Expense management is one of the most difficult aspects of running a credit union today, and depressed margins and an ever-growing competitive operating environment make this task exponentially harder. To properly manage and quantify expenditures relative to income, credit unions must be attentive to a number of metrics.
The efficiency ratio is one such measure that gauges a credit union’s operating efficiency by measuring how much the credit union has to spend to generate $1 of revenue. It is defined as non-interest expense divided by interest income, less interest expense, plus non-interest income and provision expenses.
Similar to the operating expense ratio, a lower efficiency ratio generally indicates a stronger performance. Unlike the operating expense ratio, the efficiency ratio subtracts interest expense from the denominator to control effects in earnings resulting from changes to interest rates.
According to FirstLook data from Callahan & Associates, the average efficiency ratio for credit unions was 74.6% as of the June 30, 2015. Between June 30 of 2014 and 2015, 3,187 credit unions reported improvements to their efficiency ratios. In general, economies of scale effect how well a credit union can leverage its size to improve efficiency. As such, credit unions in the larger asset-based peer groups generally have lower efficiency ratios than their smaller counterparts. However, as shown below, credit unions in the smaller asset-based peer groups improved their efficiency, too, posting year-over-year declines in their relatively higher ratios.
|Peer Group||Efficiency Ratio
|YOY Change in Efficiency Ratio|
|All Credit Unions||74.6%||75.1%||-0.50%|
|Credit Unions > $1B||68.4%||68.8%||-0.40%|
|Credit Unions $500-$1B||78.4%||78.5%||-0.10%|
|Credit Unions $250M-$500M||80.7%||80.3%||0.40%|
|Credit Unions $100M-$250M||83.3%||83.9%||-0.60%|
|Credit Unions $500M-$100M||86.2%||85.7%||0.50%|
|Credit Unions $20M-$50M||87.7%||88.2%||-0.50%|
|Credit Unions $10M-$20M||94.1%||92.1%||2.00%|
|Credit Unions $5M-$10M||91.6%||91.9%||-0.30%|
|Credit Unions $2M-$5M||96.2%||95.7%||0.50%|
|Credit Unions < $2M-$2M||105.3%||105.3%||0.00%|
Read more FirstLook quarterly analysis before the full credit union performance data set is available, only on CreditUnions.com.