Featured Posts - CULytics Community2024-03-28T13:34:42Zhttps://culytics.com/blogs/feed/featuredIs Star One is the Most Efficient Big Credit Union?https://culytics.com/blogs/efficiency-ratio2018-05-11T22:58:31.000Z2018-05-11T22:58:31.000ZNaveen Jainhttps://culytics.com/members/Naveen<div><h1><a href="https://storage.ning.com/topology/rest/1.0/file/get/14699916?profile=original" target="_blank" rel="noopener"><img class="align-full" src="https://storage.ning.com/topology/rest/1.0/file/get/14699916?profile=RESIZE_710x" width="710" /></a></h1>
<h1>How efficient is your credit union?</h1>
<p>At the recent <a href="https://culytics.com/2018-credit-union-analytics-summit" target="_blank" rel="noopener">2018 Credit Union Analysis Summit</a>, Jon Voorhees from Peak Performance Consulting talked about <a href="https://culytics.com/articles/2018-day-1-channel-analytics" target="_blank" rel="noopener">Efficiency Ratio</a> and how Credit Unions should use it to analyze their overall performance and more specifically branch performance. </p>
<p>At the core, all credit unions are similar. They borrow money (as savings, checking, certificate deposits, etc.) at one interest rate from members and then lend it out at a higher interest rate (as credit card loans, auto loans, mortgages, etc.) and pocket the spread between the two as their main source of income.</p>
<h2>Definition of Efficiency Ratio</h2>
<p>Efficiency ratio is essentially how efficiently credit unions are operating to generate the income. The formula for efficiency ratio is very simple.</p>
<p>Efficiency Ratio = Non-Interest Expense / (Net Interest Income + Net Non-Interest Income)</p>
<p>Net Interest income is the difference between the revenue generated by a credit union and the expenses associated with paying out the liabilities. Typical credit union’s assets include assets such as credit card balances, auto loans, personal loans, and mortgages. And the liabilities include all the deposits. The difference between the interest revenue generated from assets, minus the interest paid out on the deposits, is the net interest income.</p>
<p>Non-interest income is the income that credit unions generate primarily from fees such as insufficient funds (NSF) fees, annual fees, interchange fees, services fees, etc.</p>
<p>Non-interest expenses include employee salaries, benefits, branch and office rentals, loan loss provisions, utilities, professional fees, conference fees, etc.</p>
<h2>Lower Efficiency Ratio is Better</h2>
<p><strong><u>Credit Unions should strive for lower efficiency ratio</u></strong> since lower ratio indicates how efficiently they are operating to generate income. Generally, a ratio of 50% is considered optimal efficiency ratio.</p>
<h2>Why is it important?</h2>
<p>Efficiency ratio is important for various reasons. It tells us how a given credit union is functioning.</p>
<ol>
<li>High-efficiency ratio indicates that a credit union is making lot of investment to generating income. Either the expenses are higher than usual or the income that is generated is less than usual. Quality of the loan portfolio, crumbling economy, losses of jobs by members can be underlying reasons why the income generated by the portfolio may be impacted leading to higher than optimal efficiency ratio.</li>
<li>Low-Efficiency ratio might indicate that a credit union is more efficient. However, if the credit union is holding on making the appropriate investments in upgrading their infrastructure, technology investment, etc. then in the long term it may impact their operations. As long as the credit union is making appropriate investment to secure the future while maintaining the low-efficiency ratio, then they are moving in the right direction. </li>
<li> 50% is considered the maximum optimal efficiency ratio.</li>
</ol>
<h2>Star One is the Most Efficient Big Credit Union</h2>
<p>Based on 5300 filing, as of 12/31/2017, Star One Credit Union is the most efficient Big 10 Credit Unions with the efficiency ratio of 26%.</p>
<table width="352">
<tbody>
<tr>
<td width="215">
<p><strong>Credit Union Name</strong></p>
</td>
<td width="137">
<p><strong>Efficiency Ratio</strong></p>
</td>
</tr>
<tr>
<td width="215">
<p>NAVY FEDERAL CREDIT UNION</p>
</td>
<td width="137">
<p>44%</p>
</td>
</tr>
<tr>
<td width="215">
<p>STATE EMPLOYEES'</p>
</td>
<td width="137">
<p>51%</p>
</td>
</tr>
<tr>
<td width="215">
<p>PENTAGON</p>
</td>
<td width="137">
<p>39%</p>
</td>
</tr>
<tr>
<td width="215">
<p>BOEING EMPLOYEES</p>
</td>
<td width="137">
<p>58%</p>
</td>
</tr>
<tr>
<td width="215">
<p>SCHOOLSFIRST</p>
</td>
<td width="137">
<p>56%</p>
</td>
</tr>
<tr>
<td width="215">
<p>THE GOLDEN 1</p>
</td>
<td width="137">
<p>60%</p>
</td>
</tr>
<tr>
<td width="215">
<p>FIRST TECHNOLOGY</p>
</td>
<td width="137">
<p>53%</p>
</td>
</tr>
<tr>
<td width="215">
<p>ALLIANT</p>
</td>
<td width="137">
<p>40%</p>
</td>
</tr>
<tr>
<td width="215">
<p>SECURITY SERVICE</p>
</td>
<td width="137">
<p>55%</p>
</td>
</tr>
<tr>
<td width="215">
<p>STAR ONE</p>
</td>
<td width="137">
<p>26%</p>
</td>
</tr>
</tbody>
</table>
<p> </p>
<h2>What it the Efficiency Ratio of your credit union?</h2>
<p>As you can see efficiency ratio is one of the extremely easy formulae to help get a better understanding of your credit union. By no means, this should be considered an end-all, be-all financial metrics. There are other financial measures that should be used along with efficiency ratio to have a better understanding of the financial performance of a credit union.</p>
<p>What is the efficiency ratio of your credit union? Share here with the community.</p>
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