What You Need to Know About the Expense Analysis Page

Paying attention to the expenses in your credit union is an ever-present task, with loans and share drafts typically your most labor-intensive offerings.

Cornerstone’s ALM Key Ratio Analysis Report includes an Expense Analysis, which can provide insights for your credit union. The Expense Analysis, found on page 11 of the report, gives you another perspective to consider when looking at the costs to run your credit union as they relate to offering loans and share drafts—the products and services you offer your members to make their lives better.  

What Is the Expense Analysis Telling You About Your Operation?  

Years ago, when the initial Key Ratio Report was designed, Dr. Charles Idol included the ability to run an expense analysis for our member credit unions. This was done on a request-only basis because the reports were manually generated, and the information had to be keyed in by hand. Things are a bit different now. 

The Expense Analysis offers perspective on the operation expense for your credit union as it relates to staffing, salary and fringe benefits, and the expense to service each million dollars of loan and share draft volume. When Dr. Idol built the Expense Analysis, it had nothing to do with the asset size of a credit union and everything to do with the volume of loans and share drafts the credit union supports.  

As mentioned, loans are the most labor-intensive offering on the asset side, and share drafts are the most labor-intensive offering on the liability side. As part of that consideration, in the “old days” you typically had one employee for every $1 million in assets; and more often than not, the typical field of membership was employee-based, and the credit union was on site. The credit union model is different now, but this is still worthwhile data to review and monitor. 

Understanding Page 11 

The top half of page 11 breaks out the expense items by category, which is pulled from the 5300 Call Report data. There are four columns across the top: 

A couple points to highlight about this information: 

What is the bottom half of this page telling us?  

Here we see how our credit union compares to the rest of the world on expenses based on the loan and share draft volume in our shop. We're specifically addressing staffing levels and salary/fringe amounts for credit union employees. Remember, the driver for number of employees (in our model) is making loans and having share draft accounts. This is where you need the bulk of your employees.  

Looking at the calculations tells us: 

1. FTE Emp /$MM LNs and SDs—Staffing Ratio: Are we in line with the world/peer supporting XMM in loan and share draft volume? Potential understaffing or overstaffing by X# of employees is indicated at the bottom of the equation.

   
   You’ll notice we use the word “potential” understaffing or overstaffing because there are a couple of factors that will impact this. A credit union that is transaction heavy in loans and share draft accounts is going to have more frontline people. We also see that those credit unions with a low-income designation have the need for more frontline staff. The other factor that will impact this is certainly the number of branches a credit union has in comparison to similar-size credit unions. Some credit unions, as part of their business model, want to be where their members are to provide ease of access. They knowingly will be overstaffed to support this.
   
   For those credit unions that do have more branches, it can be helpful to review how many employees there are at each branch broken down by job function. Often, we will see that after counting the additional employees and branches, that number may add up to the “potential” overstaffing value or be close to it. 

2. $M (Salary & Fringe)/FTE Emp: Looking at our Compensation (S&F) divided by our number of FTE emp and how that relates to the peer expense. What are our compensation/salary costs based on the number of employees in comparison to peer?

3. $M (Salary & Fringe)/$MM LNs & SDs: Calculating compensation (S&F) divided by our loan and share draft volume. This gives us our compensation costs to service our loans and share drafts. Then relates it to peer.

4. Net Exp/$MM LNs & SDs: Finally, calculating net expenses divided by our loan and share draft volume. Looking at our net expenses against labor intensive loans and share draft volume. How do we compare to peer? Factors that can impact this include multiple locations and declining loan and share draft volume.

I hope you found this information about the Expense Analysis on page 11 of the Key Ratio Analysis Report helpful and informative. The value of looking at ratios allows you to assess how your credit union is performing today and then make comparisons to past periods. Additionally, you can compare your shop to other credit unions in your area and those of similar asset size, which can give you a better sense of whether you’re making the right decisions for your credit union and, ultimately, your members. 

Learn more on our website and grow your understanding of asset/liability management by attending the ALM webinars or workshops held around the Cornerstone region.