WASHINGTON - Service revenue or that category of non-interest income is proving to be the saving grace for some credit unions looking to maintain a strong bottom line. Be it through courtesy pay programs, debit interchange, ATMs, shared branching or commercial insurance sales, service revenue can take several forms. According to Callahan & Associates, Inc., which recently ranked the top 50 credit unions in service revenue to asset size, the category includes fee income plus other operating income including unconsolidated CUSO income, said Bret Remey, Callahan vice president of industry analysis. "We didn't look at gains or losses in investments, fixed or deposited assets or other non-operating income," Remey said. "We wanted to look at when a credit union provides a service to its members." Topping the Callahan list was $20 million Communicating Arts Credit Union (CACU) in Detroit, which saw 5.67% in service revenue as a percentage of its total assets as of Sept. 30, 2004. Growth of service revenue was 75.57% and return on assets was 2.08%. Hank Hubbard, president/CEO of CACU said they're at the top spot on Callahan's ranking due to its courtesy pay program, which was launched in November 2003 and was up and running in 2004. "That year, we finally found the key to serving our membership, which tends to be a low balance, high transaction group and it's the courtesy pay," Hubbard said. "Quite frankly, it's been a cause of significant stress for us because it's an expensive group to work with." Still, Hubbard said the credit union is committed to helping members get out of the habit of making "bad choices" including sending out tips through direct mail and newsletters that encourage them to only use courtesy pay for emergency purposes. "If we see a member that has gotten themselves in trouble with courtesy pay, and their credit may be horrible, we might give them a loan to get them out of the hole," Hubbard said. "What we're seeing is that the people who can least afford (to be in this situation) are relying too much on courtesy pay." CACU's lending has improved in part, due to service revenue, Hubbard said. Last year saw a strong push from the credit union to focus on loans being paid through direct deposit for some of its "riskier" members. Return on assets has been a "struggle" for CACU but last year it hit 2% and net capital reached 10%. "We will be able to increase share rates and decrease loan rates and hopefully, the members will gain from this," Hubbard said. Remey said service revenue goes directly to the bottom line and from there, credit unions look at operating expenses. "What's been happening is non-interest income for service revenue is becoming more of a factor for credit unions," Remey said. "As credit unions are getting larger and offering more of a gamut of services, there's an increase in non-interest income." For $230 million Florida Commerce Credit Union (FCCU), which is ranked 25th on Callahan's service revenue list, a number of factors have led to the category's percentage as a part of its total assets, said Ronald Fye, president/CEO. As of Sept. 30, 2004, the credit union had 3.81% in service revenue as a percentage total of its assets with a 5.52% growth and a 2.40% return on assets. "One of the big things for us is we stay pretty much loaned out," Fye said. "We do a lot of auto loans; 55% of our total loan portfolio is in automobiles and we derive income from that area." FCCU's service revenue has also been bolstered by a "pretty high" checking account penetration level, heavy use of debit cards which has resulted in strong interchange income and overdraft and NSF fees, Fye said. "For us, it really goes back to getting loan business other than mortgage business," Fye said. "A lot of people don't realize how substantial interchange income can be." Due to the type of member it serves, $47 million American Savings Credit Union's (ASCU) number two ranking on Callahan's list is "not a surprise," said William Kidd, president/CEO. "We get a lot of NSF fees, we open and close a lot of accounts," Kidd said, adding that the credit union's16,000-plus membership is "mostly blue-collar workers and low-income persons." According to Callahan, ASCU saw a 5.33% in service revenue as a percentage of its assets as of Sept. 30, 2004 with 0.66% growth here and a 1.24% return on assets. "It really comes down to the type of member we serve," Kidd said. "We don't run credit reports on anyone. We're open to different SEGs." Higher fee income in 2003 came as a surprise for most credit unions due to the unexpected high volume real estate loan originations when interest rates were at historic lows, according to Callahan. As a result, credit unions grew reliant on these fees to maintain a strong bottom line. The subsequent slowdown in real estate loan origination volume and the Visa/Mastercard settlement where credit unions were to receive one-third less fees generated from debit cards, led to searches for alternative sources to supplement their service revenue. Remey said service revenue will ultimately depend on how the credit union wants to run efficiently on expenses and maximize their interest margin. "Going forward, we can see interest margins being squeezed and a greater need for other income," he said. [email protected]