Jay Johnson, Chief Collaboration Officer, Callahan & Associates
Credit unions kicked off 2019 with another strong first quarter. Although lending activity is slowing versus a year ago, membership growth — a key indicator of future growth potential — remains above 4% over the past 12 months. The 12-month asset growth rate of 6.3% picked up from the rate posted in the first quarter of 2018, largely driven by the solid 5.8% increase in share balances. Earnings and capital levels are rising, with return on assets reaching 95 basis points in the first quarter and the net worth ratio at 11.15%.
By traditional measures, credit unions are stronger than ever. The industry’s $1.5 trillion balance sheet is healthy and growing. Capital tops $175 billion. Increased advertising by credit unions has elevated the visibility of the industry, and more than one million new members are joining each quarter. Market share in leading products such as auto loans and first mortgages continues to trend higher.
Given the industry’s momentum since the Great Recession, there’s a risk that complacency could set in. Success can lead organizations to pull back a bit from the activity that drove recent results. That’s one reason that repeat champions in sports are typically the exception, not the norm.
That’s why I was encouraged by the answer to a question posed in a recent planning session I facilitated. The title said it all: “Are we doing enough?” Through this planning session and others, I’ve found that credit unions are continuing to push forward, looking to build on their success and increase their impact. There are too many opportunities to support members and communities to slow down. As cooperatives, they must continue to address ever-changing member needs.
Are We Doing Enough?
The question posed at the planning session comes at a time when this credit union is posting its strongest results ever in terms of growth and earnings. The cooperative recognizes that its increased size provides even more opportunities to impact the community it serves, and that its financial strength provides additional flexibility as it looks to invest in new initiatives.
Even more telling, the performance measures this credit union tracks have recently evolved. After focusing for many years on financial metrics such as operating expense ratio, ROA, and net worth ratio as their measures of success, last year the management team proposed to the board that it begin incorporating measures that focused more on the value they are returning to the credit union’s stakeholders. These measures include employee “success sharing” bonuses, bonus dividends to members, community giving, and volunteer hours.
By expanding beyond metrics that focus primarily on the financial health and performance of the institution, this credit union is now looking at the key factors that actually drive those results. Many CEOs believe that investing in employee engagement is essential to ensuring member engagement. Employees need to be recognized and rewarded for their contributions to the credit union’s success, so tracking what they are earning from their work makes sense. Members certainly should be rewarded for participation, and more credit unions are paying bonus dividends that reflect their borrowing and saving activity. Of course, the credit union will be challenged to sustain its success if the community it serves is struggling, so contributing to the community’s well-being with both dollars and time plays a role in supporting its market.
Callahan recently led a cohort of 33 executives from credit unions across the country in a course called Sustainable Business Strategy with Rebecca Henderson, offered in collaboration with Harvard Business School Online. The course is centered around research that indicates purpose-driven organizations deliver better outcomes in terms of employee and customer engagement, market differentiation, and financial returns. A recurring theme of the course is that companies can “do well”— make money — by “doing good”, by acting beyond the sole interest of the firm to improve the well-being of all of its stakeholders, including customers, employees, and their local community.
By expanding beyond metrics that focus primarily on the financial health and performance of the institution, this credit union is now looking at the key factors that actually drive those results.
The executives we worked with didn’t need convincing about the theory of “doing well by doing good” since they see it happening every day in their credit unions. But the course did get them thinking more about how they might expand their credit union’s impact. These credit unions are all “successful” in terms of financial results and they are all active players in the communities they serve, but this course inspired them to think bigger. Are there issues that their members and communities are wrestling with that they could contribute to, or partner on, that could further amplify their impact?
The key is to look from the outside in to identify ways in which your credit union can influence employees, members, industry leaders, or community leaders to work on answers to the big challenges that need solutions. Our group cited housing affordability, income inequality, and consumer financial wellness as the type of issues that could be addressed.
Underlying this discussion was the understanding that credit unions have the opportunity to play a critical role in the sustainability of the communities they serve. The group recognized that their credit union’s success is directly related to the success and well-being of their community, so there needs to be ongoing contributions toward its sustainability.
Credit unions are often part of the fabric of the communities they serve. They are not building branches in locations simply to grow deposits and loans. They are building them to plant a stake in the community. As one participant commented, “We are capital working for communities rather than the other way around.”
Are We Using The Right Success Measures?
Another part of our discussion was about metrics. Just as the previously mentioned credit union has evolved the results they track, our cohort of executives are also looking into non-traditional measures of success: some from the community impact perspective, others with a view of members’ financial health. From the community perspective, several participants noted how many of their mortgages are for first-time home buyers; others how many loans went to start-up businesses. For member financial health, measures included the number of members with at least $500 in savings and checking accounts, average fees per member (lower is better!), and credit score migration.
Although these measures are not typically ones that regulators pay attention to, perhaps they should. After all, a stronger community and financially stable membership are good indicators of the long-term viability of a credit union. When the NCUA focuses on risks to the insurance fund, are the regulators taking too narrow a view? Are they missing the opportunity to better capture the significant impact that credit unions are having today? Can they underscore that doing good truly helps the industry do well?
With a solid economy as a backdrop, 2019 will likely be another year of strong results for the credit union system. But as we go through the year, it may be time to look beyond the financial results and instead keep asking the question, “Are we doing enough?”
Sustainable Business Strategy
This new Callahan Academy course pushes C-suite executives and senior leadership teams to explore and debate:
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Business models that drive change.
Tactics that demonstrate the competitive advantages of being a purpose-driven firm.
The broader political and social landscape in which credit unions operate.
Why collective efforts are important and how business can be a catalyst for system-level change.
What you can do to become a purpose-driven leader and how you can develop purpose-driven leaders within you organization.
This article appeared originally in Credit Union Strategy & Performance. Read More Today.