With the economy in its current troubled state, many credit unions are turning a critical eye towards their own operations to see how they can operate more efficiently in an attempt to positively impact their bottom line. With credit unions using numerous metrics and strategies to measure their efficiency and productivity, how have these metrics been faring in the current environment?
Efficiency Metrics Struggle as Expense Growth Outpaces Income Growth
Two of the more common measures of efficiency are the operating expense ratio and the efficiency ratio. Both of these metrics measure a credit union's efficiency, but they use different criteria to produce their end result. In both of these metrics, a lower figure is better.
Let's begin with a look at the operating expense ratio. As of December 2008, the average operating expense ratio for credit unions stood at 3.38%. This marks a slight increase from the 3.36% annualized ratio reported in the third quarter of 2008, but is down from the 3.40% reported at the end of 2007. This shows that credit unions are maintaining a focus on careful expense management, as they have managed to keep operating expense growth below that of asset growth as the industry expands.
Another key measure for tracking a credit union's efficiency is the efficiency ratio. This ratio uses operating expenses as a measure for productivity, essentially showing how much your credit union is spending in order to earn a dollar of revenue. At the end of 2008, the average efficiency ratio reported was 92.4%. This metric unfortunately has increased since December of 2007 when credit unions reported an efficiency ratio of 84.4%. One of the major drivers of the increase in this metric has been the declining net interest income during the year, as credit unions more than doubled their provisions for loan losses from the previous year.
Productivity Measures Show Both Negative & Positive Trends
Another method of measuring efficiency is by looking at employee productivity metrics. Credit unions have made a number of positive strides in key productivity metrics over the past year. First of all, the number of members per employee has continued to decline, down to 372, as employee growth continues to slightly outpace member growth. This more personalized attention may be providing members with a greater opportunity to deepen their relationships with the credit union, as the average member relationship increased 5.2% to $14,088 per member through the end of 2008.
Credit union employees remain a crucial component of any credit unions' growth and member retention strategies, which was highlighted by a 6.3% increase in salaries and benefits in 2008, outpacing employee growth at a 3 to 1 pace. However, as salaries and benefits increased, the revenue generated per dollar of salary and benefits did decline slightly. Through the end of 2008, credit unions reported an average of $4.09 in revenue per dollar of salary and benefits, down from $4.25 in the previous year. Although this metric has decreased as growth in salaries outpaces growth in revenue, average revenue generated per employee did manage to increase slightly during the year, up to $228,880 in December.
As employment continued to increase, up 2.1% in 2008, and loan originations fell slightly from record peaks reached in 2007, we also saw the amount of loans generated per employee fall slightly. As of December 2008, each employee originated $1.05M in new loans during the course of the year; this is marginally down from the $1.08M that credit unions reported in 2007.
Choosing the Right Metrics is Key
As the external market continues to struggle, credit unions have yielded a mixed bag of results when it comes to productivity and efficiency measures. Some metrics are on the rise, while others have fallen from performance highs in 2007. This illustrates the importance of your credit union selecting the right metrics to gauge your efficiency and productivity. While you might see negative trends using certain metrics, looking at different measures may greatly change your outlook. The decision on which metrics your credit union uses to evaluate your performance can be a crucial one that should be re-evaluated regularly, based on your credit union’s business model and the goals you have set to ensure that you are looking at this complex issue from the right angle.