Commonwealth Credit Union is Kentucky’s second-largest credit union, and like its state-based peers, it is growing. At second quarter 2016, member growth sits at 4.29% and share growth has reached 6.78%. Those metrics may be lower than those of state- and asset-based peers, but they represent large gains compared to the -1.44% member growth and 1.86% share growth the credit union posted in the fourth quarter of 2013.
But even as the nation as a whole continues to rebound from the Great Recession — the national unemployment rate has dropped from a high of 10% in October 2009, to 5% in September 2016; similarly, U.S. foreclosure activity has greatly improved, from more than 900,000 properties filing for foreclosure in third quarter 2010, to fewer than 300,000 at first quarter 2016 — Kentucky’s economy hasn’t quite grown to the same degree.
For Commonwealth Credit Union ($1.1B, Frankfort, KY), a newly designated community-chartered credit union, earning enough to keep the lights on while charging reasonable rates and fees remains a critical operational balance.
“If I said non-interest income was ‘very, very important,’ that would still be an understatement,” says Commonwealth’s vice president of lending, Alan Davis.
Commonwealth’s non-interest income as a percentage of assets stood at 1.47% as of June 30, 2016. That’s stronger than both credit unions in Kentucky as well as credit unions with more than $1 billion in assets, which reported second quarter ratios of 1.43% and 1.28%, respectively, according to data from Callahan & Associates.
To earn non-interest income, Commonwealth focuses on income from insurance products, including credit insurance products the institution has offered for more than three decades.
The Need For Non-Interest Income
Commonwealth finalized its conversion to a community charter in mid-2016. Previously, the Kentucky credit union’s membership consisted solely of state employees and their family members. That was good business — until it wasn’t.
In 2014, Kentucky produced approximately 7.7% of the nation’s coal output, ranking third among all states. After President Obama unveiled the Clean Power Plan in August 2015, coal plants across the nation, including in Kentucky, started closing. According to a report from the Kentucky Energy and Environment Cabinet, the number of coal industry jobs in the state as of March 2016 was the lowest since 1898.
CU QUICK FACTS
commonwealth credit union
Data as of 06.30.16
HQ: Frankfort, KY
12-MO SHARE GROWTH: 6.78%
12-MO LOAN GROWTH: 7.00%
This contraction, coupled with year-over-year declines in state government workers according to the Bureau of Labor Statistics, pushed Commonwealth to adopt a community charter.
The state’s economic hardship has made Commonwealth’s credit insurance more than a steady source of non-interest income for the credit union — it’s made the product a valuable lifeline for members facing grim financial realities.
“It’s not just a cross-sale product that generates income,” Davis says. “It’s a way to improve our members’ financial well-being.”
How Credit Insurance Works
Commonwealth has offered some form of credit insurance since Davis started with the credit union 29 years ago. Today, the Kentucky credit union offers two different insurance offerings — credit life and credit disability — as either stand-alone products or joint products.
Credit life pays or reduces loan balances in the event of an unexpected, covered life event. Credit disability helps members pay off the loan in the event of total disability caused by injury or illness.
Commonwealth offers these insurance options on all loan products — rather than for simply HELOCs and consumer loans, as is traditional — and bases the monthly premiums on the size of the loan.
“We’ve been told we are one of a few credit unions that ensure credit cards,” Davis says. “Those are a little challenging because most of the time they are opened with $0 balance. But because most end up having large balances down the road, the protection of the credit insurance can come in handy when a claim is filed.”
On the credit union side, Commonwealth employs a reasonable incentive structure to encourage team members to keep the products at the forefront of member interactions. Incentives are based on the first month’s premium; therefore, team members who sell insurance on larger loans receive higher incentives. According to Davis, incentives run from $25 to as high as several hundred dollars.
“Incentives are a way to encourage team members to offer our product to all of our members,” Davis says. “It’s not something you can get rich from.”
As of third quarter 2016, Commonwealth’s insured loan percentage was slightly lower than 45%. That figure represents individual loan products, not members. So if one member has two loans and one of them is insured, Commonwealth counts that as a 50% rate. And that's the sweet Commonwealth is aiming for: 50% insured loans.
Pique Member Interest For Peak Non-Interest Income
As part of its insurance strategy, Commonwealth focuses on educating its membership. That includes explaining the features, overage, and costs as well as outlining the benefits should the member need to file a claim.
But even beyond primary education, Davis says the credit unions wants team members to promote the insurance in a specific way.
Our team members are not arm-twisting or telling members stories that make the product look better than it is.
“Our team members are not arm-twisting or telling members stories that make the product look better than it is,” the vice president says. “It’s an insurance product that helps members if they need it. If they say they’re not interested, we say ‘Thanks for listening. If you change your mind give us a call.’ And then we’ll talk about Kentucky Wildcats basketball or the weather.”
To Davis, pushing the product too hard creates a lose-lose situation. Members would be unhappy with the credit union and Davis would be unhappy with the poor member service.
Another best practice in selling insurance, according to Davis, is to provide top-down support. For example, Commonwealth sponsors awards and events to recognize the work of team members.
The credit union’s CARE Award is a certificate for team members who cross-sell an insurance product on which a member makes a claim. Before the CARE Award, the credit union simply reported on the number of monthly claims. Although that was helpful, knowing how much the claims were for and why better captures the value of the product for the loan officers selling it, Davis says. And it shows team members the credit union cares when they do right by members.
Read The Executive summary 4 graphs about nii
Callahan's Non-Interest Income Survey
In July 2016, Callahan & Associates surveyed 170 credit union executives from 40 states to gain insight into their current and emerging sources of non-interest income.
“The award tells [team members] that we appreciate them taking the time to share the benefit of insurance with a member,” Davis says. “That made it real for our team members.”
The credit union also holds two cross-selling contests — one in late fall and one in the summer. For the Christmas-themed fall edition, team members get to draw a number out of a hat for every insurance product they sell. That number, then, corresponds to a gift around a Christmas tree. The summer contest is similar, with team members picking numbers out of a summer-themed catalog.
Both contests inspire seasonal festivity while reinforcing the value of the contributions team members are making. Selling insurance can be difficult, after all.
“We want to support our team members from the top down,” Davis says. “We want to make things fun so it’s not just this weight on their shoulders.”