Credit Unions Improving Efficiency

Learn to operate more efficiently to retain member benefits in a low rate environment.


During times of low interest rates, ongoing stabilization assessments, and slow economic growth, credit unions are faced with many challenges.

One of the most crucial challenges is how to maintain earnings while staying true to the cooperative model. Instead of passing the buck onto the member in the form of higher fees or reduced products and services, first quarter data show that credit unions are proving they can operate more efficiently.

The efficiency ratio provides insight into credit unions’ overhead costs. It shows the credit union how much it is spending in order to generate one dollar of revenue. For example, the efficiency ratio industry-wide stands at 78.1%. This means the average credit union is spending just more than 78 cents to earn $1 in revenue. Credit unions strive for lower efficiency ratios over higher ones.

With a lower ratio, more money is available for the credit union to return to the member or use to invest in new products. The ratio is calculated by taking a credit union’s year-to-date operating expenses minus stabilization expenses and dividing the total by the credit union’s operational income (interest income, fee income, and other operating income) minus interest expense.

Over the last year, the efficiency ratio for the nation has declined to 78.1% from 79.3%, showing that credit unions are becoming more efficient in their operations. Most peer groups reported declines in their efficiency ratio, due to income sources increasing at a faster rate than operating expenses. Although most peer groups improved efficiency, credit unions with under $20 million in assets had negative income growth that pushed their efficiency ratio up 73 basis points to 96.2%.

Efficiency Ratio by Peer Group

Source: Callahan & Associates' Peer-to-Peer

Although credit unions are improving efficiency, significant variations exist within different peer groups, ranging from smaller credit unions with their efficiency ratio of 96.2% to the largest credit unions, those with more than $1 billion, with a ratio of just 71.0%.

Larger credit unions are operating more efficiently than smaller credit unions due largely to fixed costs. Both small and large credit unions have many of the same day-to-day operating costs such as rent, utility bills, and the upkeep of their branches, but the larger credit unions are seeing more traffic and results from those costs. So, larger credit unions are essentially getting more bang for their operating buck. Larger credit unions are spending 2.6% of their average assets on operating expenses while smaller credit unions are spending 3.74%. In addition, larger credit unions are working with a larger income-generating asset base. On average, the larger the credit union, the larger the loan portfolio. That results in higher interest income from the loan portfolio, which would improve the efficiency ratio.

Even faced with the economic challenges over the past few years, credit unions have been trimming the fat from their budgets effectively. Credit unions are operating more efficiently, rather than passing the responsibility on to the member.




July 20, 2012


  • I agree with Bill, it depends on your business model, as well as business culture. Managed Services vs. In-House services is a potential area. In some cases, we've been able to show a 50% reduction for our customers in the Managed Network Security Services model. However, this, much like "cloud" services, is still a cultural and philosophical hurdle than a technical hurdle.
    Ken McCutchen
  • How good the efficiency ratio is at measuring operating efficiency depends on what your business model is, and on if you are growing or not.

    I was just banged on the head for having a high expense to asset ratio. Since we are growing, and need assets in place to meet future needs, that's true, but our efficiency ratio tells how well we turn the dollars we spend into income, and that is very low, comparatively.
    Bill Wade
  • David- I agree that high "giveback" CUs will have worse efficiency ratios, but one must keep in mind the Operating Expense to Assets ratio can also be skewed. (For example, in this current environment of double digit asset growth.) Looking at both ratios while understanding what is really driving those numbers is the balance I try to take.
    Mike Brandt
  • Efficiency Ratio is not a good measure of operating efficiency in credit unions. Most credit unions provide a return to members "above the line", in the form of higher rates on deposits, lower rates on loans and lower fees, thereby reducing reported revenue. All things equal, high "giveback" credit unions will report higher (worse) Efficiency Ratio's. A better measure of credit union efficiency is Operating Expense/Assets.
    David Mooney