Credit unions differ from other depository institutions because of their cooperative structure and tax exemption. Credit unions are member-owned cooperatives run by boards elected by their members. They do not issue capital stock; rather, they are not-for-profit entities that build capital by retaining earnings. However, like banks and thrifts, credit unions have either federal or state charters. Federal charters have been available since 1934 when the Federal Credit Union Act was passed. States have their own chartering requirements. As of December 2002, the federal government chartered about 60 percent of the nearly 10,000 credit unions, and about 40 percent were chartered by their respective states. Both federally and state- chartered credit unions are exempt from federal income taxes, with federally chartered and most state-chartered credit unions also exempt from state income and franchise taxes. Another distinguishing feature of credit unions is that they may serve only an identifiable group of people with a common bond. A common bond is the characteristic that distinguishes a particular group from the general public. For example, a group of people with a common profession or living in the same community could share a common bond. Over the years, common-bond requirements at the state and federal levels have become less restrictive, permitting credit unions consisting of more than one group having a common bond to form “multiple-bond” credit unions. The term “field of membership” is used to describe all the people, including organizations, that a credit union is permitted to accept for membership. As previously noted, the loosening of common-bond restrictions, as well as expanded powers, have brought credit unions into more direct competition with other depository institutions, such as banks. In addition, credit unions can offer members additional services made available by third-party vendors and by certain profit-making entities with which they are associated, referred to as credit union service organizations (CUSO). CUMAA was the last statute that enacted major provisions affecting, among other things, how federally chartered credit unions could define their fields of membership and how federally insured credit unions demonstrate the safety and soundness of their operations. In February 1998, the Supreme Court ruled that NCUA lacked authority to permit federal credit unions to serve multiple membership groups. In response, CUMAA authorized multiple-group chartering, subject to limitations NCUA must consider when granting charters. Also, the act limited new community charter applications to well-defined “local” communities. Moreover, CUMAA placed several additional restrictions on federally insured credit unions. It tightened audit requirements, established PCA requirements when capital standards were not met, and placed a cap on the percentage of funds that a credit union could expend for member business loans. NCUA has oversight responsibility for federally chartered credit unions and has issued regulations that, among other things, guide their field of membership and the scope of services they can offer. NCUA also has responsibility for overseeing the safety and soundness of federally insured credit unions through examinations and off-site monitoring. In addition, NCUA administers NCUSIF, which provides primary share (deposit) insurance for 98 percent of the nation’s credit unions.NCUA, in its role as administrator of NCUSIF, is responsible for overseeing federally insured, state-chartered credit unions to ensure that they pose no risk to NCUSIF. State governments have responsibility for regulating state-chartered credit unions. State regulators oversee the safety and soundness of state- chartered credit unions; although, as mentioned above, NCUA also has responsibility for ensuring that state-chartered credit unions that are federally insured pose no risk to NCUSIF. States set their own rules regarding field of membership and the services credit unions can provide. In addition, some states allow the credit unions in their states the option of obtaining private primary share insurance. Currently, 212 credit unions in eight states have primary share insurance from a private company, ASI, located in Ohio. Primary share insurance for these privately insured credit unions covers up to $250,000. Between 1992 and 2002, the capital ratios of federally insured credit unions improved and remained higher than those of other depository institutions. The industry’s assets also grew over this period, coincident with an increased emphasis on mortgage loans. Credit union industry profitability, after declining from 1992 to 1999, has since stabilized. In addition, since 1991 there has been a significant drop in the number of problem credit unions as measured by regulatory ratings. Consolidation in the industry has continued while total industry assets have grown, which has in part resulted in two distinct groups of federally insured credit unions—larger credit unions, which are fewer in number and provide a wider range of services that more closely resemble those offered by banks, and smaller credit unions, which