Credit unions, like most financial institutions, typically track a set of standard financial ratios to measure their success. These ratios include Return on Assets, Delinquency and Capital to Assets. Such measures focus on the financial performance and strength of the institution. Benchmarking and achieving targets for these measures became particularly important as deregulation took place in the 80’s. With loan and savings rate decisions put in the hands of each credit union, strong financial performance was a critical success measure.
By each of the measures mentioned above, credit unions are succeeding. Return on assets for the industry is stable at 0.88 percent as of the third quarter. This is below historical averages but with capital at 11.9 percent of assets, credit unions are well above the “well capitalized” regulatory definition of 7.0 percent and therefore do not need to generate a strong bottom line that adds their capital base. In addition, asset quality remains outstanding with delinquent loans accounting for just 0.6 percent of total loans.
Measuring Success in the Era of Open Charters
As these measures indicate, credit unions have proven over the last 25 years that they are very capable managers of their members’ funds. However, credit unions are now in a new era in which the rules of competition have changed once again. Expanded charters are allowing credit unions to serve a broader range of consumers, many of whom have previously not been able to benefit from access to a cooperative financial institution.
As credit unions evolve into this new era, they are learning to compete in new ways. New brand names, the use of public media for advertising, and sponsorships of community events and teams are just some of the changes being undertaken. Products and services are also being expanded in response to new member needs, including adding business and trust services among others.
Just as credit unions are evolving, so should their success measures. While financial performance remains important, credit unions must now also measure their market performance. What would this include? Growth is certainly one measure of market success. Net membership growth is important, as is loan and share growth although even this is changing at many credit unions as they look beyond balance sheet growth to measure off balance sheet items such as loan servicing portfolios and member investment balances. Other measures of market success include:
- Member usage of “sticky” products such as checking and online banking that often indicate primary financial institution (PFI) status
- Growth in average balances in loan and share products that indicate members are increasingly attracted to credit union value
- Market share in key lines of business where it can be readily tracked such as auto lending
What Gets Measured Matters
Including these types of success measures when reviewing credit union performance is essential to ensuring that value is being realized by members and the marketplace. Ultimately, that is how credit unions can and will differentiate themselves. Unless such measures are tracked, credit unions will continue to be financially sound but will not achieve the market momentum needed for long-term success.