4 Ratios All Staff Members Should Know

These four performance metrics will help CFOs explain the business of credit unions and show how every employee helps the credit union achieve its goals.

Sam Taft

By Sam Taft


Credit union CFOs have a complex, highly demanding job. In addition to managing their own daily tasks — and the credit union’s performance — they often must educate C-suite executives and other employees who do not have the level of financial acumen required of a CFO. Often, they must show credit union staff members how to analyze and interpret various financial benchmarks and metrics. The following benchmarks are ones that CFOs use daily. Combined with easy-to-understand outlines and descriptions, this week’s Graphic Of The Week makes a great primer for nonfinancial employees. 

Efficiency Ratio

How It’s Calculated: The efficiency ratio is calculated by dividing a credit union’s operating expenses by interest income less interest expenses plus non-interest income.

Operating Expenses

Interest Income - Interest Expenses + NII


Source: Callahan & Associates’ Peer-to-Peer Analytics

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. A high or rising efficiency ratio means the credit union is losing a larger share of its income to overhead expenses. A low efficiency ratio means operating expenses are a smaller percentage of income. The efficiency ratio can fluctuate over time, influenced by the interest rate environment, as income is generally more sensitive to changes in interest rates than are expenses. 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.

Non-Interest Income/Average Assets

How It’s Calculated: This measure is calculated by dividing the sum of annualized fee and other operating income by average total assets.

Annualized Fee Income + Annualized Other Operating Income

Average Total Assets


Source: Callahan & Associates’ Peer-to-Peer Analytics

This ratio measures the amount of non-interest income the credit union generates as a percentage of average assets. The higher the number, the more income the credit union is generating through sources other than asset-based products. Analyzing non-interest income as a percentage of assets removes the variations that exist when comparing the ratio to total income because viewing NII through a total-assets lens removes the impact of a weak loan-to-asset ratio. Non-interest income factors that impact the ratio generally fall into two major categories: (1) income generated directly from the member in the form of fees; (2) income generated indirectly from members or other aspects of the credit union’s operations, such as interchange income from credit and check cards or income from CUSO activity. The rate of asset growth is the most impactful variable on the ratio, although strategies for non-interest income play a part as well. Rapid asset growth will depress the ratio while slow or stagnant asset growth will inflate the ratio.

Return On Assets

How It’s Calculated: Return on assets (ROA) is calculated by dividing annualized net income by average total assets.

Annualized Net Income

Average Total Assets


Source: Callahan & Associates’ Peer-to-Peer Analytics

ROA is an important gauge of a credit union's profitability. It shows how efficiently management is running the credit union by revealing how much income is generated for each dollar of assets deployed. In general, a high ROA relative to peers reflects management's success at using assets to generate income. Credit unions; however, should view ROA in light of their institution's distinct strategy. For example, if a credit union passes along potential profits to members through low fees or high deposit rates and low lending rates, then its strategy might result in a lower ROA relative to its peers.

Cost of Funds

How It’s Calculated: Cost of funds is calculated as the dividends paid to members or interest paid on borrowed money, divided by the average outstanding shares and borrowings.

(Share Dividends + Deposit Interest + Interest On Borrowed Money)

( Total Shares ($) + Total Borrowings ($))


Source: Callahan & Associates’ Peer-to-Peer Analytics

A credit union’s cost of funds is influenced externally by the overall rate environment and internally by the makeup of the deposit portfolio. For example, older members might have more CDs, or a more affluent membership might have higher balances on tier-priced products. Both situations will increase the cost of funds. Credit unions with high checking account penetration will generally have lower cost of funds. When interpreting the cost of funds, it's easy to think about it as how much the credit union must pay in interest for every dollar of shares or borrowings it receives.


Feb. 23, 2015


  • Since most Credit Unions are Less than 100 million in shares, How do smaller credit unions compare to the larger credit unions. And are there uniqueness of each for these ratios?
  • The graphs bring this entire article to life. Comparing the larger asset size credit unions with the smaller ones brings valuable perspective. Also, it is good to know where these ratios should be for those of us new to the FI world. Thank you!
  • A better presentation because of the graphs, but a total copy from an article written in 2011 by Lydia Cole from Creditunions.com. Who is the editor here? http://www.creditunions.com/articles/15-ratios-every-board-member-should-know-part-1/
  • Thank you for your feedback, Anonymous. My name is Rebecca and I was the editor on both pieces. As you observed, they have the same format. We've found these "ratio" articles are quite popular with readers and have published several iterations with different readers in mind. The longer ones, like Lydia's, are so comprehensive in nature that some of the newer, more focused content can overlap. However, we strive to offer something new and different in all our content — like the graphs in this article — to attract not only new readers but also those who have been with us for a while, like you. Thanks for reaching out to CreditUnions.com, and I hope you keep reading and commenting.
    Rebecca Wessler
  • This article caught my attention and was intrigued by the efficiency ratio, in particular the concept of this being a ratio that all CU staff should know and understand how it is calculated. This ratio has been part of our scorecard for 7 years. We find that staff must always be reminded of what this measures, how it is calculated and that "a lower ratio is better". This year we are changing the components of the scorecard by taking a more granular approach to improving the efficiency ratio through specific activities. So far, when this has been shared with different groups, the light bulb has gone off and in a few short weeks, we are seeing a measureable impact towards the goals that have been set. At a high level, the pure efficiency ratio is understood. But to engage the staff and move the needle, the ratios need to be understandable and tangible for the general population. I look forward to the remaining installments and the feedback from the readers.
  • I think these ratios are great for evaluating the financial "sustainability" of the credit union, and really are the four main ratios used for bank performance. However, since credit unions have a unique mandate, one of the top four should be a "member benefit" ratio such as loans/shares etc
  • Thank you for your thoughts on this, this is the first installment of a series of articles where we profile various benchmarks that are relevant to credit unions and their employees. Please see the link below to learn more about Callahan’s unique credit union measurement metric, Return of the Member (ROM), which is all about quantifying how well credit unions are serving their members. http://www.creditunions.com/articles/callahan-return-of-the-member-rom-index-quantifies-member-value/ Additionally, we will be breaking out our ROM scoring system in an upcoming article so make sure to keep an eye out.
    Sam Taft
  • I disagree on the efficiency ratio. While promulgated by regulators, this ratio doesn’t tell whether income or expenses are the cause, it promotes leverage, and ignores the mission of credit unions as compared to banks. It is particularly misleading for small credit unions that may not seek as high of a return and give more back to its members. Not to say it does not have value when benchmarking an institution as a whole - rather that in isolation as one of the main “four metrics” it is a very poor metric.
    Brian K
  • Just checking. I don't think Mr. Taft has correctly calculated the efficiency ratio. I believe it should be operating expenses minus interest expense divided by total income? Also it's probably important to point out that for non-interest income and return on average assets, the numerator should be income annualized. I hope I'm correct here.
    Mark Overfield
  • Mark, Thanks for your comments. You are correct about the annualizing of non-interest income and ROA and the corrections have been made. Sam Taft
    Sam Taft