While banker attacks, potential taxation, and other external, non-controllable issues do present serious challenges to the credit union system the more serious internal and controllable challenge is to diligently focus on EXPENSE control. As the NIM (net interest margin) decreases due to cost of funds and the need to remain competitive in the lending and investment arena, statistical data (see NCUA Letter #06-CU-15) indicates credit unions' NIM, as of June 30, 2006, dropped another 5 basis points, while operating expenses increased by 5 basis points, a full 10 basis points swing. Yes, credit unions are partially offsetting the pressure on earnings with increased fees and other income streams, but this too presents another external challenge; concerns over non-related business income. A New Measure Is Needed

When the entire NIM (3.24% for 2005, now 3.19% in 2006) is needed to fund operating expenses (3.24% for 2005, now 3.29% in 2006) where do you go? Factor in the free revenue earned from reserves and undivided earnings and the problem exacerbates. Perhaps the ROA, while important, should become a subordinate measure of the CAMEL rating. A better measurement, I suggest, is the "Operational Efficiency Ratio (OER)." This ratio expresses the portion and percentage of the NIM and other income that is needed to fund operating expenses. Well-run credit unions maintain an OER in the 55% to 65% range. This translates into an ROA well above the 0.86% reported in the June 30, 2006 NCUA letter.

Over the past 20 years, I have been involved in helping to reshape the operations of many CAMEL 4 situations, all requiring major surgery in order to survive. Some just couldn't or wouldn't get it! They have since merged or gone to the credit union graveyard. Their investments in managerial ego, outdated processes, board member preferences, and traditional ways of doing business did them in; they could not survive in the highly competitive marketplace without change. Others welcomed and embraced the dynamics of the change process, which had the dual effect of making both service delivery and operating processes more efficient. Of course the reader can conclude this is a self-serving, shameless commercial for consulting services. Consider this real life example: In 2000, a $400 million operation (fifteen branches, covering three states) engaged our firm and in a period of 12 months experienced a $2.4 million net bottom line improvement after paying our consulting fees. Five years later, their Dec. 31, 2005 FPR Report indicates assets of $805 million, an NIM of 3.24% (Same as NCUA data) operating expense ratio of 2.45% (NCUA 3.24%) and an ROA of 1.30% or 0.45 bps higher than NCUA data (0.85%). You do the math! Their 2005 operating expenses came in at 36.42% of gross income for an OER of 65.24%. Excellent management and outstanding long-term results!