Kentucky credit unions' key financial indicators are positive, yet conservative. And,that's just how they like it in the Bluegrass State.

“Kentucky is a fairly conservative state, so we don't typicallyget the real high highs or the low lows you see in most economiccycles and that's kind of the case here,” said Kentucky CreditUnion League President Wendell Lyons, speaking about Kentucky's statewide average of0.80% delinquency.

“Probably another factor is the underwriting here tends to bemore conservative. For example, the hot topic of the day is memberbusiness lending, and in Kentucky, of our 84 credit unions, only 21make member business loans, and of those, they only have 3% ofassets in MBL. So, we tend to be a little more traditional here inthe mix of loans,” he said.

Conservative underwriting is credited for a 0.75% delinquencyrate and 0.60% charge off rate, both as of June 30, at the $924million Commonwealth Credit Union, according to Comptroller DonnaJackson.

She also said her conservative field of membership – stateemployees who participate in Kentucky's retirement system – alsotend to have more job stability than the average Kentuckian. Thestate hasn't suffered any state employee layoffs like in otherareas, she said, and Kentucky's unemployment rate matches thenational average of 8.2%.

Commonwealth, based in the state capitol of Frankfort, tightenedup its underwriting in 2008 when the financial crisis hit, butrecently relaxed underwriting because losses were so low, Jacksonsaid.

“We felt maybe we had tightened too much, so we (loosenedunderwriting) about a year ago. We tried to follow the lead of whatwe were hearing in the marketplace, and that seemed to work for usthis time,” she said.

Fewer losses have helped boost Kentucky credit unions' averagereturn on average assets to 97 basis points during 1^stquarter 2012.

The $60 million Greater Kentucky Credit Union has been veryprofitable this year, reporting 1.75% ROAA as of June 30, accordingto President/CEO Mike Fromma. He credited Greater Kentucky's lack of losses,saying “when you're not funding your allowance account, that ROAwill look pretty good.”

The Lexington-based Greater Kentucky also earns good interestincome, Fromma said, with an 80% loan to share ratio.

“Interest income is the lion's share of revenue,” he said, “butthere's a huge drag on it with rates where they are. There reallyisn't much spread to speak of, and it barely covers our operationscosts.”

Lyons stressed that Kentucky's nearly 100 basis point ROAA is amathematical average, and could paint the impression thatprofitability is higher than reality because the state's largecredit unions are performing well.

“I think probably also an important figure is the 74% of creditunions with positive ROAA, which is right on the national average,”he said. “When you look at the larger credit unions, Fort Knox forexample, which has $1.1 billion in assets and very strong ROAA.That begins to pull the average up for everybody. We still have 26%who are struggling with earnings.”

Struggling credit unions tend to be smaller, Lyons said,although Kentucky has plenty of relatively small credit unions likeGreater Kentucky that are doing well.

“It depends upon the sponsor group,” Lyons said. Kentucky ishome to health insurance company Humana, four automotive plants,UPS' worldwide air hub, and the bourbon and horse racingindustries.

Like in other states, Kentucky credit unions are struggling togrow their loan portfolios, with a 12-month state average of2.6%.

“They're looking for loans wherever they can get them,” Lyonssaid. “There has been some growth in indirect auto loans, which hasbeen a struggle, but it's positive.”

Greater Kentucky has had robust loan growth so far this year,with Fromma reporting a 9.34% gain as of June 30.

“Through '08 and '09 we had a drag going and actually hadnegative growth, but in 2012 and most of '12 we've seen goodgrowth,” he said. “A lot of it is fueled by consumer loans: cars,personal loans, those types of things.”

The community charter credit union hasn't had problems makingmortgage loans, either. Fromma said he tries to hold his long-termassets to 20% of assets, allowing it to go as high as 30%.

“We've had a lot of bleeding off of variable rate mortgages inthe last three to four years,” he said. “People don't want thoseanymore, even though the rates are so low.”

Loan growth has been less robust at Commonwealth. Numbers arepretty flat, at a little under 1% year-to-date, Jackson said.

“We generally have a harder time in the first half of the year,because our field of membership uses their tax returns to pay offtheir Holiday loans,” she said. “We are estimating 3% growth thisyear, mainly in the consumer market, which are smaller loans so ittakes a lot of them to grow. But, we have people who need new cars,credit cards, that sort of thing, so we will have some loan growthand will manage share growth in that range, too.”

Jackson said managing deposit growth has been key in maintainingpositive ROAA.

“When we see loans aren't growing, we kick back our savingsrates to keep growth down,” she said. “We do want to pay ourmembership the best rate we possibly can, but we also want to bethere for them when they have borrowing needs. We believemaintaining that balance is the right thing to do overall for ourmembership.”