How soon will fee income rebound at credit unions?

Credit unions are struggling to set expectations for growth in fee income this year.

Third-quarter data from the National Credit Union Administration, the most recent information available, showed a 9.5% year-over-year increase in noninterest income, compared with 5.5% growth in the year ending Sept. 30, 2019. However, that figure — which includes gains from investments in credit union service organizations and other income sources — masks a substantial decline in fee income, which was down by about 12%. That drop reflects the fact that not all credit unions participated in the Paycheck Protection Program or benefitted from the mortgage refinancing boom, both of which generated fee income. Many consumers also had less need for overdraft protections thanks to stimulus checks and expanded unemployment benefits.

The bigger problem is that it’s not clear where growth will come from in 2021.

“Some of those gains we saw last year are neither sustainable nor replicable,” said Steve Reider, CEO of the consultancy Bancography.

Many credit union leaders are hoping an economic rebound later in the year contributes to an increase in interchange income. NCUA data doesn’t separate swipe fees from other noninterest income, but it’s clear that consumer spending dropped substantially in the first half of the year before picking back up somewhat in the summer and fall, suppressing interchange income, said Norm Patrick vice president of PSCU’s Advisors Plus consulting division.

Travel, entertainment, restaurants and gasoline remain four of the biggest categories holding back the payments market, said Patrick.

“Those are four very different segments, but if we could get those back into the positive, that’s really going to help make some traction — in particular on the credit card side — with getting back to normal,” he said. “But again, as far as timing and to what extent, the jury is still out.”

Ongoing vaccinations will also contribute to a rebound, added Reider, and credit unions could begin to see the effect of that by summer.

“I believe there’s going to be a massive pent-up summer travel kick, and even people who aren’t vaccinated are going to feel a little bit safer,” said Reider. That’s going to lead to the return of family activities like beach vacations and Disney trips, he said. “All of that occurs on credit cards or debit cards.”

On top of that, said Reider, the vast majority of credit unions are under the $10 billion-asset mark, they’ll receive a larger interchange fee than those above $10 billion, as mandated by law.

Until then, some credit unions are hoping the latest round of PPP funding and ongoing mortgage refinancing can keep noninterest income flowing.

Credit unions have only accounted for a small part of overall PPP loan volumes, with recent figures from the Small Business Administration showing the industry accounts for just 15% of lenders and less than 3% of total loan volumes in 2021.

Still, for credit unions that have participated, the program has provided a hefty dose of revenue.

Evergreen Credit Union in Portland, Maine, earned more than $4.5 million in noninterest income last year, according to call report data from the NCUA, a 13% increase over 2019. But Kate Archambault, the $401 million-asset credit union’s chief financial officer, said those figures are, “a little bit misleading, because most of our noninterest income was down, but we did over $9 million in PPP loans, and that’s what made it up for us.”

Evergreen budgeted an 8.5% increase this year on the assumption that interchange revenues return to normal in the second half and mortgage originations slow as rates rise due to an improving economy. The credit union’s forecast does not include PPP loans, however, since the latest round of the program had not been announced when that budget was set.

Notre Dame FCU in Indiana was also heavy into PPP lending last year, which helped boost noninterest revenues substantially, but CEO Tom Gryp said the fees that came from selling mortgages were just as impactful. Fee income was up by 50% last year to over $7.7 million, and the credit union sold nearly $258 million in first mortgages to the secondary market in 2020, compared to just $105 million the year before.

Gryp predicted similar trends for 2021 “but probably off of the 2020 highs, because [PPP] activity is not as robust as the first round and we expect the refinance pool will start shrinking,” he said. “There’s still going to be purchase activity but the rush of people to refinance their homes will go down because people have already refinanced.”

Some suggested that as the economy rebounds and government stimulus efforts abate, credit unions could see an increase in fee income from overdrafts.

“Our [non-sufficient funds] fee income dropped off almost 22% between 2019 and 2020, and budgeting for 2021 we are still below 2019 levels … so I think it’s going to be a two- to five-year time frame for certain fees to come back up,” said Archambault.

With fee income already down, the pandemic could spur credit unions to put an increased focus on other offerings that generate noninterest revenue, such as insurance and wealth management.

“At the top end of the industry you’ve got some pretty sophisticated offerings, but that 10-20 branch, $700 million – $2 billion[-asset] range, they’ve probably got a lot of room to run in that area, even to the extent that they have a fully built-out offering but they haven’t yet really conquered the cross-sell process,” said Reider. “They may have the product side built and even the delivery side, but they haven’t yet really exploited penetrating deeply into their own member base.”

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