Credit unions - Industry Overview

Credit unions are thriving in a time of consolidation for other federally insured financial institutions. Credit union assets, capital, and membership are all growing solidly. The federal insurance fund is strong, and credit unions are enjoying a growing market share among depository institutions.

Credit unions increased their mortgage lending activities in 1992, and tried to educate auto dealers and other consumer retailers about the availability of credit unions as an alternative to commercial banks and thrifts. The growth of share deposits and the easing of consumer demand for loans raised problems for credit union management seeking the most productive assets.

Mortgage lending by credit unions, including first and second mortgages, rose from less than 5 percent in 1980 to about 35 percent of the loan portfolio today. Credit unions originate about $12 billion in mortgage loans a year and presently hold about $49 billion of these loans. About one quarter of the loans originated in 1991 were sold into the secondary market. This percentage is growing rapidly.

Credit unions, for purposes of this chapter, include cooperative thrift and loan associations organized under either Federal or state charters to finance short-term credit needs of their members under the following Standard Industrial Classification (SIC) categories: Federal Credit Unions (6061) and State Credit Unions (6062). For answers to questions regarding data collection procedures, sources and references, and the SIC system, see "How to Get the Most Out of This Book" on page 1. For other topics related to this chapter, see chapters 45 (Commercial Banking), 46 (Savings Institutions) and 48 (Mutual Funds).

Credit unions are cooperative financial institutions that provide saving and lending services to their members. In addition to basic services, larger credit unions offer transaction accounts (analogous to checking accounts), automated teller machines (ATMs), credit cards, individual retirement accounts (IRAs), and other services. Total credit union assets of $265 billion compare with assets of $3.7 trillion for commercial banks, $815 billion for thrifts, and $1.5 trillion for mutual funds.

In accordance with the Federal and state laws establishing credit unions, members must share a common characteristic. This so-called common bond may arise through place of employment or residence, fraternal affiliation, and certain other legally specified shared characteristics. About 60 million Americans, one-third of the adult population, belong to a credit union.

Deposits in a credit union are called shares because they represent ownership. In virtually all credit unions, shares are insured. The largest insurer is the National Credit Union Administration (NCUA), an agency of the Federal Government. NCUA insures $254 billion, 96 percent of all assets, in 12,700 credit unions. An additional 524 credit unions are insured either privately or by states. These credit unions have about 2 million members and assets of $11 billion.

The National Credit Union Administration (NCUA) examines and regulates most federally insured credit unions to ensure their safety and soundness. The remainder of the federally insured and all the privately insured credit unions are state regulated. The rest of this report will cover only federally insured credit unions.

Credit unions' equity consists entirely of retained earnings-money earned but not paid out to members as dividends. Equity and reserves provide a safety net against loan losses and other possible losses (Table 1).

Table 1: Simplified Balance Sheet for Federally
insured Credit Unions
(in billions of dollars)
    As of Dec. 31, 1982
  Liabilities              Assets
Deposits             63   Loans           43
Equity                5   Investments     23
Other liabilities     2   Other assets     4
Total Liabilities    70   Total Assets    70
    As of June 30, 1992
  Liabilities              Assets
Deposits            222   Loans          134
Equity               19   Investments    100
Other liabilities     4   Other assets    11
Total liabilities   245   Total assets   245
SOURCE: National Credit Union Administration.

Credit unions make most of their investments in US. Government obligations and Federal agency securities of less than one year in duration. Riskier investments, such as stocks and "junk" bonds, and speculative activities such as arbitrage, are prohibited.

Credit unions' loan portfolios are generally safer than those of either banks or thrifts (Figure 47-1). They are safer than thrifts because they are more diversified and shorter in duration. They are safer than banks because there is no lending to foreign countries and only a minuscule amount of business lending. Both these types of loans are in general riskier than consumer loans.

In the decade from 1981 to 1991, the safety of the credit union system increased significantly. The equity capital ratio (retained earnings and reserves as a percentage of total assets) grew from 5.5 percent to 7.7 percent. This represents a substantial increase in safety, since capital is a cushion against unpredictable losses.

At the same time, the insurance fund backing federally insured credit unions has become stronger. For some time now it has held more than $1.25 for each $100 of deposits. This is a much higher percentage than that held by either the Bank Insurance Fund or the Savings Association Insurance Fund, both of which are part of the Federal Deposit Insurance Corporation.

