Cost of funds is the king of retail banking acronyms. Yet, it only tells us half the story. Granted, without a sharp eye on COF, credit unions can expose themselves to devastating interest rate risk. As recent years have shown us, net interest margins can compress very quickly — and stay compressed much longer than anyone previously expected — revealing how little control we have over our mixed asset yield. Fortunately, we can still influence overall deposit cost and take back a large portion of our margin control.

COF falls incredibly short, though, when assessing the true cost for the core component of any member’s relationship with their credit union — their checking account. To illustrate, high-yield checking accounts average $5.90 in monthly interest expense, or a COF of 0.79%. But a more holistic measurement of those same accounts reveals they actually generate an average of $6.20 net profit. That’s nearly $75 in annual profit per account, before even considering the interest income generated by redeploying the deposits.

Clearly, basing strategic funding decisions on COF alone is like driving with blinders on, leaving you in danger of making a costly mistake.

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