WASHINGTON and SAN BERNARDINO, Calif. — Some credit unions have been able to maintain high net interest margins despite a flattened yield curve that has others looking to non-interest income to compensate. "When net interest margin is squeezed then ROA will go down unless the credit unions do something to make a difference," CUNA Chief Economist Bill Hampel said. There are three things that drive return on assets, he said: NIM, operating expenses, and fees. To deal with the flattened yield curve of the last 18 months that is compressing NIM, credit unions must either lower expenses or increase non-interest income.
"Heightened competition has created a drop from 400 to 360 [basis points in net interest margin across U.S. credit unions from the early 1900s to the start of the new millennium]. Since then, I think, the drop from 360 to 320 is transitory. It's temporary," he said. Hampel also said that NIM was somewhat more volatile than ROA.
While ROA has dropped approximately 20 basis points from credit unions' approximate 1% comfort-zone, a 20 basis point increase in non-interest income has kept ROA from dropping the 40 basis points NIM has.
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"What most credit unions are worrying about is the bottom line and net interest margin is one way to get to the bottom line," Hampel explained. But credit unions are generally well capitalized so they continue to function with less ROA. "If a credit union has already done a lot to lower its expenses–cut the fat so that any more would be cutting into the lean…if their ROA is dropping from 80 to 60 basis points, they may be better off riding it out," he suggested. Many credit unions are doing better than riding out the Fed's tightening. "We've actually kept ours pretty good and it's been a battle to do that," Arrowhead Credit Union President and CEO Larry Sharp commented. The almost $1 billion credit union's NIM was 5.34%, according to Callahan & Associates, as of the end of first quarter. "We've had good yields all along. It's just a matter of keeping them from dropping," he explained. The nearly billion-dollar credit union provides mortgages, but sells them off immediately to cash in on the higher rates that are coming and continue serving its members. Arrowhead sold its last book of auto loans to WesCorp. Sharp observed, "The member cares if they get the loan. The member doesn't care if you service the loan." However, Arrowhead does service some of the loans it sells off.
"I think it's pretty simple," Sharp said of success in the current economic environment. "Really the long-term, fixed is a problem right now." Credit unions should have been preparing themselves to sell off their mortgage portfolios when the predictions began coming in from economists and it is hard to change horses mid-stream, he said. If they have not already, credit unions should try to package up their loans and leverage them for better rates. Arrowhead has also positioned itself to keep most of its funds in regular shares and checking, which has made the credit union "not as sensitive to change in the price of money." Fees from its free checking accounts, mainly Non Sufficient Funds fees, are a solid source of revenue, Sharp added. Arrowhead tries to price below the banks and to stay competitive, he explained. About 95% of Arrowhead members hold checking accounts, which is much higher than most credit unions.
The credit union has also found business lending and related services to be very profitable; businesses have $85 million in deposits with Arrowhead, according to the CEO.
The credit union is around 100% loaned out, which is a bit above where they want to be and they are working to bring that down some.
Additionally, since last August, Arrowhead has been making adjustments to staffing as well as across the board efficiencies. As of the end of July, Sharp said, its ROA was 1.73% with 8.13% capital.
The credit union has opened some new branches, but not as many as initially planned because it takes about 18 months for a branch to just break even, he explained.
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