Letting Members Manage Your Bottom Line?

The premise of this communication is pretty simple – if you don’t have a non-interest income strategy you better get one.  To me, a non-interest income (NII) strategy has to address three basic questions:

What member behaviors am I attempting to influence with the various components of NII? Do I want to encourage the use of electronic, insurance and investments services, or discourage certain activities through the implementation of abuse (NSF, OD & late) fees. Would I rather reduce or waive closing costs to obtain the lending relationship? Do I think members should have to earn a free checking account or that it’s an inherent right?

Why am I generating NII? Is it primarily to bridge the deficit between Net Interest Margin & Operating Expenses? Am I offering more convenience, products & services that require more NII to offset the expense?

What is the right level of NII for my institution? Do I have a targeted level of NII? Is it sufficient to support our growth plans and sustainable given the economic & regulatory climate? Or do I attempt to “give back” on the NII by maintaining interest margins and controlling expenses?

Basic Components of Net Income

When it comes to generating net income (making money) the reality exists that the number of variables we have to work with are quite limited. These “levers” are typically broken down in the following fashion:

  1. Net Interest Margin – what we earn from loans & investments net of what we have to pay in dividends on shares or borrowings
  2. Operating Expenses – typically compensation & benefits come close to making up half of these, with facilities, systems, marketing, professional services and provision for loan losses making up the difference. Where do you think these are headed?
  3. Non-Interest Income – Over half of NII is generated from NSF fees and card interchange, while the remaining portion varies widely based on an organization’s differentiating factors and complexity.  I’ll make the argument that the remaining half provides clear insight on your organizations priorities. Whether you realize it or not, this is where you are influencing how, or if, members will conduct business with you.

Letting Members Manage Your Bottom Line?

Several recently published reports and subsequent articles have focused on the subject of non-interest income. They rightfully point out that without fees and non-interest income credit unions would be operating at a significant loss. The chart below from NCUA highlights the negative gap that has continued to emerge over the last several years.  



Over the last twenty years ROA net of fees has declined by nearly 100 basis points. Conversely, fees and other Non-Interest Income (NII) haves risen by (only) 70 basis points.

If you’re not setting non-interest income targets and attempting to influence member behavior you’re letting your members manage the bottom line.

How Do I Target the Right Level of Non-Interest Income?

Each of these net income “levers” has a number of opportunities for managing them more effectively. I’d start by comparing how my NII equates to peers. The following chart recently published by Callahan provides breakdown by the percentage each component provides to the NII pie.

NII breakdown

How does your breakdown compare? Are there significant differences you wouldn’t expect based on your credit unions values? While the chart doesn’t provide a level of NII to average assets if there are substantial enough differences or complete categories missing from your income statement those may be an area to start exploring for additional NII opportunities.

There generally aren’t any easy answers to the questions I’ve posed. In order to get them right it requires you to be true to the principles your credit union operates by, and at times you won’t like the results.  If you find yourself in need of a guide in the process, don’t hesitate to reach out. That’s why we’re here – to help CU Succeed


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