Return on Assets is Music to Your Earnings

During a recent meeting I attended, a colleague from another credit union made a statement that many of us in our credit union movement believe deeply, “There can be no mission without margin.” I am fond of this simple description that connects the heart of our work with our industry’s business fundamentals. In a world full of data, it can sometimes be complicated to pare down what matters most to any organization. It can be even more challenging to connect the dots between functions and how they come together to demonstrate member impact.

For those of you who have a favorite band that tours regularly, the day that band announces their tour dates truly lights up with joy. Recently, I experienced that joyful day as the Dave Matthews Band released their summer plans. The joy quickly expands as the consideration for picking shows comes to life. I feel privileged to have friends who have a similar passion for live shows and planning. Together, we toss around ideas as we consider the location, the reputation of the venue, our calendar commitments for work and family, and the historical connectedness the band has to the setting. While heading to an epic venue like The Gorge might be higher in the consideration set, the matrix of variables all come into play, and sometimes, the sheer logistics of merging busy calendars marks the decision.

The same can be said for the financial measures of a credit union. There are many to consider, and some weigh more heavily than others. Perhaps no financial ratio is as frequently cited as a measure of success as return on assets (ROA). Yet, overall, it is only one of many ways to paint the picture of a healthy organization. ROA is a key measure of relative operating performance, and the beauty of the credit union model is how a not-for-profit financial cooperative can return value in ways other financial institutions cannot.

Most credit unions maintain a close eye on various financial indicators, including ROA, return on equity (ROE), core deposit growth, and, in this season, productivity indicators such as total shares per full-time employee, that demonstrate the delicate balance of providing technologically-forward personalized service that creates a modern experience and drives efficiencies. Many balanced scorecards also include member and team member input. As a financial cooperative, our members’ and team members’ voices matter deeply. Looking across measures allows for a complete picture of the impact of the cooperative, as no one measure on its own tells the whole story of either progress or success.

One of the key differentiators of the model for credit unions is the ability to think in long-term horizons to maximize the impact on those who need us most. Unlike other stockholder-driven organizations, we are not driven to react to keep up with quarterly forecasts and results. When used in a balanced way, financial indicators, like ROA, fuel the organization’s long-term success in mid-term (3 years) and long-term (7 to 10 years) horizons. This can liberate credit union leaders to:

• Bring to life an enduring, evolving, and unique culture,
• Develop and implement an audacious strategy,
• Make appropriate investments and use innovation to build member value,
• Identify change as it is occurring and, iterate strategy through that change, and
• Direct improvements in performance within the organization to achieve and sustain competitive advantage.

The anchoring effect bias is one peril of relying on ROA as a dominant metric in isolation. For years, we have been conditioned to think of an ROA of 1.00 to be heuristically solid. This characterization creates a tendency to rely heavily on the first piece of information encountered when making decisions (our ROA heuristic). It influences subsequent judgments and choices, leading to a selective perception of information that aligns with the initial anchor. So, what does it mean? Is achieving an ROA of 1.00 no longer the gold standard? Is a low ROA a bad thing? It all depends. At times, credit unions may need to map out lower ROAs, perhaps near zero or even negative, as a point in time over a long-term journey with a plan to return to higher earnings as the forecast’s horizon elongates.

Just like a group of incredible friends crafting their concert-going summer experiences, effective executive teams are well-positioned to discuss the short and long-term forecasts for earnings and how those will bring to life the best strategies to return value to members. The following are just a few questions related to levers available to credit union leadership teams that could drive essential considerations depending on the unique needs of the organization in any given season:

Should we decrease the interest rates we pay on deposits?

• What are your organization’s alternatives to member deposits to fuel lending?
• How long might your current rates serve your short-term needs before you adjust them? What does that shift look like? What are the consequences?
• Does your brand and product line support such a decrease? Or is your value proposition hinging on offering one of the highest rates in your market?

Might we increase the interest rates we charge on loans?

• If you face liquidity challenges, how quickly is your asset liability committee willing to adjust loan rates? As fast as banks do? As a result of a competitor analysis? How fast does it need to be?
• How long might your current rates serve your short-term needs before you adjust them? What does the shift look like? What are the consequences of your position in the market?
• How is our cost of funds impacting our bottom line? How do we balance the good of individual members and the interest rate environment with the broader membership’s needs and the credit union’s health?

Should we launch and promote new revenue-generating products?

• Might your organization be able to shift investments and loan portfolios to higher-interest investments and loans?
• Are there untapped opportunities to increase fees on existing products?
• How might innovation help based on what you are hearing from members? What needs to exist that your organization is uniquely positioned to solve?

How might cost control efforts impact our efforts and impact?

• What will be the cultural implications of cost-cutting measures? What costs are worth reducing, and what should you not touch to maintain long-term investments in the future?
• Will members’ experience be negatively impacted? In what ways? Will this cost reduction allow us to further invest in our differentiator?
• How might you optimize your heavy machinery to attain big wins in the market?

Planning for the joy of seeing Dave Matthews play live jumpstarts the experience of the actual show. The mapping of plans starts the anticipation of seeing an epic band play joyfully. The same can be true for the questions a leadership team weighs as it considers how to map a successful forecast. While the credit union’s evolving results might not be quite as much fun as attending a concert, the considerations can create a vibrant opportunity for a leadership team to collaborate and leverage data and trends to build an iterative strategy. Credit unions have an incredible opportunity to leverage our unique model to invest in member needs, think in longer horizons, and build toward scale. ROA can be one of many vital tools guiding our path. There is genuinely no mission without margin.