Dear Board of Directors:

Enclosed is a report analyzing credit union financial trends for the first six months of 2010. The analysis is based on data compiled from second-quarter call reports. It is intended to inform you about national trends and risks that NCUA will continue to focus on throughout 2010.

The overall financial condition of the credit union industry remains sound. However, NCUA has identified negative trends affecting certain types of products. In particular, real estate and business loan delinquencies are increasing as economic uncertainties persist. Loan modifications continue to rise and now total $10 billion. As a result, credit risk remains a crucial issue for credit unions and will be closely monitored by our field staff. It is imperative that credit unions maintain prudent risk management practices to control these risks.

Interest rate risk is another concern for credit unions going forward. The credit union industry continues to hold a significant amount of long-term fixed rate loans, while shares are primarily in rate-sensitive or short-term accounts. The growth in lower-rate real estate loan modifications increases interest rate risk further. Proactive structuring and proper control over loan concentrations and share products will be fundamental to the future viability of credit unions. For these reasons, interest rate risk will be another area of emphasis during examinations.

Although aggregate delinquency and charge-off ratios inched lower in the second quarter, credit unions in many areas of the country continue to experience greater loan losses. NCUA’s Chief Economist, regional offices and field staff are monitoring these trends closely – particularly in areas struggling with high unemployment, declining real estate values, and failing businesses.

These negative trends are having a severe impact on many credit union members. As their debts become overwhelming, members who are dealing with job losses and foreclosures are now much more likely to file for bankruptcy. The number of members filing for bankruptcy doubled during the second quarter of 2010. By year-end 2010, bankruptcies are on pace to exceed the total for 2009.

There is some good news. Credit unions’ aggregate net worth ratio is holding steady at 9.9 percent. More than 94 percent of federally insured credit unions still exceed the statutory definition of “well capitalized.”

A few other positive signs emerged during the second quarter of 2010:​

• Credit unions lowered their cost of funds at a faster rate than their decline in loan yields. Both of these factors widened credit unions’ net interest margin.
• Credit unions were able to reduce their provisions for loan losses by 31 basis points, which contributed to an increase in earnings of 23 basis points. However, return on average assets decreased from 47 basis points to 41 basis points.

Thank you for submitting your financial and statistical data in a timely manner. While some short-term numbers are moving in the right direction, challenges remain for credit unions to fully overcome the effects of the economic downturn. Field staff are working diligently with affected credit unions to control costs, mitigate risks, and maintain stable balance sheets. NCUA will continue to take proactive steps to protect the safety and soundness of the credit union industry.