Us-onomics 101: The funding of the cooperative

January 17, 2013 · By Kelvin Smith

As I was preparing to write today’s post I received an email from Randy Baldwin, the credit union’s Chief Financial Officer, with some unofficial financial results for 2012. They are not yet final, but here are some highlights:

  • We finished the year with just under $1.3 billion in total assets.
  • Our net worth ratio (capital divided by assets) stands at 9.71 percent. That’s up from 6.43 percent at the beginning of 2012, and an increase of 6.82 percentage points since January 1, 2011.
  • Our net income for the year was $44.5 million, a Return on Assets of 3.46 percent. That’s nearly four times the average rate of return for credit unions of our size.
  • Our net operating expense ratio (net operating expenses divided by assets) finished the year at 2.07 percent. The average of our peer credit unions is 2.40 percent, so we’re doing substantially better than most.

Now, if Arizona Federal were a traditional financial institution, and you were one of its customers, you might read these figures (if you ever saw them, which would be unusual) and either find them to be irrelevant to you personally, or maybe even feel a bit resentful, thinking the organization had done well at your expense.

But Arizona Federal is not a traditional institution; it’s a financial cooperative, owned by the people it serves (all of Us), so that the people who provide the income by buying the products and services are also the people who benefit from the proceeds. So, as a member/owner, here is what these figures should mean to you:

  • Our asset size, while smaller than it was pre-recession, remains large enough to allow us to enjoy economies of scale and keep per-member overhead costs in check. A $400 million credit union, for instance, might have difficulty sustaining 15 physical locations while providing leading-edge technology such as mobile banking with the ability to deposit a check using a smartphone. We don’t need to be the largest credit union in town, but maintaining breadth and depth has value.
  • Our net worth is approaching the level at which our need to accumulate capital will decrease, and we’ll be able to return even more to members (all of Us) through product pricing, enhanced services and delivery systems or direct payments such as PLUs (Paybacks for Loyalty to Us).
  • Even while assets are decreasing, we are operating more efficiently than ever. For comparison, our net operating expense ratio in 2007 was 3.27 percent. We will need to make some investments in technological infrastructure that could affect that number slightly in the future, but management and staff continue to be good stewards of the assets entrusted to them by all of Us.

 All this talk of numbers leads me back to a topic that seems to still be on the minds of some of Us, at least judging by the comments I’ve received from readers: our new practice of requiring the payment of dues as a condition of membership. While some members who’ve written have expressed an understanding of the need for all of Us to share in the costs of operation and just want to be sure that we maintain (or return to) high standards of service, others are of the opinion that membership ought to be free and all expenses ought to be factored into the price of services.  Let me respond to that second group.

As I mentioned above, our financial results demonstrate that management and staff are doing a good job of keeping the overhead low, especially considering the types of services and technology all of Us continue to demand. That said, though, the fact remains that we do have overhead – costs that we incur just to keep the credit union operating at a minimum level, provide basic account access, insure deposits, provide security, and complete other day-to-day activities that aren’t connected to  anything that creates revenue such as making a loan or selling an insurance policy or investment. According to our finance department, those base expenses add up to $126 per member per year. That’s the individual cost of keeping the doors open.

On the other hand, we’re requiring each of Us to pay $36 in dues toward that cost – less than 30 percent of our individual share of the cost of maintaining the cooperative. The rest comes from our individual participation, taking part in activities that do create revenue or what we refer to as “mutual benefit.” To me, that seems more than fair.

Now, as for the first group I mentioned, those who are willing to pay dues but want to see a level of service that is worth paying for: I completely agree. It is the responsibility of the Board, management and staff to ensure that each of Us receives value far and above what we’re required to pay – including a service experience that is second to none – and if we fail at that, we fail as a cooperative. I urge each of you to hold me and the rest of your representatives and leaders accountable for doing just that. One way you can do that is to send me a comment, now or anytime.

Until next time … thanks for being one of Us!


Tags: Cooperatively Speaking