With paychecks usually coming once a month and only 10 times a year, teachers are known for having the discipline to hunker down on their savings and keep spending on a tight leash.
Because of those habits, having a field of membership composed of mostly educators has in turn helped the $8 billion SchoolsFirst Federal Credit Union manage its expenses and keep a firm rein on its budget.
One-third of the Santa Ana, Calif.-based credit union's more than 400,000 members are teachers or work in the education community, said Jose Lara, senior vice president of planning and development. Their ability to stretch a dollar is clearly evident. The average share balance per member is $17,000 and loan balance is $12,000 at SchoolsFirst.
"Theoretically, those deposits fund loan operations. You can keep your cost of funds down if you're managing spread," Lara said. "We believe that our operating expenses are in line due to our cost of funds."
With industrywide assessments taking their toll and the effort to stabilize the corporate credit union system, many credit unions are scrutinizing every line of their budgets and cutting back in a number of areas while still striving to meet their members' needs and remain competitive.
Besides serving members who are prudent savers, what also helps SchoolsFirst manage its costs is having a straightforward product line, Lara said. The credit union's strategic objectives and day-to-day decisions are based on what is in the best interest of the members. Savings plans and loans are very popular. SchoolsFirst members use nearly five products, which reduces the cost to deliver them. It would not cost the credit union more to make 10 loans than one loan incrementally because the credit union is using the same infrastructure for each one, Lara pointed out.
Filene Research Institute studies show that average savings balances and average loan balances are powerful predictors of a credit union's expense ratio, said Bob Hoel, a research fellow at the Madison, Wis. firm and professor of business emeritus at the University of Colorado.
"This surprises some people including many regulators because they tend to focus on the numerator [or] operating expenses when trying to manage expenses," Hoel said.
The expense ratio is the operating expenses divided by the average total assets, which can also be managed by increasing the average member deposits and average loans, Hoel explained. He said a credit union with 100 members, average deposits of $1,000 and operating expenses of $10,000 would have an expense ratio of 10%, assuming no net worth. If the same credit union had average deposits of $10,000 (total deposits of $1,000,000) and the number of members and operating expenses remained the same, the expense ratio would be 1%. Higher deposits can cause net worth ratios to drift downward, he cautioned.
A credit union's operating expenses in dollars could remain fairly constant because much of its expenses are linked to the cost of carrying the member, Hoel said. Whether a member has $1,000 or $10,000 on deposit, he or she still gets only one monthly statement and uses the teller line and ATM about the same number of times. Therefore, a credit union with high deposits per member tends to have lower expenses than a similar cooperative with lower deposits per member, he noted.
"The same general logic illustrates why high loan balances per member is a predictor of a low expense ratio," Hoel said. "The cost of originating and servicing a single $50,000 loan is less expensive than originating and servicing 50 $1,000 loans."
Sometimes, it is just a scale or volume issue, Lara said. If there's not enough scale, it would be expensive to service a bunch of loans. For instance, SchoolsFirst has a nearly 70% penetration rate in its checking accounts.
Another way SchoolsFirst is managing its expenses is with its hiring practices. The credit union has a senior team that has to approve any new position added to the staff's roster, Lara said. Rather than bring on new employees and the costs associated with that, SchoolsFirst would be more inclined to move staff around departments internally. There are exceptions, such as with the collections department, which Lara said the credit union is unfortunately adding to in order to keep pace with the delinquencies.
"In areas where we need more help, we move people around rather than hiring," Lara said, adding SchoolsFirst has not instituted a hiring freeze.
At the other end of the spectrum is the purging of inactive or low-balance accounts and what impact that has on a credit union's budgeting and cost controls. Lara acknowledged that SchoolsFirst, like others in the industry, has many members who participate in the credit union's services at a very low level. They are not charged fees. Instead, a reward system is in place for those who take advantage of other offerings.
"We are not purging any accounts yet," Lara said. "If you have a member, you're going to have some expenses to service the account. We offer rewards to increase participation."
Even though there is an urgency within the industry to court Generation Y more aggressively, Hoel said credit unions should not neglect the 50 and older demographic. It's more expensive to manage Gen Y's financial habits, Hoel said. Still, younger people can boost revenue because they tend to be heavy users of online banking and debit and credit cards, which are prime sources of fee income. The bottom line is regardless of age, the industry is poised to seize on several opportunities to help streamline budgets.