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The Health of Federally-Insured Credit Unions

Credit unions are cooperatively owned depository institutions that provide financial services to their members. They serve as a viable alternative to commercial banks and savings associations for basic depository institution services such as consumer loans, checking accounts, and savings accounts. Like banks and savings associations, the credit union industry has followed a path of consolidation.

From 2004 to June 2011, the number of federally-insured credit unions has fallen from 9,014 institutions to 7,239 institutions. However, over the same time period, total credit union assets rose nearly 46 percent from $647.0 billion to $942.5 billion. Moreover, the number of credit union members has steadily increased, growing 8.9 percent from 83.6 million members at the end of 2004 to 91.0 million members at the end of June 2011.

Figure 1. Credit Union Indusry Structure

Fueled by positive loan growth, credit union assets grew through the end of 2009, before turning negative in 2010 and 2011. From 2004 to 2009, loans issued by federally-insured credit unions grew 38.1 percent from $ 414.3 billion to $572.4 billion. However, like at banks and savings institutions, from 2010 to midyear 2011, loans at federally-insured credit unions fell 1.5 percent to $564.0 billion.

It is interesting to note that from 2004 to 2007, loans as a share of assets grew moderately, increasing from 64.0 percent to 70.0 and started to decline in 2008, falling 10 percentage points to 59.8 percent of assets by midyear 2011. Based on the decline in the amount of loans on credit unions’ balance sheets as well as the reduction of the loans’ total share of credit union assets, it appears that, like commercial banks and savings institutions, credit unions have not been immune to the ongoing deleveraging by households.

Figure 2. Credit Union Lending Trends

Federally-insured credit union shares have risen steadily since 2004. Shares, which are the equivalent of deposits in banks and savings associations, are the primary source of funds for credit unions, accounting for roughly 85 percent of total sources of funds. Like the growth in loans, the annual growth of credit union shares has fluctuated over the past 7.5 years, varying between 3.9 percent and 10.5 percent. Overall, shares grew at a robust 4.8 percent annual growth rate over this time period. From 2004 to June 2011, credit unions have continued to accumulate capital, with the exception of 2009 when capital fell 1.2 percent. Overall, credit union capital has increased from $70.6 billion the end of 2004 to $95.7 billion at the end of June 2011, an improvement of more than 35 percent.

Figure 3. Credit Union Shares

Not surprisingly, since retained earnings are the only source of capital for credit unions, the pace of capital accumulation mirrors the general downward trend in the return on average assets (ROA) and the return on average equity (ROE) since 2004. The return on average assets fell from 0.92 percent in 2004 to 0.17 percent in 2009. In 2010, the return on average assets rebounded to 0.51 percent and continued to improve to an annualized rate of 0.71 percent for the first half of 2011. Not surprisingly, over the same time period, the return on equity followed a similar pattern. The decline in profitability for credit unions during the 2007-2009 recession is due in part to steadily increasing operating expenses per dollar of assets and the relatively high costs of funds.

Figure 4. Credit Union Profitability

Overall, the health of the credit union industry appears to be good. Capital as a percent of assets stands at 10.1 percent at midyear 2011. On the other hand, asset quality, while improving, continues to be a concern. Delinquent loans as a share of total loans has improved, falling from a peak of 1.84 percent in 2009 to 1.58 percent at midyear 2011—well above the pre-financial-crisis loan-delinquency rate of 0.68 percent at the end of 2006.

Figure 5. Credit Union Capital

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