The nation's leading credit unions got squeezed by last year's run-up in interest rates.
The top 100 credit unions boosted their assets by just 6.3% - the slowest growth in at least five years, according to an American Banker survey. And the group's earnings fell 9.7%, an abrupt change after three years of double-digit gains. (Complete tables begin on page 14.)
"Last year's asset growth was unusually low by any standard," said William F. Hampel, chief economist for the Credit Union National Association.
As rates rose, he and others said, customers shied away from deposits in favor of higher-yielding money market mutual funds. As a result, the credit unions had less new funds to invest in assets.
"Money markets are a big, big competitive issue for credit unions," said Peter J. Schueth, vice president of balance sheet strategy for CS First Boston's credit union services division.
Meanwhile, deposit yields climbed faster than the credit unions' loan rates, reducing net income.
Mr. Schueth said the earnings decline shows that the industry needs to improve its asset-liability management.
"A credit union needs to establish a plan that says what they want to accomplish and the need to test it in different scenarios," he said. "These kinds of procedures are still in their infancy, and they are not well understood or implemented."
Mr. Hampel took exception to this.
"With rapidly rising interest rates (net income) could have been expected to fall faster than it did," he said. "I think it's going to continue to fall."
Even with the decline, he said, earnings were still respectable, having fallen from peak years. The group's return on assets fell to 1.26% from 1.51%, according to Mr. Hampel.
Though attracting deposits was tough for the industry leaders, the group was able to post some impressive loan growth by liquidating securities holdings. Loan portfolios for the industry leaders surged 15.7% to 44.8 billion, as deposits grew only 5.8% to $66.7 billion, according to the study, based on data from Callahan & Associates Inc., Washington.
Indeed, shifting assets to loans with higher yields than securities was one was one reason that the industry leaders didn't take a bigger hit on their net income, Mr. Hampel said.
Credit unions that managed to increase assets substantially often did so by aggressively pushing certificates of deposit. Illinois-based Citizens Equity Federal Credit Union, for example, grew its assets 19%, to $1.3 billion.
"We went out and paid 8% for four-year CDs - that brought in big bucks during December," said John Siefken, chief executive of the Peoria institution, the industry's 10th largest.
"We went out and kicked butt," he said.
The disparity between loan and deposit growth created liquidity pressures for some institutions. This squeeze is expected to be felt through the second half of this year, Mr. Hampel said.
"Some will have short-term issues on how to get liquidity before a nine- month investment's term is up," he said. But credit unions could fund more loan growth by liquidating still more securities, he said.
Among the top 100, loan growth was paced by auto loans, which shot up 27.5%, to $13.9 billion. Real estate loans grew 17.7% to $18.8 billion, while credit cards grew 15.6% to $3.8 billion.
Many credit unions spurred their loan businesses with aggressive pricing.
For example, State Employees Credit Union, Raleigh, N.C., experienced a boom in first mortgages without any advertising.
"We came out with a two-year adjustable as low as 4.75% in March and April," he said. "We did $900 million in mortgages last year, when in a normal year we do $250 million."
Total loans for the $3.7 billion credit union, the country's second largest, grew 36.4% to $2.4 billion.
But while credit unions may have pulled in loans through low pricing, the strategy clearly contributed to the drop in earnings, some observers said.
"What's wrong with this picture? They're not adjusting rates" in a rising-rate environment, said Tun Wai, chief economist for the National Association of Federal Credit Unions.
Mr. Wai said traditionally credit unions lag behind the market in increasing the price of loans when interest rates rise, a key reason their loan volume increased as much as it did.
Pentagon Federal Credit Union had a great year - increasing assets 20.5% and loans 23.2% - but still suffered a 4.8% drop in net income due to increased operating expenses and the effects of rising interest rates.
Ron Snellings, president of the $2 billion-asset institution, expects further decreases next year, because it takes about 28 months for low- yielding loans to cycle out.
He's said he's taking the shift in stride.
"It's a game where you're chasing one end or another," he said. "That's what makes it fun."
