Due to their not-for-profit nature, credit unions can maximize the value provided to their members without worrying about returning profits for the sole benefit of share holders. Some net income is necessary for future product and capital investments, but overall, credit unions are not profit-driven institutions. The industry prides itself on offering the best rates, products, and service to its members. Providing the highest member value possible is what differentiates credit unions from the rest of the financial services industry. Many credit unions measure member value with Callahan & Associates' Return of the Member Score (ROM). For over a decade, it has been actively used by hundreds of credit unions in such areas as: granting year-end staff bonuses and incentives, promoting their value to the local press, and considering long-term strategic planning and the affect on members.
ROM focuses on three key areas: savings, lending, and service usage. Importance is placed on average balances, growth in balances, average rates, and product penetration. Given these metrics quantify member value, do these credit unions also excel using more traditional financial performance metrics? The chart below uses the $50M - $100M peer group at December 31, 2008 to determine whether Leaders in ROM (154 credit unions over the 80th percentile) performed better financially than the "average credit union" in the same peer group.
$50M - $100M Peer Group Performance Comparison: Leaders in ROM vs. the Average Credit Union
Leaders in ROM have key advantages over their peer credit unions. While the average asset size is similar between the groups, the leaders in ROM are lending at a higher rate than the average credit union. The loan-to-share ratio stands at 84.7%, a full 10.3 percentage points over the other credit unions. The higher lending volume has resulted in a slightly higher delinquency ratio, although the spread is only 7 basis points.
The leading ROM credit unions are also more efficient. Operating Expenses to Average Assets Ratio is at 3.58% at year-end, below the 4.23% of the average credit union. Further indications include similar expenses in salary and benefits, but drastically higher loan originations per employee for the ROM credit unions ($995,902), when compared to the average credit union in the peer group ($652,942). Lower expenses and increased interest income has resulted in a slightly higher ROA (0.38%) for the ROM credit unions than their peers (0.29%). Credit unions in this peer group are remarkably well-capitalized. ROM credit unions do have a lower capital ratio (11.4%), indicative of their higher lending volume. These credit unions may also be using their reserves to increase delivery channel networks or other member touchpoints.
The calculations in ROM favor deeper member relationships – higher rates tend to lead to increased product penetration and higher growth rates. The average credit union in this peer group may be embarking on new growth strategies or be satisfied with its current performance and membership. Quantifying member value and financial performance may help with member and media communications, internal operations, and long-term strategic planning. For more on ROM, check out our Related Resources.
Callahan’s quarterly publication, Credit Union Strategy and Performance (CUSP), lists ROM leaders in nine peer groups.
Industry Analyst Nick Connors explores the arithmetic behind ROM and describes on CUtv how some credit unions use the measure in everyday operations.