BOSTON-Board members and other CU volunteers here got a refresher course on the numbers they ought to be watching, including some newer ratios many may not have considered.
During NAFCU's annual conference here Sam Kilmer reviewed "Ratios Every Senior Manager, Board Director and Supervisory Committee Member Should Know, and Why," even as he acknowledged there are differences of opinion among some over what comprises certain ratio and which are most valuable.
Kilmer, senior director of client development with Cornerstone Advisors, told a large group of board members at the meeting, "When we go into a strategic planning engagement with a credit union, one of the things we like to do is take a real quick financial snapshot. The things that jump out are overall performance, efficiencies, safety and soundness and trending."
That snapshot usually comes in the form of a "scorecard" or "dashboard," the components of which are growth, member satisfaction, efficiency, employee engagement, risk and profitability, said Kilmer, who reviewed each.
"The view over multiple reporting periods for trending. This is typically a really good ideas," he said, before urging CU volunteers to ensure they are measuring themselves against peers and taking time to seek out best practices. He also ran through a multitude of financial terms and acronyms, including AA, ROA, ROAE, NII, NIE, Operating Revenue (net interest income and noninterest income), FTE, and YOY, and recommending everyone know what they mean.
"Do the very best you can to get the analysis on one page," said Kilmer. "It's just much easier to consume and it's not as overwhelming as a large series of reports."
When it comes to individual metrics related to profitability (generating ROA and ROE), Kilmer reviewed NII, L/S ratio, operating revenue, net interest margin, yield on loans and on earning assets, and spread. He defined operating revenue as the ability of each employee to generate a dollar of revenue, and called on CUs to know their own numbers.
When it comes to reviewing expenses, Kilmer said every board member needs to know cost of funds, interest expense, operating expense ratio ("getting a grip on overhead and if/how scale matters"), and efficiency ratio (how much expense is there to generate $1 of revenue).
"This is a touchy one at credit unions," said Kilmer. "As nonprofits, lower may not always be better. But generally speaking over time what we're seeing, clearly, is CUs moving this number down." Similarly, he reviewed the "burden ratio" (what must be made up for with net interest income to break income). "This whole idea of fees is a contentious issue. We may be reluctant to do this, we do have to take a look at how credit unions can improve their earnings and fees are one way to make that journey happen without it being onerous to the members."
Efficiency, Growth Measures
Following a review of the components of the efficiency ratio, Kilmer said the "areas most likely to look at for expense reduction or improvement are people, process and technology."
When it comes to understanding if a credit union is growing, Kilmer reviewed basic ratios, and challenged some common numbers. "Instead of looking at products per household, or cross-sell ratio, some look at those with 2-plus services," he said.
Kilmer called for boards to pay attention to the open/close ratio (new accounts/closed accounts), and said clear differences can be seen in that number between high performing and low-performing CUs. "It seems to be improving more dramatically for high performers in this area, and decreasing for low performers, and there seems to be polarization," he said.
Among drivers of growth are member satisfaction-related metrics, including the percentage who are satisfied vs. willingness to recommend; Net Promotor Score or other member advocacy ratings; the percentage of "engaged" or "signature" members and various product penetration ratios.
Kilmer observed one ratio frequently not monitored by boards are metrics tied to employee engagement, such as satisfaction, willingness to recommend to others, percentage of positions filled internally, and turnover. "One thing I've seen is differences between satisfaction of the employee overall with the credit union, vs. satisfaction with the direct manager," he said.
