Credit unions across the land have learned to live with the razor-thin margin between savings and lending rates by nurturing sources of noninterest income. Sure, everyone in credit union land knows that.

But did you know that it's not all fee income? Not even close. In fact, fee income as a percentage of average assets has basically held steady for more than 15 years. It was 0.64% among all U.S. credit unions in 1999, spiked to 0.88% during the recession in 2008 and settled back to 0.66% in 2015.

However, other operating income was only 0.26% of average assets as the new millennium dawned. It's grown steadily to 0.69% last year, according to our analysis here at Callahan & Associates.

Taken together, we found that NII – fee income plus other operating income as a percentage of average assets – was 0.9% in 1999 and last year it was 1.35%, also steadily ascending over the past 16 years.

Traditionally, financial institutions focused on fees to drive noninterest income. Fee income includes account-related charges, such as late fees, overdraft fees and monthly account service charges. Over time, the focus has shifted for a variety of reasons including consumer protections, member demand and increased competition in the marketplace.

Now other operating income has become a greater piece of the noninterest income pie, expanding as products, services and member behavior evolve. For instance, more members are making credit unions their primary financial institution, which has pushed deposits and checking account activity to record numbers. As those member relationships deepen, interchange income is rising at credit unions.

Add to that insurance, investments and the like, and the impact on the bottom line is striking. The average ROA of all credit unions in 1999 was 0.92%. Without fees and other NII, make that 0.02%. Last year? The average ROA of 0.77% flips to red ink, at -0.58%.

Indeed, we found in a survey of credit union NII best practices we did at Callahan & Associates earlier this year that today's successful member-owned financial cooperatives use a variety of value-added products and services to achieve NII happiness.

We see those as maturing financial institutions, surviving and thriving by helping their members make their future more secure in these uncertain times. That goes well beyond share insurance to include life insurance, health insurance and even insurance for the gap between what a member owes on a car and what it's worth. They and their members also are profiting from real estate and investment services that are delivered with the credit union philosophy in mind.

Here are some other findings from our survey and deep dives into the 5300 call report data we get each quarter from the NCUA:

State of Credit Union Revenue Generation

Nationwide, NII reached $16 billion in 2015, making up 29% of total income at credit unions.
NII as a percentage of average assets stood at 1.35% in 2015, up two basis points from 2014.
On a per member basis, NII grew 4.7 percentage points to reach $150.50 in 2015, compared to negative 3.4% growth in 2014.

NII Reliance Continues to Grow

As time passes, credit unions rely more heavily on NII to ensure sustainability.
Operating expenses are putting pressure on credit union profits. For instance, operating expenses including salaries, facilities, compliance and technology grew 6.7% in 2015, totaling $36.7 billion.
Return on assets is also facing downward pressure, in part, due to banking and fintech competition. As of 2015, ROA declined five basis points year-over-year to reach 0.77%.

Key Findings From the NII Survey

Total card-related interchange and fee income accounted for 42.3% of total NII in 2015.
Income from mortgage sales, servicing rights and real estate lending tied credit card interchange and fees for the third-largest component of noninterest income, making up 12% of total noninterest income in 2015.
More than three-fourths (80%) of survey respondents offer credit and prepaid card rewards to roughly one-third (34.1%) that offer debit card rewards.

Blending Interest With Noninterest Income

Record-breaking lending nationwide means that credit unions can now offer supplemental services, such as auto insurance, to their members, which ultimately creates a win-win scenario.

Each credit union has to decide its own path to NII success. We hope this information helps inform yours.

Michelle Parker is senior analyst for Callahan & Associates. She can be reached at 202-223-3920 or mparker@callahan.com.

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NII: A Story of Rising Interest in a Low Interest Rate Environment

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