H1 2020 operational efficiency & effectiveness ratings of U.S. credit unions

Hoeg & Company, Ltd. has completed its review of the U.S. Credit Union Industry for H1 2020 and named the 50 most Operationally Efficient and 50 most Operationally Effective institutions nationally.  The review included 5,260 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, given their book of business
• Operational Effectiveness – A measure of the quality of the business portfolio each credit union has built in terms of its bottom-line potential, independent of operating costs, compared to industry best performers 

Hoeg & Company developed the ratings by applying Efficient Frontier Analysis (EFA), a concept from investment portfolio theory used to identify best performance in investing, to credit union operational measures.  The evaluation is objective, using publicly available data reported in credit union financial statements (Call Reports) available from the National Credit Union Administration* and with no input from the credit unions themselves. The ratings are scored from 100 (best) to 0 (worst).  

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.

Industry Situation – H1 2020 

The U.S. Credit Union Industry in H1 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 customer service challenges, loan payment deferrals, increased member withdrawals, interest rate declines and stimulus payment related activity. 

In such an environment competitive success for credit unions is largely dependent on having a portfolio of business that maximizes positive bottom-line results through low interest costs and/or managing business operations very efficiently.

Best Performers 

The most Operationally Efficient credit unions nationally tended to be slightly smaller than the average of U.S. credit unions in terms of assets but generated larger than average net incomes in H1 2020.  In terms of size as measured by number of offices and employees the most efficient credit unions are smaller than the average nationally.  This combination of resources appears to have resulted in superior economies of scale driving greater operational efficiency.  Unfortunately, these most efficient credit unions were all well below the industry average for effectiveness in building and maintaining quality business portfolios for producing positive bottom-line results, thus countering much of the benefit gained by being operationally efficient.

The most Operationally Effective credit unions, those building and maintaining quality books of business, also tended to experience better than average levels of operational efficiency.  These credit unions are, as a group, similar in size to the average of U.S. credit unions in terms of assets and their number of offices.  They did stand out from industry averages though by having more employees and lower net income than average for H1 2020.  This combination of resources may indicate these credit unions are providing a more thorough and higher quality service to members, thus attracting and retaining a higher quality book of business.  Further, the ability of these credit unions to excel at building quality business portfolios while operating at competitive levels of operational efficiency means these most effective credit unions are contributing to strong bottom-line results both operationally and strategically.

Worst Performers

Those 50 credit unions that most underperformed the industry in H1 2020 in terms of Operational Efficiency also all underperformed in operational 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, number of personnel and number of offices, with one exception, and produced negative net incomes.  It may be that the group’s weak efficiency performance is due to a lack of economies of scale.

The 50 credit unions in H1 2020 that most underperformed the industry in Operational Effectiveness had mixed results in terms of operational efficiency performance with some performing better than the industry average.  As a group, these credit unions were much smaller than the typical institution in the industry in terms of assets, offices and employees. As a group, these least effective credit unions, had negative net income, with a mixture of results individually. 

Conclusion

Ultimately, institutional size matters to credit union success in economically difficult times such as the industry experienced in H1 2020.  Orienting a credit union’s operations toward building and maintaining a quality book of business tends to carry with it operational efficiency, whereas achieving operational efficiency does not appear to assure operational effectiveness. Although one’s instinctual response to harsh economic conditions might be to hunker down and cut costs, the data shows that focusing on effectively building and maintaining a quality book of business appears to be the best strategy for credit unions in dealing with challenging times.