Performance Evaluation Of Credit Unions: Reaping The Benefit Of Tax Status

Performance measurement supports the functions of evaluation and control. The underlying goal is to ensure that the organization is achieving what it set out to accomplish. Therefore, performance measurement should focus on the objectives established in the long-term or strategic planning process of the organization. Credit unions originally were granted tax-exempt status to offer lower loan rates and higher deposit rates to low-income individuals with a common bond. This objective would lead one to believe that credit unions should minimize their net interest margins. However, as credit unions increase in size and expand their range of services, and as the common bond weakens, managers may be losing sight of their ultimate objective. This study compares the net interest margin (the difference between loan interest revenue and deposit interest expense, divided by earning assets) of credit unions and a group of for-profit competitors (mutual S& Ls) for compliance with the original government objective. The results indicates that credit union management may not be passing along the tax subsidy to members. It is also possible that managers may have personal objectives that are not aligned with those of their organization, which gives rise to agency costs. Two agency cost variables are examined (total personnel plus travel expenditures and operating expenditures) and the results indicate that credit unions have higher total personnel and travel expenditures and higher operating expenditures than do mutual S& Ls, which is consistent with agency theory.