Key Numbers For Monitoring Efficiency Suggest Both Promise And Caution

Although credit unions spent more in 2012 for every dollar of income, their operating expenses as a proportion of total assets actually declined.

Credit unions continue to rebound in 2013, emerging from the economic downturn with more members, greater assets, and a larger market share. Still, there are plenty of headwinds. Low interestrates, which are expected to continue into 2015, and tepid economic growth pose challenges to credit unions looking to maintain earnings without jeopardizing efficiency.

To get an idea of how effective they are at generating revenue, credit unions need only look to their efficiency ratio, which shows how much is spent for each dollar of income. Interest rates play a big role in efficiency ratios because income is generally more sensitive to rate changes than expenses are.

To calculate the efficiency ratio, year-to-date operating expenses are divided by the sum of year-to-date net interest income and non-interest income.The lower the ratio is the more efficiently the credit union operates. Low efficiency ratios also indicate that less revenue is needed to cover operational or day-to-day costs, leaving more money available to return to the member.

In 2012, the average efficiency ratio for credit unions nationwide rose to 71.3%, indicating that credit unions spent a little more than 71 cents for every additional dollar in revenue. That ratio was up 2.1 percentage points from 69.2% in 2011.


Generated by Callahan & AssociatesPeer-to-Peer Software.

When broken down by asset size, large credit unions had lower efficiency ratios than their smaller counterparts in 2012. Generally, large credit unions increased revenue whilesmaller credit unions saw declines that negatively affected their efficiency ratios. Efficiency declined for all peer groups in 2012 compared to 2011, indicating that a larger share of a credit unions income went toward operating costs.

The operating expense ratio is another indication of efficiency. This ratio measures expenses relative to theassets that are serviced and indicates how efficiently they are managed. Fixed operating costs play a larger role at small credit unions because although the value of their assets may fluctuate, their costs remain the same. Essentially, economies ofscale help large credit unions operate more efficiently. Credit unions with more than $1 billion in assets have an operating expense ratio of 2.77% and are the only group to have an operating expense ratio of less than 3%.


Generated by Callahan & AssociatesPeer-to-Peer Software.

In 2012, employee costs accounted for much of the increase in the efficiency ratio because salary and benefits, which constitute half of all operating expenses at credit unions nationwide, rose nearly 7%. As credit unions increase their loan originations and other sources of operating income, there has been a greater need to hire employees to service that growth. Despite this increase in operating expenses, the operating expenseratio fell eight basis points in 2012 to 3.19% and is significantly lower than the 3.6% ratio at the height of the recession. Credit unions may have ramped up their lending activities in recent years, but clearly, they have done so without increasingoperating expenses relative to their assets.

Monitoring these ratios will continue to be important in the face of economic uncertainty and low interest rates, as credit unions will need to find ways to remain efficient without sacrificing value to their members.

June 6, 2014

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