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.
Fee Income per member
This metric, the level of fee income per member, is driven by the credit union’s fee strategy, which is a function of the credit union’s field of membership and overall financial structure. A credit union’s fee strategy is generally designed to fill in the shortfall between the results of the other aspects of net income and the credit union’s ROA goal. Other issues include the field of membership’s tolerance for fees, competitive pressures in the credit union’s trade area, and the Board’s attitude toward fees. Beyond this, fee income per member can also indicate member usage. Generally, credit union members pay some type of fee for their use of products and services (as they would at any financial institution). Prefer not to think of member usage in terms of fees? Check out another metric, Share Draft Penetration.
The Board’s philosophy toward service levels, delivery channels, product pricing, and breadth of services drives the strategies the credit union uses to acquire new members. Consumers join a credit union for a variety of reasons, but the predominant reason is the credit union fulfills or meets a need. Therefore the variety of products and services the credit union offers has a direct correlation to the number of members joining it. Also, the level of service the members receive affects member retention and word of mouth marketing.
Average Member Relationship
The average relationship per member reflects how much the retail member is using the credit union’s share and loan products. The credit union’s pricing strategy, underwriting policies, product mix, service levels, and sales culture contribute to this performance measure. In addition, the makeup of the field of membership and the economic environment can have an impact. Factors that can contribute to higher share and loan balances include competitive rates, affluent membership, and loan and deposit product variety. The credit union’s ability to market and sell loan and deposit products can also have a measurable impact on the average relationship per member.
Bonus Metric: Return of the Member
There’s a lot gray area in credit union financials. Although a low cost of funds is generally perceived to be better than a high cost of funds, in conjunction with a high ROA, high fee income, and low member growth, it would indicate larger concerns about whether members are receiving good value from their institution. Likewise, institutional efficiency is advantageous, particularly if it improves processes so members can more easily apply for loans or use technology to manage their accounts. But efficiency should not come at the cost of superior service or be used merely to improve the bottom line. Callahan & Associates’ Return of the Member Index uses 18 metrics (many of them used in this 15 Key Ratios series) to weigh and rank credit unions relative to their peers. Learn more about how Callahan calculates ROM, then find your credit union’s score in the online section of Credit Union Strategy & Performance, CUAnalyzer, or Peer-to-Peer.
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 4: Operating expense to income, efficiency, members per employee.
Click here for a complete listing of the 15 ratios every Board member should know.