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ALEXANDRIA, Va.-NCUA’s 2005 financial trends report for federally insured credit unions underscored what the industry already knows: liquidity is shrinking and margins are tightening for the nation’s credit unions. According to the report, loans were up $4.0 billion or 10.60% in 2005. Nearly 48% of credit union lending came from first mortgages or other real estate loans. Loans in total accounted for 67% of credit union assets. At the same time, shares were up just 3.80% or $21.3 billion. However, more than one-third of this was from nonmember deposits and another 20.40% from share certificates. The other share categories that experienced growth were share drafts (6.90%) and IRA/Keoghs (3.40%). The loan-to-share ratio for federally insured credit unions jumped from 74.49% a year-end 2004 to 79.36% at the end of 2005. “My guess is it’s not going to get significantly better during 2006.We may get some increased share growth in 2007,” Ron Parker, a partner with cooperative accounting firm Clifton Gunderson, commented. Operating expenses were up only slightly in 2005 to 3.24% over 2004′s 3.21%. “As an industry, we’ve generally been pretty efficient. We see a lot of our clients going back top to bottom,” he explained, looking for further cost savings. Parker said his credit union clients are reviewing the profitability of certain products, services, branches, and other items. “In the 1990s, credit unions were pretty profitable and you didn’t have to worry about these things,” he said. This could have an impact on member satisfaction, Parker admitted. “If you’re offering a service to a member and you have to eliminate it, those people aren’t going to be happy about it,” he said. However, he believes credit union members will not be too peeved if the adjustments are clearly explained as in the best interests of the institution. Parker added, “We see some of our clients doing some in-depth analysis of how to attract deposits.” With strong loan growth expected to continue through this year, chief financial officers at a recent gathering were looking for innovative ways to bring in shares, including variable rate products. That is exactly what Patelco Credit Union is looking at. According to CFO Scott Waite, the credit union is in its second offering of “bump rate” certificates. Basically, the CD is priced just above the current market price then allows members a one-time bump up to a higher rate as the interest rates rise. After just 60 days of offering the product, Waite said the $3.6 billion credit union has attracted $275 million in deposits. This method should help Patelco pay off the $50 million borrowing from its corporate coming to maturity this year. Not only does the consumer potentially benefit from the bump, but the credit union make more money on the deal as well because many accountholders never actually exercise the right because “they don’t want to sell themselves short” as rates continue to rise. The privately insured Patelco must be doing something right, having earned a 1.15% return on average assets. According to NCUA’s trend analysis, the federally insured credit unions had an aggregate ROA of 0.85%. “Our key was we didn’t pay up too fast on certificates and savings rates,” Waite said. He also said he was intrigued by credit union officials’ acceptance of and comfort with a lower ROA. On the other side of the ledger, real estate lending will remain strong, particularly home equity loans, both said. Waite also explained, “There are a lot of ARM products that will come up to re-pricing.where I think that’s leading is a lot more refinancing.” Patelco expects to see a lot of their popular 5-1 adjustable rate mortgages re-pricing in 2007. While the rates will go up probably the full 2% allowed on most, according to Waite, it may also pose an affordability problem for consumers. However, real estate was not what drove Patelco’s loan growth. The credit union’s largest growth sector for 2005 was auto loans, including a 52% increase in new car loans beating out used 2-to-1, Waite said. He added that Patelco has a good balance of direct and indirect auto lending on the books. As far as getting more involved members from their indirect contacts, Waite commented, “We are trying as hard as any other credit union, but we haven’t found a silver bullet.” Parker said he would also like to see gains in member business lending, which many of his clients are already in or are getting into. “At the end of the day, it’s not like we’re in an environment where there’s some low hanging fruit that we’re going to get into,” he said, like indirect lending at one time. NCUA’s financial trends also showed delinquencies up 12.1% or $360 million in 2005, but the ratio of delinquent loans to loans only increased from 0.72% at year-end 2004 to 0.73% by the end of last year. Credit union members filing for bankruptcy climbed, as it did for all lenders following the passage of the bankruptcy reform law, up 34.2% compared to 2004. Charge offs due to bankruptcy were up 21% to 36.64% of loans charged off, according to NCUA. Investments represented 21.8% of assets. Cash and short-term investments were up 3.36% or $3.5 billion while long-term investments dropped 17.53% or $18.4 billion. Too much uncertainty exists for credit union investments to begin to go longer, according to Parker. Waite agreed. With another year of strong lending, credit unions will want to keep it short for liquidity. Looking ahead to 2006, NCUA’s report stated, “Continued success depends on how well individual credit unions manage their balance sheets while monitoring net worth. However, it may be necessary to adjust operations to adapt to this ever-changing financial environment.” -

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