are larger in number and provide more basic financial services. The capital of federally insured credit unions as a percent of total industry assets—the capital ratio—increased steadily between 1992 and 1997 and has since remained mostly level. As shown in figure 1, the capital ratio of the industry was 8.1 percent in 1992, increased to 11.1 percent in 1997, and was 10.9 percent in 2002. As a point of comparison, the capital ratio of credit unions has remained higher than that of banks and thrifts since 1992. As a result, credit unions have a greater proportion of assets available to cover potential losses than banks and thrifts. This may be appropriate since credit unions, unlike banks, are unable to raise capital in the capital markets but must instead rely on retained earnings to build and maintain their capital levels. Total loans as a percent of total assets of federally insured credit unions grew between 1992 and 2002. In 1992, 54 percent of credit union assets were made up of loans and 16 percent were in U.S. government and agency securities, while in 2002 loans represented 62 percent of industry assets, and U.S. government and agency securities represented 14 percent of total assets. The largest category of credit union loans was consumer loans (a broad category consisting of unsecured credit card loans, new and used vehicle loans, and certain other loans to members, but excluding real estate loans such as mortgage or home equity loans), followed by real estate loans. For example, in 2002, 31 percent of credit union total assets were classified as consumer loans and 26 percent were classified as real estate loans. However, over time, holdings of real estate loans have grown more than holdings of consumer loans. For example, real estate loans grew from 19 percent of total assets in 1992 to 26 percent in 2002, while consumer loans grew from 30 percent to 31 percent over the same period. Despite a larger increase in real estate lending relative to consumer lending, credit unions still had a significantly larger percentage of consumer loans relative to total assets compared with their peer group banks and thrifts: consumer loan balances of peer group banks and thrifts were less than 8 percent of total assets in 2002. To provide context, in terms of dollar amounts, credit unions had $175 billion in consumer loans while peer group banks and thrifts had $190 billion in consumer loans. However, these banks and thrifts held a greater percentage of real estate loans than credit unions. See appendix III for additional details. The profitability of credit unions, as measured by the return on average assets, has been relatively stable in recent years. The industry’s return on average assets was higher in the early to mid-1990s than in the late 1990s and early 2000s. While declining from 1.39 in 1993 to 0.94 in 1999, the return on average assets has since stabilized. It has generally hovered around 1, which, by historical banking standards, is a performance benchmark, and it was reported at 1.07 as of December 31, 2002. For comparative purposes, the return on average assets for peer group banks and thrifts was 1.24 in 2002. Earnings, or profits, are an important source of capital for financial institutions in general and are especially important for credit unions, as they are mutually owned institutions that cannot sell equity to raise capital. As previously mentioned, credit unions create capital, or net worth, by retaining earnings. Most credit unions begin with no net worth and gradually build it over time. Since we last reported on the financial condition of credit unions, there has been a significant drop in the number of problem credit unions as measured by the regulatory ratings of individual credit unions. Regulatory ratings are a measure of the safety and soundness of credit union operations, and credit unions with an overall CAMEL rating of 4 (poor) or 5 (unsatisfactory) are considered problem credit unions. The number of problem credit unions declined by 63 percent from 578 (5 percent of all credit unions) in 1992 to 211 (2 percent of total) in 2002. Total assets in federally insured credit unions grew from $258 billion in 1992 to $557 billion in 2002, an increase of 116 percent. During this same period, total member shares in these credit unions grew from $233 billion to $484 billion, an increase of 108 percent. At the same time, the number of federally insured credit unions fell from 12,595 to 9,688. As a result of the increase in total assets and the decline in the number of federally insured credit unions, the credit union industry has seen an increase in the average size of its institutions and a slight increase in the concentration of assets. At year-end 1992, credit unions with more than $100 million in assets represented 4 percent of all credit unions and 52 percent of total assets; at year-end 2002, credit unions with more than $100 million in assets represented about 11 percent of all credit unions and 75 percent of total assets. From 1992 to 2002, the 50 largest credit unions by asset size went from holding around 18 percent of industry assets to around 23 percent of industry assets.