The Inner Workings of the Efficiency Ratio

How well did credit unions manage expenses in 4Q 2010?


Corporate write-downs, NCUSIF and CCUSF stabilization expenses, historically low interest rates, and other non-operating gains make expense management crucial in generating positive bottom lines. Rather than slashing expenses, which could have a negative impact on members, credit unions are operating more efficienctly. 

The efficiency ratio is a metric that quantifies how adept a credit union is at utilizing its expenses by measuring how much the credit union has to spend in order to generate a dollar of revenue. Similar to the operating expense ratio, a lower value in this metric is better. Additionally, the multiple variables in the formula provide credit unions with a range of strategic options to influence the ratio’s outcome.

The ratio is calculated by taking a credit union’s year-to-date operating expense totals and dividing that by the credit union’s interest income (minus interest expenses), plus fee income and other operating income. The provision for loan losses is included in this metric. However, some credit unions prefer to calculate an efficiency ratio that does not include the provision for loan losses because of the significant expense in recent years.

Over the past two years, credit unions' efficiency ratio has declined. At the end of 2010, credit unions in the United States reported an efficiency ratio of 86.6%. This is an increase from the 83.5% reported at the end of 2007. The rise in the efficiency ratio the past two quarters throughout all peer groups is because of an accounting standard; credit unions now place stabilization expenses within the operating expenses account. Excluding these line items, the U.S. credit union industry average for the efficiency ratio is 81.4% as of December 31, 2010.




Feb. 17, 2011


  • Very informative and is great tool for credit union to determine how it is managing in these challenging times.
    Greg Kunath
  • I have had monies invested with a credit union for many years.

    Very informative article. Gives a true sense of what the bottom line is after expenses.
    Helena Busick