It’s times like these that Kathleen C. Orovitz is probably glad she runs a credit union instead of a bank.
She’s the CEO and president of Smithfield-based Navigant Credit Union, which has seen a 50% decline in its net income over the last two years. That’s in part because higher interest rates have squeezed Navigant and nearly every other financial institution recently, costing them more and earning them less.
At Navigant, annual net income has dropped precipitously from $33.7 million in 2022 to $16.7 million in 2024.
But while Orovitz oversees the state’s largest credit union with $3.9 billion in assets, the pressure she may be feeling is different than if she worked at a bank with investors and shareholders who want to maximize profits.
Instead, she’s got members, technically owners of the not-for-profit credit union where net income is put back into the institution to offer borrowers lower fees and better rates.
“We ended up continuing to lend through every channel: mortgages, small business and consumer,” Orovitz said of Navigant’s reaction to the shrinking bottom line. “We sacrificed profit and net income, but that’s OK because we have a board of directors that understands our mission.”
Still, make no mistake, the interest rate environment has created stiff headwinds for most of Rhode Island’s 15 credit unions, including the two largest – Navigant and Coastal1 Credit Union.
Earnings reached a high-water mark in 2021 and 2022 when interest rates on loans were rock bottom but so were interest rates on deposits, making it inexpensive for banks and credit unions to get cash for lending.
But things changed when the rates shot up in 2022. While financial institutions could charge more for loans, they were still holding a lot of extremely low-yielding loans on the books but the interest paid for deposits – the lifeblood of the credit union business – was rising quickly.
That interest margin squeeze cut deeply into earnings.
Pawtucket-based Coastal1, which has $3.3 billion in assets, finished 2024 with a net income of $8.7 million, down nearly 39% from a year earlier and a 72.7% freefall from the $31.7 million reported in 2022.
At the same time, the amount of delinquent loans and leases has crept upward in recent years at various credit unions, a potential prelude to foreclosures, repossessions and charge-offs.
And the financial obstacles come as credit unions nationwide continue to wrestle with more perennial challenges, namely the perception that the members of credit unions – many of which were started a century ago for small community groups to pool money using little more than cash boxes and handwritten ledgers – are aging and that the organizations don’t offer top-notch digital and smartphone capabilities sought by younger consumers.
A 2024 report by global consulting firm McKinsey & Co. concluded that credit unions nationwide are at a crossroads, adding that they “need to work harder to attract younger members or risk facing irrelevance” as they compete with traditional banks, digital banks and fintech companies.
Rhode Island credit unions have proved resilient so far. While the number of credit unions operating here has been cut in half in the last two decades, dropping from 31 in 2004 to 15 in 2024, industry data shows that credit union membership has steadily climbed in those years, from 344,955 to more than 492,000.
Local executives credit that growth to many factors, from issuing more car loans to upgraded digital platforms that they argue can rival almost anything the big banks offer.
Sean Daly, CEO of People’s Credit Union, based in Middletown, keeps close tabs on how the credit union’s smartphone app fares in the app stores ever since an overhauled version of the app was launched a few years ago. He notes proudly that it has an average of 4.9 out of 5 stars in 3,000 reviews.
On top of that, People’s – which has $747 million in assets and about 41,400 members – has invested in an extensive digital marketing campaign with the help of an outside firm, placing ads on YouTube and other social media channels that have the attention of millennials and Gen Z.
“It’s very important to attract younger members,” he said. “The No. 1 reason, obviously, is they are consumers, but No. 2, there is going to be a wealth transfer. We’ve got folks who are baby boomers who are going to be dying, and their assets are going to their kids, so we want to be attracting that wealth transfer as well.”
[caption id="attachment_487768" align="aligncenter" width="1024"]
STILL STANDING: Coastal1 Credit Union has experienced a 73% decline in yearly net income since 2022, but CEO and President Brian A. Azar is still looking to grow Rhode Island’s second-largest credit union.
PBN PHOTO/MICHAEL SALERNO[/caption]
‘A THINNER MARGIN’
Orovitz likes to proclaim that Navigant’s 26 brick-and-mortar branches span “from Woonsocket to Westerly,” covering the entire state of Rhode Island.
This was not always the case. The credit union started with only $22,000 in assets after being established in a church basement as La Credit Union de Notre Dame de Central Falls in 1915, just one year after the General Assembly passed a law allowing “loan societies” to incorporate as credit unions.
For the next 75 years, Credit Union Central Falls had just one branch, which primarily served the Blackstone Valley. By 2007, the credit union changed its name to Navigant to reflect its desire to branch out beyond Central Falls. And that’s what it has done on the way to becoming the biggest in Rhode Island. In the last five years alone, Navigant membership has grown from 100,165 in 2019 to 157,913 at the end of 2024 while assets climbed from $2.3 billion to $3.9 billion.
