With rising federal interest rates increasing competition among credit unions for
low-cost deposits, fund costs are rising and margins are being compressed. After
reaching a 25-year high in 2021 at 1.07%, the return on assets (ROA) for credit unions
is projected to drop to 0.65% this year, according to CUNA’s recent economic
forecast.
CU Benefits Alliance spoke with Mark Zook, president and CEO of Maps Credit Union in
Salem, Oregon. “You can’t really grow loans as quickly in the portfolio, as you’re
having to adjust rate on deposits, so it’s compressing the margin and causing us to
see ROA deterioration,” says Zook, who acknowledges, “These are fairly
unprecedented times.”
Despite the challenges, leading credit unions are taking action to harness costs
within their control, reduce expenses, and raise their ROA.
Factors Negatively Impacting ROA
CUNA’s Chief Economist Mike Schenk acknowledged that the association’s economic
forecast for credit unions changed dramatically throughout last year. First, calling for
a recession, then predicting a general return to normal — but with “potential
hiccups.”
Those hiccups, all threats to ROA, include:
● High loan delinquencies. As of the third quarter of 2023, the delinquency rate
was 72 basis points , up from 53 the previous year.
● Rising charge-offs. The net charge-off rate (NCO) reached its highest peak
since the first quarter of 2012 at the end of 2023, rising to 0.77%.
● Steep interest rates. High interest rates are starting to have an impact on new
loan applications. Although total loans outstanding increased 9.1% to $132
billion in the third quarter of 2023, the growth rate has slowed.
Additionally, the Consumer Financial Protection Bureau (CFPB) is raising pressure at
a national level around overdraft and non-sufficient fund (NSF) fee income. In its
recently proposed rule, the CFPB says it aims to “curb out-of-control overdraft fees
and other junk fees.”
“When you look at our fee income, there’s definitely some aggressive positioning
from the CFPB. To reduce NSF income does change the business model for credit
unions pretty significantly,” says Zook. “When you combine what you’re seeing with
portfolio yields and charge-offs going up, it creates a tricky situation. Those are more
threats on the horizon.”
Download: How to Maximize Your ROA in Challenging Times
These factors are new territory for credit union leaders who haven’t seen a downturn
since the late 1990s. There has already been some turnover in the C-suite as boards
maneuver to navigate the economic landscape. Even so, credit unions are in a much
better position than banks, with around 25% uninsured deposits compared to credit
unions’ just 3%.
Forward-thinking credit unions are taking action to strategically position themselves
even more favorably.
How to Positively Impact ROA
Some factors, like federal regulations and interest rates, are beyond the control of
credit union boards and executives. But that doesn’t mean there’s nothing credit
unions can do.
With compressed margins hampering revenue growth, one option is to reprice loan
portfolios to boost revenue. However, credit unions that increase their credit risk face
the prospect of increased delinquency. “You may not want to do that right now,”
cautions Zook.
Short of increasing net income, another way to mitigate the impact of a downturn is
through expense control and reduction. Actions like employee layoffs can offer a
short-term Band-Aid but often result in more harmful long-term effects like lower
employee morale and a reduction in the quality of member services. Not to mention,
they conflict with the community-based, people-first values that differentiate credit
unions from other, more impersonal financial institutions.
Instead, strategic credit unions are turning their focus to one of the largest yearly
expenses for credit unions: Healthcare costs.
Download: How iQ Credit Union Expanded Employee Benefits While Lowering Costs
The Secret Ingredient for Raising ROA
Employee benefits and health insurance expenses are routinely among the top three
expenses for credit unions. A growing movement among credit unions, known as the
CU Benefits Alliance, is addressing this expense head-on. Alliance-member credit
unions across the U.S. are coming together to leverage their favorable risk to drive
down healthcare costs, improve the quality of their employee benefits, and, yes,
significantly impact their ROA.
Through their collaboration, Alliance-member credit unions have driven down
employee benefit costs by 20-30%. For Massachusetts-based Workers Credit Union,
that savings translated to a 24% boost in its ROA.
3 ways credit unions in The Alliance are collaborating to lower their ROA
Mid Oregon Credit Union enjoys one of the highest ROAs in the country. President and
CEO Kevin Cole credits Mid Oregon’s membership in The Alliance as a significant
contributing factor. “We grow about twice the rate of the average credit union based
on assets, and we grow about two and a half times the average credit union based
on membership. Being a member of The Alliance is a strong contributor,” he says.
How? Alliance members are directly saving costs in the following ways:
1. Cutting employee benefit expenses. Traditional health plans pool risk from a
wide variety of industries, including high-risk ones like manufacturing and
construction. Alliance-member credit unions pool their favorable risk profiles.
In doing so, they stop subsidizing the healthcare costs of high-risk employers
and lower their own healthcare costs by an average of 27%. Also, with
traditional fully insured health insurance plans, credit unions and their
employees pay in advance for expensive coverage plan members may or
may not use within the plan year. The Alliance’s model ensures members only
pay for actual services rendered.
2. Improving quality. By taking control of the health plan’s structure, each
participating credit union can mold its individual network to include its
region’s best healthcare providers and top-rated facilities. Unique plan design
elements like wellness and medical travel benefits provide further
enhancements.
3. Recruiting better talent. The Alliance’s strong benefits plan keeps employee
contributions low without compromising value. With low-cost, high-quality
health insurance acting as a strong recruitment and retention tool, Alliance
members attract and retain talented employees, lowering the costs of hiring
and improving service delivery for members. “It’s a very strong benefits
package, and that helps us attract and retain the best talent to deliver
superior results for the credit union and its members,” says Mid Oregon’s Cole.
Download: How Mid Oregon CU Saved $1M+ by Joining the CU Benefits Alliance
Better Benefits, Higher ROA
The market will continue fluctuating, and many economic factors will remain outside
credit unions’ control. However, there are proactive steps credit unions can and are
taking to raise ROA despite such obstacles.
“Being a member of The Alliance, medical insurance becomes a much easier
expense to look at,” says Maps’ Zook. “You’re not weakening your organization’s
position. You actually end up with better benefits for less money.”
To find out if your credit union qualifies for membership in The Alliance, schedule a
consultation today.