Call them chief financial officers. Or senior vice presidents of finance. Or just the head bean counters. These are people who perhaps best understand and rely on benchmarks to gauge the performance of their credit unions relative to the industry.
But they're not the only ones who can glean valuable information from these metrics. Marketers, lenders, the rest of the C-suite and every other stakeholder in the back office can learn much from these measures about how the credit union movement is doing on the balance sheet and beyond.
Some of the easiest metrics for non-accountants to grasp are those that have been capturing industry headlines: Record lending levels and asset growth, for instance. But continuing tight margins from sustained low interest rates and slowly rising operating expenses make some other benchmarks worth watching.
Here's a look at four of them. Then check out the infographic and see how your credit union measures up.
Efficiency
In general terms, the efficiency ratio measures how much the credit union spends to create $1 of revenue. Typically, a lower efficiency ratio is desirable, as long as it doesn't come at the expense of member service. 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. Notice how the belt-tightening response to the recession is evident in the sharp drop for the industry as a whole in 2010.
Return on Assets
At first glance this is a simple calculation, annual net income divided by average total assets. But there's a lot more to the story. ROA is influenced by income of all kinds, as well as productivity and profitability. Just because an institution has a high ROA doesn't mean it's a good thing. Serving members best takes a balance of fee income and interest rates high enough to stay in business. After a 2009 dip, ROA as a whole has risen throughout the industry, with accelerating loan and asset growth outpacing net income growth.
Coverage Ratio
The coverage ratio looks at the allowance account relative to non-performing (delinquent) loans. The coverage ratio is a quick test of how well the credit union is prepared to absorb losses if every delinquent loan were to be charged off. Managing an allowance account via the provision expense is an art and takes a strong understanding of how the entire loan portfolio is performing, the credit union's member demographics and performance trends, and the state of the broader general economy. As the chart shows, credit unions continue to have a higher coverage ratio than banks, perhaps a product of the movement's generally conservative nature and the regulatory environment.
NIM to Operating Expenses
Part of every CFO's job is balancing revenue and expenses. The net interest margin is net interest income less interest expenses (dividends on shares, interest on deposits and interest on borrowed money) divided by average assets. By comparing both interest income less interest expenses and noninterest expenses to average assets, you create a common comparison, and get a better picture into the business model of the institution.
In general, the net interest margin for the industry is less than its operating expense ratio and has been since June 2011. So in order to be profitable, the institution must supplement its interest income with noninterest sources (fee and other operating income). Low interest rate environments, like what we've been experiencing for the past couple of years, only exaggerate that need. The net interest margin has seen a slight uptick and the spread appears to be closing slightly; moving forward, this will be a necessary measure to monitor as the Federal Reserve deliberates on continued gradual interest rate hikes.
Sam Taft is director of industry analysis for Callahan & Associates. He can be reached at 202-223-3920 or [email protected].
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