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Operating Expenses: Are We Good?

by Tabitha Garvin, MCUN

Each quarter MCUN sends our credit unions a Custom Performance Report or CPR. (For more general information on the CPR, read this previous post from Donya.) The CPR provides peer to peer analysis on a number of key indicators. Let’s take a closer look at Operating Expenses as you may see a lot of variation from your credit union to the peer groups which can make it difficult to know how to best use the data.

Operating expenses are frequently provided as a percentage of average assets. Operating Expenses include employee compensation and benefits, office occupancy, office operation, loan servicing, professional services, operating fees, or other general expenses needed to house a business to name a few.

Operating expense ratios in the CPR

  • $ Expense to Growth Rate Comparison
  • Fee & Other Income as a % of Expenses
  • $ Expenses per Employee (FTE)
  • $ Expenses per Member
  • $ Salary & Benefits per Employee (Annual Basis)Office Operating Expense (annualized) per Employee
  • Total Credit Union Expenses per Total Member Accounts (Shares and Loans)

As you can see, there are a lot of ways to take a closer look at your credit union’s operating expense and compare it to its appropriate peers in order to establish the criteria your board needs to monitor this financial factor.

Generally, Operating Expenses are 2.5% to 4.5% of average assets. The World Council of Credit Union’s PEARLS model recommends the ratio remain below 5%. When you look at your credit union's Operating Expense compared to peer, how do you know if your ratio is good or troublesome?

The CPR provides some questions to help you get started determining the quality of your operating expense ratio.

  • Does your credit union’s Fee & Other Income help offset Expenses or subsidize member service?
  • Are there any categories of Expenses as a % of Average Assets that have had any significant increases or decreases? If so, why?

I would also encourage you to compare your operating expense ratio to your strategic plan. If your strategic goal is to maintain “high touch” with your members, you will require more employees and your operating expenses will be higher. If your strategic goals is to leverage technology to meet member needs, you may have fewer employees which may result in a lower ratio.

The Operating Expense as an Average Asset Ratio can be a tricky ratio to examine in isolation. Be sure to examine your strategies, overall mission, and financial condition as you make comparisons to peers to determine the best efficiency goals for your credit union.

Tabitha Garvin is the VP-Fee Based Services for the Montana Credit Union Network. She would welcome any questions or comments on this material. You can email Tabitha or call her at 800-745-5546, ext. 132.

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