ALEXANDRIA, Va.-Looking back at 2012, there's a key differentiator between those CUs that made money and those that didn't: expense management.

"The ability to keep expenses low-and in some cases reduce expenses-and to try to find some non-interest income have really been key because of the interest rate environment we're in," said John Worth, NCUA's chief economist. "With weak demand, if you're one of those credit unions who have a very low share of your assets loaned out, even though you're paying almost nothing on those deposits, it's still a continued drain on the bottom line."

Worth acknowledged that some CUs have limited their own growth as a way of rebuilding their balance sheet, which he said was not problematic because those CUs are generally executing a strategy.

"As the economy improves and the unemployment rate comes down, we should see provisioning continue to come down, and that's going to be a source of profitability and capital for a lot of credit unions," he said. "A lot of the improvement we've seen in earnings over the last couple of years has been driven by reductions in provisioning."


The $500-Million Threshold

Mike Moebs, CEO of Moebs $ervices in Lake Bluff, Ill., noted that it's difficult for credit unions to reach economies of scale until they hit $500 million in assets. After that, he said, "you have to examine every financial service you offer, and if you have services that are not cutting basic direct functional expenses and indirect functional expenses, you've got to get rid of them."

Moebs clarified that items such as IT and compliance costs are considered indirect functional costs. "They're not going to vary, they're going to be heavily fixed, and they have to be absorbed by other activities of the functional department of lending."

(The issue of how assessments paid to NCUA's Corporate Stabilization Fund remain an issue for many looking to grow or get out of the red will be covered in the next issue of Credit Union Journal).

Brian Turner of Catalyst Strategic Solutions in Dallas, however, noted that compensation and benefits constitute about 49% of total expenses at both large and small CUs. Smaller institutions, however, tend to have a net operating expense ratio about 80 basis points higher than their larger counterparts. "It's a function of the fact that they're closer to their floor than other large credit unions are," he said. "Every financial institution has a fixed cost level-a minimum cost that they can't do any less than on the cost of operations. Smaller credit unions are just closer to that floor."


An 'Ongoing Problem'

Bill Myers, director of NCUA's Office of Small CU Initiatives, observed that small to mid-size credit unions continue to struggle with staffing-not just in recruiting for today, but planning for tomorrow. Succession planning remains an "ongoing problem" for small CUs, said Myers, noting that as many as 40% of all credit unions do not have succession plans in place.

"Getting new staff into a small credit union is really tough, and about 30% of them fail at that point," he said.

While OSCUI continues to emphasize succession planning, Myers said in 2013 the Office of Small Credit Union Initiatives will shift from attempting to push succession planning up front to pulling new managers away for brief succession-planning training stints as time permits.

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