Pressure continues on noninterest income

Fee income as a percentage of average assets has fallen from a high of 0.87% in 2007 to 0.45% in 2022, says CUNA Mutual Group Chief Economist Steve Rick.

That’s due in large part to the reduction or elimination of overdraft and nonsufficient funds fees by many credit unions, he says.

On Dec. 1, 2021, the Consumer Financial Protection Bureau issued a press release citing financial institutions’ reliance on overdraft and nonsufficient fund fees, although such fees were 19% lower at credit unions than at large banks.

Other reasons for the pressure on fee income are technology and competition, Rick says.

“Online banks and fintechs are upping the ante for credit unions,” he says. “The online model is more efficient from an operational perspective. If an online competitor or the bank down the street can offer the same services with fewer fees, there’s more pressure for credit unions to lower their fees.”

At the same time, “other income” has risen from a low of 0.41% to a high of 0.93% in 2021 before dropping to 0.65% in 2022. The primary reason for both the rise and recent drop in other income can be attributed to fewer mortgage sales to the secondary market, Rick says.

“In recent years, more credit unions have begun selling mortgage loans to the secondary market to achieve income,” he says. “But in the past year, the Federal Reserve has significantly raised interest rates. Credit unions are no longer gaining those revenues earned on mortgage sales.”

The Federal Reserve raised its benchmark federal funds rate by 25 basis points on May 3, pushing the overnight rate above 5% for the first time in more than 15 years—the tenth consecutive increase since March 2022.

Rick expects mortgage lending to remain cool in 2023 amid the high-rate environment and the prospect of a recession.

On a relative basis, noninterest income (NII) is becoming a more important part of credit union balance sheets, Rick says. In 2022, he estimates NII will account for about 28% of overall credit union gross revenues, up from 20% in 2007.

But Rick says there’s a disparity among credit unions in their NII composition.

“Increasingly, it’s the larger credit unions that offer mortgages and have the flexibility to eliminate overdraft fees,” he says. “Smaller credit unions can’t always offer the services that large credit unions do to offset the loss of fee income.”