A more conservative portfolio and a higher insurance fund ratio together mean that the credit union system is much safer than the other insured depository systems.

Credit Union Market Share

Credit unions have a small share of the total financial services industry. They have about 13 percent of consumer lending (credit cards, installment debt, car loans, etc., not including mortgage lending) and about 7 percent of household savings.

Though making more loans, credit unions' market share of all consumer borrowing is in a long-term decline. In 1982, the share of borrowing was 15 percent, compared to about 13 percent now, after bottoming out at 12 percent at the end of 1990.

The decline in market share for borrowings probably results from the increased competition from non-financial institution players, such as captive car finance companies and corporate credit cards.

For consumer savings the story is different: credit unions have grown from 4 percent in 1982 to the current figure of 7 percent. The growing market share of savings is probably the result of the two factors: (1) the shrinking thrift industry, and (2) the expanding services being offered by credit unions, such as certificates of deposit.

The presence of more competition has driven credit unions to merge to make larger institutions that can offer more services more efficiently. There have been more than 300 voluntary mergers per year during the last decade, although judging by the trends table merger activity appears to have slowed in 1991. The temporarily smaller rate of decline in number of credit unions reflects the influx of non-federally-insured credit unions that joined the National Credit Union Share Insurance Fund (NCUSIF) after the insurance fund crisis in Rhode Island.

Increased competition usually means lower prices for consumers. Credit unions will always be able to compete, but tougher competition forces them to focus on efficiency, which sometimes means giving up providing services to their members that they would like to provide.

Outlook for 1993

In times of declining interest rates, credit unions tend to lag the market in lowering their rates on deposits, so that they are paying higher rates than other financial institutions. After members shop around, they choose to put their savings in their credit union. The continued rapid growth of deposits through 1992 was largely the result of this comparative effect. If interest rates continue to decline during 1993, this comparative effect should continue to benefit credit unions.

Current spreads between loan interest rates and cost of funds are very favorable for all financial institutions. Because credit unions are not in a position of having to build capital as aggressively as other financial institutions, they may be able to cut loan rates faster than can other institutions, thereby increasing their market share.

Credit unions are aggressively working to protect and expand their market share. Some are establishing connections with car dealers to increase their new car lending. Some are learning to use the principles of marketing to tailor their service and product package to the unique need profile of their membership. Some are developing new products, such as the 26-payment mortgage based on payroll withholding.

Long-Term Prospects

Because of their small market share, how credit unions perform in the future depends largely on how well they compete with other, larger financial service providers in making consumer loans. Life is always toughest for credit unions when commercial banks decide that this "retail lending" is an attractive and profitable business. This condition has been present in recent years, yet credit unions have continued to thrive and grow.

Probably the most important reason credit unions have been able to meet this challenge is that credit union management has become considerably more sophisticated in the last decade. Credit unions now offer services that were unknown 10 years ago, and they have begun to introduce advanced management techniques.

If credit unions are to continue to regain market share in the vastly enlarged financial services industry, they must do several things: (1) take advantage of their strong capital position to cut loan rates, (2) continue to find new ways to serve borrowers, and (3) continue to tailor their service package to the unique specifics of their individual membership.--D. Michael Riley, Director, Office of Examination and Insurance, and Lindsay Neunlist, program analyst, National Credit Union Administration, (202) 682-9600, August 1992.

[TABULAR DATA OMITTED]

Additional References

Annual Report 1991 National Credit Union Administration, 1776 G St. NW, Washington, DC 20456. Telephone: (202) 682-9600. (The 1992 annual report will be available after May 1993). Annual Report 1994 National Credit Union Share Insurance Fund, 1776 G St. NW, Washington, DC 20456. Telephone: (202) 682-9600. Credit Union Newswatch, Credit Union National Association, P.O. Box 431, Madison, WI 53701. Telephone: (608) 231-4042. Credit Union Magazine, Credit Union National Association, P.O. Box 431, Madison, WI 53701. Telephone: (800) 356-9655, ext. 4093. The Federal Credit Union, National Association of Federal Credit Unions, 3138 N. 10th St. Arlington, VA 22201. Telephone: 1-800-336-4644.

COPYRIGHT 1993 U.S. Department of Commerce
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