Credit Union Year in Review

2006 once again proved to be a year of change and progress within the credit union industry. While new opportunities presented themselves, new challenges were plentiful as well. Among the many significant events in 2006, here is a summary of a couple of the noteworthy events:

• The rapid credit union merger trend (more than 250 per year) continued, with the total number of credit unions now down below 8,500. Most notable during 2006 was the merger of twelve State Farm Credit Unions into one.

• At the same time total assets and credit union members are reaching all-time highs, credit union capital levels are remaining near all-time highs. If you take out the non-risk assets (guaranteed loans, etc.), the capital level approximates 17%. Credit unions remain extremely sound.

• Nationally, loan growth remains strong, with real estate growth leading the way. Through September 30, 2006, real estate lending increased 13% over the past 12 months. Share growth has been slower, up less than 3% for the same period. In fact, 62% of all credit unions lost shares during those 12 months. This has resulted in a loan-to-share ratio of more than 82%, the highest point in recent history. Credit card lending has increased 9.5% during this period, more than double the rate posted by banks and thrifts. Business lending is reaching record levels, as well. With these kinds of numbers, credit unions should be well situated for a strong 2007.

• Regionally, growth has been more challenging. While national loan growth has been 8.63%, Michigan and Ohio loan growth has been 3.98% and 4.19%, respectively. Real estate loan growth has been 9.35% in Michigan and 6.70% in Ohio. Share growth in Michigan has been almost nonexistent at 0.21%. Ohio has fared better at 2.57%, but it’s still below national levels. Loan to share ratios have been more similar to national trends (80.14 in Michigan and 77.05 in Ohio). While interest spreads have been higher in Michigan and Ohio compared to nationally (3.44% and 3.39%, compared to 3.20%), fee income and other operating income as a percent of assets has been higher (1.38% and 1.31% compared to 1.27%); operating expenses have also been higher (3.73% and 3.67% compared to 3.31%). This has resulted in an overall return on assets for Michigan and Ohio credit unions lagging the return of national credit unions (0.74% and 0.70%, compared to 0.88%) for the 12 months ending September 30, 2006. The economic woes of the Midwest have extended to the credit union industry.

• Interest spreads, at less than 3.2%, are at historic low levels. This has forced credit unions to evaluate fee income and to closely monitor operating expenses. For the most part, credit unions have been successful, maintaining ROAs at nearly 90 basis points.

• After 17 consecutive interest rate increases, the Fed has now held the rates for 4 consecutive meetings. With varying opinions as to what direction rates will move in 2007, ALM modeling is crucial to ensure continued strong results in credit unions.

• The stock market increased during 2006 with a strong performance (Dow up 16.3%, S&P up 13.6%, and NASDAQ up 9.5%) and surpassed the 12,000 level for the first time ever, continuing to attract investment dollars and further challenging credit unions with acquiring additional share deposits.

• OFIS (Michigan) announced in early 2006 that they would no longer be filing a joint IRS Form 990 on behalf of all state-chartered credit unions. The burden of preparation now rests on each state-chartered credit union within Michigan.

• While credit union taxation remains a hot topic in Washington, no real advances were made during 2006. The 58 credit unions with completed field audits have no further information on tax liability. Both a 1997 Private Ruling request and a 2002 Technical Advice request are still pending. However, a Government Accountability Office (GAO) report, dated December 1, 2006, questioned the overall rationale for tax exemption for credit unions. Specifically, the GAO called for better monitoring of how credit unions serve those of modest means and also urged for more transparency on executive compensation. The NCUA had recently released the results of its Member Service Assessment Pilot, indicating that credit unions were fulfilling their charters by serving their members in all income brackets. While the IRS continues to intend to issue technical advice memoranda on unrelated business income tax (UBIT), we will have to wait to see if this occurs. What appears certain, however, is that the credit union taxation debate will not go away anytime soon.

• In early 2006, the much awaited Deposit Insurance Reform Act was finally passed. Key in this Act was an increased insurance level for certain types of deposits and an indexing of insurance levels to inflation.

• In February, 2006, the NCUA issued an Advanced Notice of Proposed Rulemaking (ANPR) seeking public views on whether the NCUA should require credit unions to obtain attestation on internal controls (similar to the Sarbanes-Oxley Act for publicly traded companies), what framework should be used for the basis of management’s assessment and external auditors attestation, and whether there should be a standard for the independence of state-licensed, compensated external auditors. No board action has been taken to date; however, they continue to evaluate the responses and will determine if they should proceed with a Proposed Rule.

• The NCUA significantly revised the 5300 Call Report in the spring of 2006. The new form is more streamlined, directed, and shorter.

• In the late summer of 2006, the NCUA issued updated guidance to examiners in determining the strength of a credit union beyond simply measuring ROA. An arbitrary 1% ROA is not necessarily an effective measure of evaluating performance.

• The November elections resulted in a shift of national power. The effect on the overall economy and credit unions specifically still remains to be seen.

• On December 13, 2006, the NCUA joined the Federal Reserve Board, Office of Comptroller of the Currency, FDIC, and Office of Thrift Supervision in issuing a new policy statement on the allowance for loan and lease losses.