With the current spread between the 3-month T-bill and 30-year Treasury bond only nine basis points (bps), the net interest margin for the industry is at an all-time low of 3.18%. Since credit unions cannot control the interest rate environment, there are two ways in which the industry can maintain a solid bottom line: reduce expenses by promoting efficiencies within the credit union or institute more member fees and other sources of non-interest income.
Although capital remains solid, the industry still must maintain a moderate ROA to invest in new products and services. But since increasing non-interest income does not look favorably on your credit union from the member perspective, controlling expenses and promoting internal efficiencies are the most member-friendly ways to achieving ROA targets.
In 2006, credit union net interest margin fell below the operating expenses/average assets ratio for the first time since deregulation. Thus the spread from the traditional core businesses of offering lending and savings products is no longer enough to cover the day-to-day costs of running the credit union. In this environment, reaching ROA objectives is more difficult to achieve than ever. Being innovative in cost constraint methods is becoming vital.
Improving Efficiencies to Increase ROA: SAFE Credit Union
SAFE Credit Union ($1.3b in North Highlands, CA) prides itself on promoting efficiency and reducing expenses, all in the interest of the member. With operating expenses declining 5.5% over the past year, SAFE is becoming a more efficient and cost-effective institution. Henry Wirz, CEO of SAFE, states, “Reducing expenses is a great idea and one of the few things that management can control.” Because of this philosophy, their ROA increased 10 bps over the last year while the industry average declined 12 bps.
Some steps they have taken are as simple as reducing the amount of cash held in ATMs and branches. By predicting cash demand from historical usage, they have reduced system-wide cash by more than $1 million. This has reduced the amount of lost interest income and staff time having to manage and count that large cash amount.
Another area SAFE invests in is a project management system. This system tracks all organization-wide projects to ensure they are on time and on budget. By tracking every detail of a project, a credit union can track progress to the due date more easily and ensure capital spent is efficiently utilized. To date, Wirz states that projects are almost always completed on time and budget.
Managing Staff Resources Maintains Healthy ROA: King County Credit Union
Like many credit unions, King County Credit Union ($176m in Seattle, WA) has faced rising operating expenses and a competitive marketplace. Health care costs alone within their organization have risen approximately 150% during the past five years even with 10% fewer employees in 2005, while net interest margin has declined 108 bps over the past five years.
When CEO Tom Graves joined King County in 2005, his goal was to work on developing more efficient staffing solutions. He decided not to add new staff but instead to focus on placing current staff in the most efficient roles possible. Examining the company’s human resources plan has led to positive performance results during the past year. From March 2005 to March 2006, operating expenses declined two bps while ROA increased 44 bps. Graves adds that this improved performance is important because ROA increases lead to more value returned to King County members.
To learn more about how your credit union can promote efficiency and cut costs, please join use for our webinar, Overcoming the ROA Squeeze to Deliver Strong Bottom Line Results, brought to you by Callahan & Associates.