Many credit unions in Rhode Island got their start in a similar manner, although not growing to Navigant’s size.
The smallest example: the Natco Employees Federal Credit Union in West Warwick, which was started in 1965 by workers of the manufacturer Natco Products Corp. As of June 2024, it had just 29 members and $192,493 in assets.
On the other end of the scale, seven of the state’s credit unions have assets topping $300 million and tens of thousands of members each.
These days, the bigger credit unions provide similar services as banks, such as savings accounts; business, home and car loans; and credit cards.
And observers say the member-owned structure and federal tax-exempt status can be an advantage when weathering an interest margin squeeze.
Charles Reilly, an associate teaching professor of finance at the University of Rhode Island, says bank executives can feel acute pressure to obtain short-term gains for shareholders, whereas credit unions do not need to be as ruthlessly driven by profit because their shareholders are also their customers.
“Credit unions don’t need to make a 10% profit off all of their equity,” Reilly said. “When I buy a stock, I expect more than a 10% return. It could be a combination of dividends and growth, but I definitely want more than a 10% return. But credit unions can arguably take a thinner margin.”
Coastal1 CEO and President Brian A. Azar acknowledges that his credit union has felt the squeeze in the last two years, but there’s also been a bright side for the 141,570 Coastal1 members.
“It has been a benefit for our depositors after probably two decades of earning very low interest on their money,” Azar said of higher interest rates. “They’re starting to see a better rate of return, and I think that’s good. It’s good for the economy, and it’s good for our members who have money market and CD deposits with us, so we see it as a positive.”
[caption id="attachment_487770" align="aligncenter" width="1024"]
MARGIN PROBLEM: The net income of the top five credit unions in Rhode Island peaked in 2021 and 2022, when
interest rate margins – the spread between the cost of borrowing and lending – were wider
and more favorable to credit unions and banks. When rates started rising quickly in 2022,
the margin narrowed sharply, and so did earnings, as credit unions now had a lot of
low-yielding loans on their books while the interest they paid depositors quickly increased. / SOURCE: NATIONAL CREDIT UNION ADMINISTRATION CALL REPORTS[/caption]
MEMBERSHIP-MINDED
One area where credit unions have tried to capitalize: auto loans.
When the Federal Reserve began hiking its benchmark rate from nearly 0% to over 5% in 2022, it reduced the appetite of banks to issue auto loans because the margins were thinning and the risk increased.
That’s when credit unions stepped in.
Many credit unions were able to offer loans at lower rates, utilizing partnerships with car dealerships not only in Rhode Island but around New England. While credit unions make auto loans directly to their members, it’s through those partnerships that credit unions make most of their auto loans.
In 2022, for the first time ever, the nation’s credit unions eclipsed banks to dominate the auto loan sector. That year, credit unions financed more than 25% of all auto loans, according to credit agency Experian’s “State of the Automotive Finance Market” report.
Indeed, financial reports indicate that the portfolio of these “indirect loans” saw significant increases at many credit unions in the last two years. At Navigant, the dollar amount of outstanding auto loans stood at $735.5 million at the end of 2024, up from $611.7 million in 2022. Meanwhile, Coastal1’s portfolio increased from $613.3 million to $700.4 million over the same period.
Beyond the vehicle loans themselves, some credit union executives acknowledge that this category of lending has proved to be a key driver of membership growth, since borrowers become members, and consumers in need of auto financing are trending younger.
“If you were to purchase a car, we partner with well over 100 dealerships, and they offer financing, and typically one of those options is Coastal1,” Azar said. “We’ve attracted younger members who are buying autos, and then we expand those relationships from there.”
Navigant is trying to attract young members even before they’re looking to purchase their first car.
Orovitz describes one of Navigant’s newest products, the Embark Account. Customer feedback resulted in Navigant offering this checking account geared toward children as young as 13. Its features include no monthly fees, no overdraft charges, free use of ATMs and real-time payment capability along the lines of Zelle, Venmo and PayPal.
“We created an account, knowing it would be, initially, not a profitable account because it’s based on volume. But I will tell you in just six months we had a thousand new accounts,” Orovitz said.
Navigant has picked up some young depositors by partnering with local school districts on financial literacy lessons that also encourage students to open their first account. Most recently, Navigant agreed to participate in a financial education program at Calcutt Middle School in Central Falls, where participating students receive a $50 Navigant savings account.
