"High performance" assessment model shows 26% jump in HP credit unions

SEATTLE – NCUA’s CAMEL system has been the most significant standard for rating credit union performance, but it’s not the only system in CU town. An alternative “high performance” assessment model developed by Ward-Smith & Company measures a CU’s operational effectiveness using an “accounts-per-member” formula. Based on data drawn from NCUA 5300 Call Reports as of Dec. 21, 2000, the company reported a 26% increase in the number of “high performance” credit unions in 2001 compared to 2000. The new listing includes 527 credit unions-up from 417 last year-and reflects tighter standards for determining exceptional performance among credit unions in the U.S., says Tony Ward-Smith, president. In previous years, for example, the “HP” ranking was solely based on account sign-up ratios. The top 25% of all CUs were automatically included. This year, several changes were made to the “HP” formula. While it still measures effectiveness based on the extent members actually use their credit union rather than banking elsewhere, in the revised formula: * A 2.5 accounts-per-member ratio was set as a minimum indicator (the average accounts-per-member index for credit unions was 2.1.) * Average account balances were used to confirm utilization. Those with average combined (deposit and credit) balances below $3,427 (national average) were eliminated. * Credit unions with 1,000 members or more were included (previous listings were limited to credit unions with 5,000 or more members.) * Services counted included checking, credit cards, new and used auto loans, consumer loans, regular (share) savings, CDs, IRAs, MMAs, and first and second mortgages. * Credit unions with negative earnings for the year were eliminated. “Now with the fixed formula, any credit union that meets the basic cross-sell and utilization criteria can qualify for the HP status,” said Ward-Smith. The revised standard continues to stress the market-based “payoff” point, and the data continues to reflect a direct correlation between members’ use of credit union services and the net earnings of a credit union. No matter what their size, credit unions with the highest accounts-per-member ratios consistently show higher performance. “How should credit union performance be measured?” asks Ward-Smith. “If the basic purpose of credit unions is to help members improve their financial conditions, the basic function then is for the credit union to present them with a wide array of services. The assumption is that members come out ahead when they use the services their credit union offers. “If you’re operating a credit union, but most of your members are doing most of their banking elsewhere instead of using their credit union, something’s not working right,” he continued. “That’s why a credit union’s performance must be measured by how much members are actually using its products and services, rather than the services being offered by another financial institution.” Unfortunately, Ward-Smith points out, for virtually all credit unions, between one-third and one-half of the membership is connected to the credit union only by a share account, and frequently one with a low balance. On the borrowing side, most credit unions hold less than half of their members’ vehicle and consumer loans. “With members faced with so many choices and options that look pretty much the same on where to take their banking business, credit unions are being challenged to find ways to grow their business. Loyalty doesn’t cut it anymore. Members expect performance and value,” says Ward-Smith. “For years, it’s been a no-no to talk about how well credit unions are performing and being used by their members. We’ve operated under the assumption that all credit unions wear white hats and do good things for people,” Ward-Smith says. “The reality is that most credit unions are not doing their best to serve their members.” To prove his point, Ward-Smith suggested credit unions look at the agenda for their strategic planning meetings. “Most of them spend the time talking about anything they want to, instead of focusing on the services they’re providing and what is and isn’t being used by members. They don’t spend enough time trying to figure out why more of their members aren’t using their services more.” Ward-Smith cautions against what he refers to as “the curse of the one-humped CAMEL.” “NCUA’s CAMEL system was never meant to be the only measure of credit union effectiveness that it has become,” Ward-Smith says. “For want of a more relevant standard, the credit union industry elevated this analysis tool from its function of analyzing fiscal health, and made it into the definitive indicator of how well credit unions are doing. “The CAMEL system is missing the marketing function, that is whether credit unions are getting members to use their services, and whether members are getting anything out of the services they’re using,” he continued. “It’s only intended to show whether credit union deposits are safe from an NCUA point of view to protect the Share Insurance Fund. It doesn’t recognize the effectiveness of a credit union, just the security of the money on deposit. There’s nothing to suggest in the CAMEL rating whether a credit union is doing a good or an exceptional job of finding members and paying them back in the form of services.” More than a few credit unions have gone as far as revising their mission statements to include achieving the highest CAMEL rating. “Shouldn’t effectiveness for credit unions relate to credit unions’ bottom-line purpose of serving their members?” he asks. “Today’s financial marketplace is overly crowded, it’s over-supplied. If credit unions are going to grow and hold their own, they have to start talking about taking business away from someone else,” says Ward-Smith, and that means getting members to use CUs’ services. “Success generates success,” he says. “It’s never one or two things that make a difference, but the collection of small things. Credit unions have to start looking at the value add things they do, put it in a small package and market the hell out of it. Credit unions do so many amazing things, but they don’t give themselves enough credit. They need to start selling the core essence of the credit union distinction.” -