Financial ratios are important tools that credit unions use to evaluate performance, set goals, and benchmark success. For credit union leaders, being familiar with a range of ratios is an essential first step toward successful benchmarking, but understanding the factors that influence each ratio and the potential drawback of using one over another is just as critical. For this reason, it is imperative executives know what questions to ask in different situations and understand the pros and cons of the financial ratios they’re using to analyze the balance sheet. This kind of foundation can only improve their benchmarking strategy.
Average Member Relationship
A credit union’s average member relationship reflects the extent to which members are using the credit union’s share and loan products. This metric is calculated by adding the total amount of shares and loans, excluding member business loans, and dividing by the number of members. A high average member relationship suggests members are using the credit union extensively and maintaining strong financial relationships. However, a lower average member relationship should not always raise a red flag. There are a variety of factors that affect the ratio, such as the credit union’s field of membership, its product and business focus, its economic environment, and its product variety.
Example 1: Membership Demographics
A credit union can have a low average member relationship because it is attracting members from younger generations who are likely to have lower loan and share balances on average compared to the baby boomers who tend to be more affluent.
Example 2: Business Focus
Credit unions with a higher concentration of credit card loans tend to have a lower average loan balance compared to credit unions with a higher concentration of first mortgages. Therefore, credit union executives have to consider not only their own credit union’s business focus but also that of peers in order to make an apples-to-apples comparison and establish an appropriate benchmark.
Make Your Benchmarking Meaningful
Now that you know what you're measuring, whom should you measure against? Looking at credit unions in your state or asset size or who serve a similar field of membership or use a similar business plan adds context to your ratios.
Members Per Employee
A credit union’s members-per-employee ratio measures the number of members the average employee serves. Credit unions often use it to measure productivity; theoretically, the higher the number, the more productive the credit union is. Although it is important to keep this ratio at a reasonable level to sustain operations, a credit union that excessively focuses on increasing it can undermine its own service quality and hamper the member experience.
Beyond serving members, credit unions need to be sustainable in the long term. Another effective measure of credit union productivity is measuring revenue per $1 of salary and benefit expense. This metric shows how much a credit union can generate revenue for each dollar of salary and benefit expenses spent on the average employee. The ratio provides credit unions with insight as to whether their service model is resulting in stronger relationships and more activity with each member.
Return On Assets
Return on assets provides insight into how efficiently a credit union’s leaders are running the institution. It also shines light on how well the credit union is generating profits from its asset base. In general, a high ROA relative to peers reflects management’s success at using the credit union’s assets to generate income. Credit unions, however, should view ROA in light of each institution’s distinct strategy. For example, if a credit union actively passes along potential profits to members — such as in the forms of low or no fees, high deposit rates, or low lending rates — then it might have a lower ROA relative to its peers.
Consider the net worth-to-assets ratio in conjunction with ROA. This one-two punch provides insight into how important the credit union views building capital, which is generated by ROA.
The efficiency ratio measures how much a credit union spends to earn $1 of revenue. It is calculated by dividing total operating expenses by total income and then subtracting interest expenses. A higher efficiency ratio means a credit union is using a higher percentage of its income to cover overhead expenses. In other words, a lower efficiency ratio is generally better. However, credit union leaders need to consider external factors, such as income composition and asset size, that impact the ratio. Leaders also need to be aware of what categories the credit union falls under according to different standards.
Example 1: Income Composition
The efficiency ratio can fluctuate and is influenced in part by the interest rate environment in that income is generally more sensitive than expenses to changes in interest rates. Typically, credit unions with a higher proportion of fee income to total income should see less fluctuation in the efficiency ratio than those with less fee income.
Example 2: Asset Size
The efficiency ratio differs significantly among different asset sizes. In most cases, larger credit unions have a lower ratio because they can leverage their economies of scales and have resources to operate more efficiently. Before comparing their credit union’s efficiency ratio to other credit unions, leaders must make sure the selected peer group is similar in asset size.
Data for all U.S. credit unions
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Source: Callahan & Associates’ Peer-to-Peer Analytics