1. What Is Cost Of Funds (COF)?

Cost Of Funds (COF) represents the interest rate credit unions pay to acquire funds from members' deposits. It measures the cost of maintaining deposit accounts and is expressed as a percentage of average deposits.

2. How Does The Calculator Work?

The calculator uses the COF formula:

Where:

• \( \text{Interest Expense} \) — Total interest paid on deposits (currency)
• \( \text{Avg Members' Deposits} \) — Average balance of members' deposits (currency)
• \( COF \) — Cost of funds expressed as percentage (%)

Explanation: This calculation helps credit unions understand the cost efficiency of their deposit funding sources and manage their net interest margin effectively.

3. Importance Of COF Calculation

Details: Monitoring COF is crucial for credit unions to maintain profitability, set competitive loan rates, and develop effective deposit pricing strategies while ensuring financial sustainability.

4. Using The Calculator

Tips: Enter interest expense and average members' deposits in your local currency. Both values must be positive, with average deposits greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good COF for credit unions?
A: A lower COF indicates better funding efficiency. Industry averages vary, but typically range between 0.5% to 2.5% depending on market conditions and deposit mix.

Q2: How often should COF be calculated?
A: Most credit unions calculate COF monthly or quarterly to monitor funding costs and make timely pricing adjustments.

Q3: What factors affect COF?
A: Market interest rates, deposit product mix, member loyalty, competitive landscape, and economic conditions all influence COF.

Q4: How can credit unions reduce COF?
A: Strategies include promoting lower-cost deposit products, improving operational efficiency, and building strong member relationships to reduce rate sensitivity.

Q5: Is COF the same as cost of capital?
A: No, COF specifically measures the cost of deposit funds, while cost of capital includes all funding sources including equity and borrowed funds.