2009. However, the loss from lower interest income has been partially offset by an additional gain in non-interest income, particularly from other operating income.
Near-zero interest rates eventually led to a nationwide refinancing boom, and as a result, credit unions sold a record number of first mortgages on the secondary market. As other operating income includes gains on mortgage sales, the rise in secondary market activity volume pushed up the total amount of other operating income at credit unions. From 2008 to 2013, other operating income grew 83.9% to reach $6.9 billion at the end of 2013.
Fee income, the other component of non-interest income, has also generally increased over the past ten years as credit unions continue to expand their member base. Credit unions reported $7.6 billion in fee income in 2013, up 9.8% from 2008.
The growing importance and prevalence of credit and debit card use at credit unions has also contributed to a rise in card interchange and fee income. According to Callahan & Associates' 2013 Non-Interest Income Survey, debit and credit card interchange and fees made up 32.3% of total non-interest income at credit unions.
Opportunity In A Rising Interest Rate Environment
The recession-era trend of declining interest income and rising non-interest income started to shift modestly in late 2013. After several hints, the Federal Reserve finally made an official decision to taper its quantitative easing efforts in December of 2013. At the end of that year, the 10-year treasury yield exceeded 3%, marking a whopping 1.3 percentage point increase within just 8 months.
Net loan income and investment income declined 1.2% and 8.4% respectively over the past year, to $31.5 billion and $4.2 billion at year-end. Yet these annual decreases for net loan income and investment income are substantially less than the numbers reported in 2012 at 3.2% and 12.3%, respectively.
Furthermore, due to rising interest rates, loan and investment yields at credit unions are expected to gradually increase in the coming years. This is likely to raise interest income earned by credit unions, thus boosting overall net interest margin and ROA.
At the same time, credit unions should anticipate fewer first mortgages to sell as refinancing activities wind down. According to the Mortgage Bankers Association, refis will only account for 32% of total originations by the end of 2014 versus 64% at midyear 2013. In a rising interest rate environment, credit unions need to prepare and plan ahead for how they will capture more of the purchase mortgage business.
This change in refinancing activity is already reflected in fourth quarter data, as other operating income increased only 0.4% to $6.8 billion in 2013. The change is dramatic considering that the industry reported a record fast pace of growth in other operating income, at 30.7%, just a year prior.
Meanwhile, the industry's total fee income through the end of 2013 stood at $7.6 billion, an annual increase of 1.5%.
The Durbin Amendment, which was enacted in 2011, placed a limit on debit interchange fees for credit unions over $10 billion. And even though only a handful of the industry's largest credit unions have been directly affected, many smaller institutions have felt the side effects as merchants choose to migrate to the lowest cost options.
Given these changes in the economic and regulatory environment, total non-interest income has increased less than 1% over the past year to $14.5 billion as of December 2013, with both other operating income and fee income increasing moderately.
Positioning For The Unknown
Over the past ten years, credit unions have experienced dramatic changes in income sources and levels. As a result, they have had to alter their strategies and explore new ways of driving profitable income growth.
For instance, a growing number of credit unions have begun to take a closer look at their product pricing strategies, not only for loans but also for traditionally free offerings like checking accounts, which could impact non-interest income. Furthermore, credit unions today are paying more attention to properly evaluating their marketing campaigns, ensuring that these investments are indeed driving profitability and generating income growth.
There is no doubt that the volatile economy presented various challenges. But on the flip side, this environment has also provided credit unions with an opportunity to bring new, creative ideas to the table at a financial, departmental, or even cultural level.