A Balancing Act: Gauging Spending Priorities

As interest income shrinks and operating expenses rise, credit union executives must carefully examine how each investment enhances member benefits.


Credit union executives must juggle the goal of increasing member value while simultaneously dealing with the industry’s overall decreasing profitability. How do they know how successful they are?

Two quantitative measures are especially helpful. Both the Efficiency Ratio and the Return of the Member (ROM) score are key measures of a credit union’s performance.

The efficiency ratio is the ratio of operating expenses to total income before interest expenses. In other words, the efficiency ratio demonstrates how much a credit union earns for each dollar it expends.

“The efficiency ratio enables credit union executives to gauge the profitability of their spending decisions,” says Jay Johnson, executive vice president of Callahan & Associates. “The lower the efficiency ratio, the more profitable the credit union’s investments have been.”

Return of the Member score is Callahan’s measurement for the amount of member value a credit union is producing. The ROM calculation considers three core credit union functions of lending, savings, and product usage. Credit unions are then ranked using an index calculation that compares credit union performance within the proper asset peer group. The closer the ROM percentile is to 1, the more value the credit union provides its members.

This is a critical measure for every credit union to understand and evaluate, since the ultimate goal of any credit union is to enhance member value, says Johnson. In fact, it is such an important gauge that Brian P. Braunberger, marketing director at HAPO Community Credit Union in Washington State is running a full-page, full-color newspaper ad touting their high ROM score. “It is good to have proof-positive data to publicize the fact that the credit union is not only a solid foundation within the community, but a financial bonus for current and potential members,” says Braunberger.

The graph below combines these two measures. “The strong negative correlation between these measures implies that as credit unions become more efficient, the credit union’s members receive more value,” explains Johnson.

Finding ways to increase member value plays a large role in how credit union decision makers manage their organization and make strategic investment decisions. As illustrated above, any investment that will improve the efficiency ratio should ultimately deliver increased value to the credit union’s members.




May 16, 2005



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