FirstLook: Fat or Skinny? Opaque Operating Expense Performance

The core components of credit union operating expenses indicate the business model is growing leaner.


The core components of credit union operating expenses indicate the business model is growing leaner, this despite continuing NCUA assessments.

According to FirstLook data in Callahan's Peer-to-Peer software, which includes 99.9% of the industry by assets, operating expenses are up 3.2% since June of 2009 but are down 1.5% on a quarterly basis. The major driver of the quarterly reduction in operating expenses is, confusingly enough, credit unions preparing for the third quarter NCUSIF stabilization assessment.

In a March article, Callahan & Associates covered the incidence of credit unions reporting NCUSIF stabilization expenses under the account code for member insurance rather than under the account code specified for the NCUA Stabilization Expense. This reporting strategy has continued into second quarter 2010. Credit unions that put aside money under the member insurance account code in anticipation of the assessment were forced to reallocate their money to the correct account for the NCUA Stabilization Expense after the NCUA made its official announcement. As a result, year-to-date total member insurance expenses actually declined by 6.9% during the second quarter.

The confusion surrounding the assessments muddles quick-glance evaluations of operating expenses, but FirstLook data shows credit unions are making cuts to core expenses. During the most uncertain times of the Great Recession, credit unions were quick to act. They focused cuts on the more intangible aspects of their business, such as travel and conference expenses, marketing expenses, and professional and outside service expenses. During the second quarter of 2010, however, credit unions have shown they are ready to make cuts to – or at least hold relatively constant – their two largest business expenses: employee compensation and office occupancy & operations.

Employee compensation and building utilities, such as turning on the lights, comprises 77% of credit unions’ total operating expenses. At the end of June, FirstLook credit unions reported spending $6.9 billion on employee compensation and benefits this year, up 2.3% from the same time in 2009.  Since March 31, 2010, however, credit unions have essentially held constant their employee compensation and benefits, slightly reducing the expense by 0.01%. Although the second quarter is not traditionally a time of year in which the industry substantially increases salaries and benefits, the fact that credit unions kept employee-related costs flat is noteworthy because they also increased their total staff by more employees, 982, than they had in any quarter over the past two years. 

In addition to compensation, credit unions also made quarterly cuts to their office operations.  Occupancy expenses are up 3.7% year-over-year, but during the second quarter they dropped quarterly by 1.9%. Operation expenses slightly increased in 2Q 2010. This is likely the result of an increase in the cost of utilities (can anyone say air conditioning?). At second quarter’s end, office operation expenses were up 1.28% annually and up 0.4% quarterly.