Credit Union Efficiency Measures Show Wide Range

There are many ways to measure a credit union’s efficiency. No matter how you slice it, the numbers show a wide variation in how efficient CUs are.


What is efficiency?

This seems like a simple question. When it comes to credit unions most people feel the answer lies with lower cost. In essence there are two main ways to lower your cost. The first, and perhaps most obvious, way is to control spending. The second option is to grow.

Growth has long been a credit union strategy to lower costs. However, the numbers tell a different tale. The graph below shows the standard Operating Expense ratio as broken down by a credit union’s size. This graph shows two key things. First, a credit union’s size is not actually indicative of how efficiently it operates. Many of the most efficient credit unions are the smallest. The second point this graph illustrates is the wide variation in credit union operating expense values. For example, the three credit unions circled in the graph all have assets of approximately $3 billion. However, though their assets are practically equal, their operating expense ratios range from less than 1% to nearly 4%. These differences are rather stark for credit unions that are essentially the same size.

A second measure that credit unions use for efficiency is the aptly named efficiency ratio. This measure looks at operating expenses as a factor of revenue generated. This number is calculated by dividing operating expense by the combination of net interest income and non-interest income. When you run a similar graph using this ratio it tells largely the same tale, that efficiency is not determined by size alone.

However, while it may look similar on the surface, this graph actually tells an entirely different story. The points may fall in similar places, but the credit unions the points represent in this graph are quite different. Some credit unions that were the most efficient in the first graph are now close to the bottom, and vice versa. This drastic change in ranking is solely dependant on which measure your credit union chooses to measure its efficiency.

These graphs illustrate the fact that efficiency cannot be measured in static terms of black and white. The measure you use to determine your efficiency can play a large role in how that data is interpreted. What is clear is that bigger does not always mean better, and simple cost cutting isn’t the only way you can go about becoming more efficient.




June 25, 2007


  • A topic which is gaining more attention - thanks for the information.
  • It might be interesting to try and account for the fact that accounting is not standard across credit unions. Netting expenses against related nonintereset income can give the appearance of lower expenses. Such areas might include ATM/Debit/Credit Card interchange. Another factor may be how a credit union has implemented FASB91, that is, what per loan cost is being calculated as origination costs and subtracted from noninterest expense.
    Dan Rader