Here we are at the conclusion of another Financial Literacy Month. Last year, I took a look at some key ratios C-Suite executives track to understand their credit union’s financial and operational standing. These included growth of “SLAM”, cost of funds, capital and net worth ratios, operating expense ratio, delinquency ratio, loan-to-share ratio, and net interest margin.
That was just scratching the surface of the ways credit union leaders measure their institutions’ success. Let’s take a look at a few more key performance indicators. And remember, this is a high-level overview of these concepts meant to provide a base level of education. If you are interested in a more granular look at any, let me know in the comments!
Return on Assets
Arguably one of the most important ratios for a credit union to monitor, Return on Assets (ROA) measures a credit union’s effectiveness at using its assets to create revenue. To calculate this, take net income and divide it by total assets.
For a frame of reference, the NCUA reported a 2022 year-end return on average assets of 0.89%, where average assets are calculated by taking previous year-end assets + current period assets and dividing by two. As a whole, the industry took a major hit to ROA in 2020 with the global pandemic. In 2019, ROA was at a 10-year high of 0.93% before tumbling to 0.70% (which can also be presented as 70 basis points or bps). However, credit unions rebounded in 2021 to 1.07%.
While ROA is an excellent indicator of the management team’s ability to generate income with its available resources, it can be misleading depending on the credit union, its community, and the institution’s goals. For example, if the credit union were to lower loan rates and increase deposit rates, changes that would undoubtedly benefit members, it would also result in a lower ROA as net income would suffer. Alternatively, if your credit union implements new fees to generate more income, it might result in a higher ROA, but at the direct expense of members. That said, as others have reported, an ROA of over 1% can be an indicator of a strong performer.
Return on Equity
An easily determined, but far less often used metric, Return on Equity (ROE) is calculated by dividing net income by capital instead of assets. As the website Newcleus put it ROE “can be thought of as a “speed limit” for long-term growth. If the credit union organically grows assets faster than its Return on Equity, capital will decrease as a percentage of assets, if the credit union grows more slowly than its ROE, it will begin to accumulate more capital as a percentage of assets.”
Average Member Relationship
In a nutshell, how much wallet share is the credit union earning? The Average Member Relationship (AMR) is a whole dollar amount figure that can be used to determine whether the credit union is deepening its relationships with members. This figure is determined by adding total loans and deposits and dividing that sum by the number of current members. In other words, what’s the average member balance in savings and loans?
This measure can be a good indicator of how aggressive the credit union is being with its underwriting, whether and where it is expanding its field of membership, and how effective staff are at selling deposit and loan products. In general, this value has gone up for credit unions—Callahan reported record highs of $22,534 per member by the end of 2021—but the degree to which this value changes can tell a story in and of itself about the economic environment and the credit union’s member strategy.
Net Charge-Off Ratio
The Net Charge-Off Ratio calculates how effective the credit union is in its delinquency mitigation and recovery efforts. To calculate this, subtract year-to-date charge-off recoveries (i.e. money recovered from previously charged-off loans) from the YTD charge-offs, then divide by outstanding loans. A lower ratio indicates the credit union has been more successful at preventing charged-off loan situations and keeping delinquency low.
During the Great Recession, the national average spiked to 1.21% in 2009 (to go alongside a 1.84% delinquency ratio). In the years that followed, the net charge-off ratio would slowly decrease to 0.56% in 2019. But then the pandemic came, and… the ratio actually fell considerably. First to 0.45% in 2020 and all the way down to 0.26% in 2021!
Members Per Employee
One of many measures of a credit union’s efficiency, members per employee is as straightforward as they come: how many members there are per full-time employee of the credit union. Theoretically, the higher this number, the more productive staff are, but as with all these metrics, it cannot tell the full story alone. Perhaps the credit union offers a lot of business services, big income generators that in turn require more staff attention and thus a bigger team.
To get a better grasp of the employee picture, management can turn to other ratios like net income per employee, loan origination per employee, and total assets per employee. Pieced together, it can give leaders great information needed to sculpt their strategic plan.
As with any KPI, these ratios provide a good indication of your credit union’s performance. However, they come with a major caveat as I’ve discussed with a previous article about surrogation. When the score begins to matter more than the strategy, the score becomes the strategy, often at the expense of those we are meant to serve.
If you see some ratios that fit your area in the credit union and you think “How can I boost our ratio?” I recommend pivoting your thinking to “How can I serve our members better?” and you will often find the metrics respond positively.