Rising interest rates squeezed credit union profits in 1994 and contributed to the industry's liquidity crunch.

The industry's overall assets grew just 4.5% to $289 billion, according to preliminary call report data compiled by the National Credit Union Administration. That's about half 1993's growth and a third of the growth in 1992.

But loan portfolios in 1994 experienced the fastest growth since 1983, swelling 15% to $175.8 billion.

Analysts attributed 1994's lending increases to consumer confidence and credit unions' refusal to raise rates in step with competitors.

Automobile lending drove loan growth, representing $14 billion, or 58%, of new loans. New auto loans grew 29% and used auto loans rose 22%.

Credit unions now have about $63 billion in auto loans, making them the second-largest auto lender after commercial banks, said Ray Springsteen, spokesman for the Washington-based consulting firm Callahan & Associates. Banks have 45.6% of the market, credit unions have 20%, and auto finance companies have less than 19%.

The industry's first-mortgage portfolio grew 14% to $37 billion.

Overall, nonperforming loans fell 1.2% to $1.5 billion, for a delinquency ratio of 0.9%. However, the amount of loans two to six months delinquent increased 4.7% to $1 billion, after falling 6.4% in 1993 and 14.1% in 1992.

Tun Wai, chief economist for the National Association of Federal Credit Unions, said this type of jump is to be expected because loan portfolios are growing faster than in recent years.

The strong lending growth required credit unions to liquidate some investments. Total investments declined 10% to $101.5 billion. However, more investments might have been liquidated had interest rates not risen. Rather than take the hit selling them would have produced, many institutions turned to their corporates to tap lines of credit.

Not raising the cost of borrowing until November did tighten margins at credit unions, shrinking the industry's bottom line. Net income fell 8.7% to $2.5 billion in 1994. By comparison, net income grew 14.3% in 1993 and a whopping 69.9% in 1992.

Industry observers said the income drop is not a great concern for credit unions, pointing out that they are not stock driven and the average capital-to-assets ratio stands at 10.4%. Capital grew by 11.3% to $30 billion last year.

The industry's return on assets ratio was 1.2%, down from 1.4% in 1993.

Deposits grew 4.5% to $255 billion, the slowest rate since 1981, according to William F. Hampel, chief economist for the Credit Union National Association. In 1993 deposits grew 6% and in 1992 they grew 13%.

Charles W. Filson, president of the consulting firm Callahan & Associates, attributed the sluggish deposit growth to nonbank competitors.

In response, more credit unions should begin offering nontraditional products, like mutual funds, he said.

The number of federally insured credit unions fell to 11,991, down 2.7% from 1993.

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