“The minimum age is 13 [for the Embark Account], and it will travel with you right through college, and then we’ve got an account that you graduate to,” Orovitz said. “We have had tremendous success as a result of creating that product, having that technology embedded in it from a payments perspective.”
As inconsequential as peer-to-peer payment capability may seem to older generations, being able to offer the service is crucial in competing for the hearts and minds of younger consumers, according to observers.
Reilly says his students at URI have totally different savings and investment habits from those of their elders. “My students don’t go to a bank branch – they use PayPal and Venmo,” he said. “Of course, they have bank accounts, but they don’t think the way older people do, who go to the bank and go see a teller.”
Frederick Reinhardt, CEO at Greenwood Credit Union in Warwick, the state’s third-largest credit union at $865.5 million in assets, believes rock-bottom interest rates in the last decade or so have altered the financial habits of younger generations.
“Between 2010-2018, interest rates were near zero, so if you had a savings account at a bank, you were basically getting no interest,” Reinhardt said. “So it changed your behavior – you were willing to leave money at Starbucks on your card, or leave money on Venmo just sitting there. It didn’t matter that you weren’t earning interest at those places because you weren’t earning interest on your bank account, either.”
Credit union executives insist they have responded.
Daly, for one, says People’s Credit Union, which is No. 4 in terms of credit union asset size, has partnered with tech firms in recent years, including a contract with Amazon Web Services to relocate People’s Credit Union’s data servers outside of Rhode Island and make them more resilient to outages and cyberattacks and to add capabilities.
“That was really the beginning point,” Daly said. “And then from there we invested in a new online banking platform. … It is the most important member-facing application we have.”
With foundational improvements to the credit union’s online and digital offerings, Daly says People’s is ready to implement other strategies to compete with much larger financial institutions. “Now we can offer better products, we are confident we can get into a market and get market share,” he said.
[caption id="attachment_487769" align="aligncenter" width="1024"]
BUYER’S MINDSET: Navigant Credit Union CEO and President Kathleen C. Orovitz says she expects more consolidation in the future among credit unions.
COURTESY NAVIGANT CREDIT UNION[/caption]
ACQUISITIONS AHEAD?
Despite being not-for-profit entities with a community-focused mission, credit unions are clearly focused on growth, much like their banking counterparts.
For example, Coastal1 – which changed its name from Pawtucket Credit Union in 2022 – became the first Rhode Island credit union to open a branch in another state, this one in North Attleborough, Mass., in 2023.
Azar says the “experiment” has been successful, and now that the credit union is already acclimated to the extra layer of regulations in Massachusetts, it is looking for places to expand its branch network in Bristol County, Mass.
The bigger credit unions are also keeping an eye out for merger and acquisition targets, both in Rhode Island and Massachusetts, either small banks or other credit unions. “There are some opportunities [to absorb] some smaller organizations,” Azar said. “Those conversations do happen.”
Orovitz says there definitely will be more consolidation among credit unions in Rhode Island in the future as smaller organizations struggle to keep up in an increasingly competitive environment.
Navigant has acquisition experience, having absorbed Woodlawn Credit Union in Pawtucket and its 6,000 members in 2018, and the Postal Government Employees Federal Credit Union in Providence in 2023.
Orovitz wouldn’t identify future potential acquisition prospects but said Navigant is also on the lookout in Massachusetts and Connecticut, too.
Growth through strategies such as mergers and acquisitions allows for a financial institution to improve its cost efficiency, risk management and allows for more capital to be available for lending, among other factors.
Scaling upward is needed “if we want to be relevant with the big banks,” Orovitz said. “You won’t survive unless you do.”
For now, though, the credit unions are looking to get past the financial headwinds of 2023 and 2024. The quarterly financial statements filed with the National Credit Union Administration don’t look nearly as strong as they once did.
Along with Coastal1 and Navigant, People’s saw its net income sink to $466,602 in 2024, down from $1.46 million in 2023 and $4.74 million in 2022. Meanwhile, Greenwood reported a net income of $4.93 million in 2024, an improvement from $4.04 million a year earlier but still significantly lower than the $8.69 million posted in 2022.
Credit union executives insist there’s no reason for concern.
“We’re all in the same economic macro environment, and in Rhode Island, we’re all in sort of the same microenvironment, and everybody got squeezed on margin,” Orovitz said. “Whether you’re a bank or a credit union, where you’re making your revenue, that income is on the margin between what you’re paying a depositor and what a borrower is paying you on a loan. So, we were squeezed.”
Azar says the financial picture is already looking brighter in early 2025 because interest rate margins have started to widen again.
“Income is only going to increase and margins are only going to increase,” he said. “I think we’ve weathered the storm.”
