Leveraging performance metrics for credit unions

We know the financial services landscape is ever evolving. We know credit unions monitor performance metrics. But do we know what happens with these metrics, how to translate them into action? In an industry defined by competition, innovation, and customer expectations, the need for accurate, actionable data has never been more critical. Performance metrics are the vital tools that empower organizations to measure and improve their performance, guide credit unions toward growth, success, and long-term sustainability. It’s time to demystify performance metrics, explore their meaning, and provide insights on how credit unions can translate them into actionable items to enhance their offerings and financial stability.

Understanding performance metrics

Performance metrics are key performance indicators (KPIs) that allow credit unions to track, evaluate, and measure their operations, growth, and efficiency. These metrics encompass a wide range of areas, including but not limited to:

• Income statement
• Member metrics
• Sources and use of funds
• Lending activity
• Loan quality

Deciphering performance metrics

Performance metrics serve as the compass guiding credit unions in evaluating their operations and competitiveness. These metrics encompass various facets, including:

Provisions for loan loss (PLL)

PLL, measured as a percentage of average assets, represents the funds reserved for expected member defaults. Credit unions should examine this metric alongside delinquency and charge-off ratios, keeping an eye on trends. If the PLL is substantially higher than peers, it’s time to consider collections products and refine strategies.

Net income/total income

This ratio measures the credit union’s efficiency by gauging net income relative to total income. A substantially lower ratio or negative numbers warrant close attention. Review this metric along with other income and expense measures to optimize earnings and operations.

12-month member growth

The result of effective business strategies, member growth signifies successful market positioning. A declining or substantially lower metric necessitates reevaluating strategies to attract and retain members.

Members/potential members

Assess this metric to determine how effectively you are penetrating potential members and engaging them in your services. A decreasing or significantly lower ratio highlights the need for strategies to increase market reach.

Non-interest income/income

This ratio reveals the credit union’s reliance on non-interest income sources compared to interest-based income. If it’s lower than peer class or negative, consider strategies to boost fee-based income and diversify revenue streams.

Loan/share ratio

This ratio reflects the balance between lending and deposit acquisition performance. A ratio below 85% or lower indicates the need to focus on stimulating deposit growth while maintaining profitability and liquidity.

Indirect loans/total loans

The percentage of indirect loans to total loans showcases the extent to which third-party channels, such as auto dealerships, contribute to your lending portfolio. This metric is crucial for strategic planning, especially when it deviates significantly from industry peers.

Delinquent loans/total loans

Delinquency ratios signal credit risk and future loan losses. Elevated metrics (e.g., >0.50%) should prompt the consideration of risk and recovery solutions to mitigate potential losses.

Net charge-offs/avg. loans

A lower net charge-offs ratio reflects sound credit risk management. Metrics exceeding 0.75% may indicate the need for risk and recovery solutions to address credit quality and collections procedures.

Turning data into action

Once these metrics are comprehended, credit unions can take strategic actions:

• Enhance collections products: High PLL, delinquency, and charge-off numbers suggest a need for collections products to mitigate risk and improve member recovery.
• Diversify income streams: In response to lower net income ratios, explore opportunities for non-interest income generation, such as home equity participation lending or POS solutions.
• Member growth strategies: Implement member growth initiatives that align with the credit union’s market positioning and charter type like checking account referrals.
• Market expansion and engagement: Use member/potential member data to tailor outreach efforts and enhance your market penetration strategies with business intelligence.
• Deposit growth focus: If your loan-to-share ratio is below 85%, prioritize deposit growth strategies to maintain profitability and liquidity.
• Collections and risk management: Evaluate delinquency and charge-off ratios to ensure effective risk management and collections procedures.

As credit unions evolve in the financial landscape, performance metrics are your strategic allies. By deciphering these metrics and transforming them into actionable strategies, you can enhance your offerings, expand your reach, and maintain financial stability. Furthermore, the exploration of financial insurance products can offer added value to members and bolster your financial resilience. Embracing the power of data-driven decision-making, credit unions can chart a course for success in the competitive financial services industry.