The credit union industry has undergone significant changes in the past decade with highs and lows across the cooperative landscape. Through thick and thin, the importance of non-interest income (NII) to the typical credit union's bottom line is a part of that story.
Each credit union has its own tale to tell. Within a 10-year period, the industry has consolidated by over a third. As of the third quarter of 2006, there were 8,696 member-owned financial cooperatives. That number has now dipped below the 6,000 mark, reaching 5,967 as of the third quarter of 2016.
Ten years ago, the housing bubble was also on the brink of bursting while the country was about to slide into the worst recession since the Great Depression. Ten years later, unemployment is down significantly, the stock market is swinging upwards, and the credit union industry continues to post record numbers, including assets (more than $1 trillion) and members (more than 106 million).
The movement by and large has remained well capitalized, with a net worth of 11.51% compared with 10.85% in 3Q 2016 and remains reasonably profitable with an ROA of 0.78% compared with 0.9% in 3Q 2006.
At Callahan & Associates, we pride ourselves on analyzing call report data to keep track of these trends, and the data show that there is a growing reliance on NII as a partner with interest income in keeping credit unions surviving and thriving.
Here are some observations that we can make from gleaning into the data that we have on hand.
Fee And Other Operating Income
Fee income and other operating income – or other income – are the two categories of NII that the NCUA captures in its 5300 Call Report. Fee income includes account-related charges, such as overdraft and late fees. Other income includes interchange fees, mortgage sales and income from ancillaries such as real estate, insurance and investment services.
That's a significant chunk of change. Total NII in 3Q 2006 was $1.4 billion among the 8,696 U.S. credit unions reporting then; the 5,967 reporting in 3Q 2016 took in twice that: $2.8 billion. That, of course, is dwarfed by interest income, which was $7.2 billion as of 3Q 2016 but $5.9 billion in 3Q 2006.
We must look at it proportionally. Interest income rose about 20% in the past decade, while NII rose 100%. That was a period that included some recession-induced spikes in interest income, of course, as lending shrank during the recession and sharply rebounded since. The industry's net interest margin in the past decade has actually shrunk, from 3.16% to 2.89%.
Low On The Ends And High In The Middle
Over the past decade, we’ve seen a significant shift within NII. Driven by the growth in interchange income and those other services, as well as moving away from or at least reducing what some consider punitive fees, other income caught up with and then, in 2015, overtook fee income as the largest component of overall NII. As of 3Q 2016, that stands at 53% to 47% in favor of other income.
In July 2016, Callahan & Associates surveyed 170 credit union executives from 40 states to gain insight into their current and emerging sources of non-interest income. Learn more by reading "In Search Of Non-Interest Income."
We also see differences in asset classes. Broadly, credit unions of $100 million to $10 billion in assets derive an average of about 30% of their total income from NII. At the top and bottom, however, the numbers are quite different. The biggest credit unions – the $10 billion-and-up club that faces additional regulations – derived but 22.87% of their total income from NII sources in 3Q 2016. The $100-million-and-under crowd – 24.74%.
Generally, the credit union industry has partnered with CUSOs to provide additional, value-added services to members. That generates income. The six largest credit unions also use and own CUSOs, but they face additional pressure due to reduced interchange per transaction. That group will grow as more credit unions cross the $10 billion line.
And for those nearly 4,400 of the smallest credit unions, they aren't that likely to be involved with CUSOs or the other ancillary services like insurance and member investments.
Taken together, one thing is clear: NII is a growing enterprise for today's credit unions. On average, NII per member was about $77 throughout 2006 and has been on the rise ever since. For the past three years, it's been about $100 per member per year.
During this 10-year period, there's been another constant: NII has prevented negative ROA. In 2006, ROA without NII would have been -0.41%. In 2016, -0.56%. In other words, interest income alone, even as loan growth bloomed as the recession faded, would not keep the credit union train on the rails.
As the industry moves into uncharted waters, noninterest income will remain a keystone in ensuring sustainability for America's credit unions.
This article appeared originally on cutimes.com in February 2017.