15 Ratios Every Board Member Should Know (part 4)

Operating expense to income, efficiency, members per employee: Three metrics to evaluate your credit union and bridge the gap between macro trends and micro performance.


In December, the NCUA passed a rule requiring Board members of federally insured credit unions to have a “working familiarity with basic finance and accounting practices.” The extent of financial literacy that volunteers must meet varies depending upon each credit union’s complexity, but there are basic concepts, definitions, and formulas every volunteer should know. To that end, CreditUnions.com is breaking down 15 ratios by providing definitions and describing how the ratios affect the balance sheet and income statement.

Operating Expense to Income
Part 3 of this series discussed the operating expense ratio, which is a measurement of operating expenses relative to the credit union’s asset base. Although it is important to be aware of the operating expense ratio, it is equally important to understand how expenses compare to the credit union’s income. The relationship between operating expenses and income is driven by several factors, including member demographics and the credit union’s philosophy toward products, service levels, and technology. The credit union’s expense-to-income ratio depends upon its ability to generate income from its products and services. A credit union’s operating expense-to-income ratio can also measure its productivity, as successfully managed technology investments contribute to a credit union’s productivity, which, in turn, lowers expenses. Finally, on the income side of the equation, product-pricing strategies also have a significant impact on the ratio.

Efficiency Ratio
The operating expense-to-income ratio measures expenses to total income. The efficiency ratio, on the other hand, compares expenses to operational income (interest income, fee income, and other operating income) minus interest expense. A high or increasing efficiency ratio means the credit union is losing a larger share of its core income to overhead expenses. A low efficiency ratio means operating expenses represent a smaller percentage of income (i.e., the credit union is comfortably covering operating expenses through its key business lines). So, the lower the efficiency ratio, the better.

The efficiency ratio can fluctuate. Because income is generally more sensitive than expenses to interest rate changes, the ratio is influenced, in part, by the interest rate environment. In theory, credit unions with higher ratios of fee income to total income should see less fluctuation in the efficiency ratio than credit unions with little fee income.

Members per Employees
The members-to-employees ratio measures the number of members per each full-time equivalent employee. Given that human resource costs are typically credit unions’ highest dollar operating expense, this ratio is critical. Theoretically, a higher ratio means a credit union is more productive; however, there are many factors that influence it. When examining the ratio, credit unions should also consider product penetration rates, members per branch location, the geographic distribution of the membership, and field of membership requirements. The strategic factors that impact the ratio include organizational service level goals, growth, and product and technology development.

More key ratios every Board member should know ...
Part 1
: 12-month loan growth, provision for loan loss, loan portfolio profile.
Part 2
: Cost of funds, net interest margin, operating expense ratio.
Part 3
: Delinquency, return on assets, net worth to assets.
Part 5: Fee income per member, member growth, average relationship per member.

Click here for a complete listing of the 15 ratios every Board member should know.