MADISON, Wis. - A strategic alternative to mergers, according to Bob Hoel, is to maintain high deposits per member and low operating expenses. Of course, once a credit union is in troubled waters and looking for a merger partner, it may be too late to resolve that issue. It’s a worthwhile strategy, though, to develop strategic alternatives to mergers.
Filene Research Institute published “Predicting and Managing a Credit Union’s Expense Ratio,” in 2004 that offered five significant influences on expense ratios, including:
* Deposits per member. This is considered to be the most powerful expense ratio predictor identified in this research. As deposits per member increase, expense ratios decrease substantially.
* Credit union size. Increases in asset size are generally associated with somewhat lower expense ratios, even controlling for other influences. However, many individual small credit unions have very low expense ratios.
* Ratio of loans to assets: As the loan-to-asset ratio rises, the expense ratio rises.
* Average loan size: A larger average loan size tends to reduce the expense-to-asset ratio.
* Real estate loans: An increase in the percentage of the loan portfolio devoted to real estate lending reduces the expense ratio.
Hoel points to the example of the $7.7-billion Schools First FCU in Santa Ana, Calif., as a credit union with high deposits and low expense ratios. The credit union, formerly known as Orange County Teachers, has an average deposit of $15,000, which is well above peer and low expense ratio. Its FOM is school employees.
“School employees don’t get paid much; they live prudently,” said Rudy Hanley CEO of Schools First. “Our low expense ratio is a function of asset size and high deposit rate, a high participation rate by members, and very careful management of expenses.”
The high participation rate by members, according to Hanley, is a focus on a unique field of membership that provides specialized services such as a summer savings account for employees who work 10 months. An educator’s mortgage that provides a better mortgage rate and a special loan that members can borrow up to $1,000 at 0%.
In 75 years, the credit union has had one merger, with Orange County State Employees, which had $70 million in assets and an overlapping field of membership. Hanley said that viable alternatives for credit union mergers are partnerships.
“Credit unions can share backoffice services, that’s probably the most efficient,” he said. “Maintain the direct link with members, while still reducing operating expenses. We belong to Prime Alliance, the mortgage CUSO. Shared branching is another perfect example of alternatives to mergers.”(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
