By Greg Hoeg
We have recently completed our review of the U.S. credit union Industry for Q1 2020 and identified the most and least Operationally Efficient and Effective institutions. The review included 5,282 credit unions operating in the U.S. and measured their performance in terms of how efficiently they managed their operations and how effectively they built and maintained quality business portfolios.
In other words, the review measured how much “bang for the buck” each institution got from what it spent on its business operations and the quality of the book of business it manages.
- Operational Efficiency. A measure comparing each credit union to industry best performers in terms of the total cost of their business operations relative to the value of the revenue those operations generate
- Business Effectiveness. A measure of the quality of the business portfolio each credit union has built in terms of its profit potential, independent of operating costs, compared to industry best performers
These measures are developed using Efficient Frontier Analysis (EFA), a concept from portfolio theory to identify best performance, which we applied to operational measures. The evaluation is objective, using publicly available data reported in credit union Call Reports and with no input from the credit unions themselves.
The result is an accurate set of measures of how effectively and efficiently each credit union manages its business resources and operations compared to industry best performers.
The U.S. credit union Industry in Q1 2020 experienced possibly the most challenging economy since the Great Depression as a result of the COVID 19 pandemic and its related economic shutdown. This was particularly difficult for credit unions in dealing with in-person member service challenges, loan payment deferrals, increased member withdrawals, interest rate declines and the stimulus payment related activity.
In such an environment competitive success for a credit union is largely dependent on having a portfolio of business that maximizes profitability through low interest costs or managing business operations very efficiently, or both.
Best Performers
Those credit unions that achieved the highest levels of operational efficiency tended to be larger than the typical U.S. credit union in terms of assets and net income in Q1 2020, but not in terms of offices and employees in which they were much smaller. Such a combination demonstrates superior economies of scale in their operations likely due to specialized customer and functional approaches.
Unfortunately, these credit unions were well below the industry average for effectiveness in building and maintaining a quality business portfolio for profitability, thus countering much of the benefit gained by being operationally efficient.
Those credit unions that achieved superior levels of operational effectiveness in building and maintaining a quality book of business also tended to experience better than average levels of operational efficiency. These credit unions were also generally smaller than the typical credit union in the industry, as measured by assets, but achieved higher levels of net income. Their ability to excel at building a quality business portfolio while operating at a competitive level of efficiency means they are contributing to their bottom lines both operationally and strategically.
Worst Performers
Credit unions in Q1 2020 that most underperformed the industry in operational effectiveness, with few exceptions, underperformed in operational efficiency also. As a group, these credit unions tended to be much smaller than the typical institution in the industry in terms of assets. These least effective credit unions also tended to produce negative net income and, as a group, are skewed toward newer or start up entities.
Those credit unions that most underperformed the industry in Q1 2020 in terms of operational efficiency also generally underperformed in business portfolio effectiveness. It is noteworthy that as a group these credit unions were significantly smaller than the typical credit union in the industry in terms of assets, personnel and offices. It may be that the group’s weak efficiency performance is due to a lack of economies of scale.
Ultimately, size and quality of business portfolio are keys to credit union success in economically difficult times such as the industry experienced in Q1 2020. Operating efficiently without effectively building and managing a quality book of business is not enough to succeed in challenging times.
Gregory J. Hoeg leads Hoeg & Co. in Lahaska, Penn. For info: gjhesq@hoegco.org. For info: https://gjhesq.wixsite.com/hoegco or 267-406-3211.