Credit Unions, Federally Chartered

SIC 6061

Companies in this industry

Industry report:

This industry classification includes cooperative thrift and loan associations (accepting deposits) organized under Federal charter to finance credit needs of their members.

Industry Snapshot

Credit unions experienced significant growth between 1980 and the mid-2000s. Membership grew from 36.9 million members in 1980 to 85.8 million members by 2006. During the same period, assets expanded from $61 billion to $709.9 billion. Despite this rapid expansion of the industry, credit unions continue to make up just a fraction of the national banking industry, which is dominated by commercial banks. The largest commercial banks hold assets in excess of the entire credit union industry.

Relaxed regulations allowed credit unions to expand their services during the first half of the 2000s, and many larger credit unions broadened their offerings to customers to remain competitive with "one-stop" commercial banking. The future of smaller credit unions, however, was a source of concern in the industry, as their smaller memberships limited their ability to provide additional services. In fact, the number of credit unions has fallen from 9,688 in 2002 to 8,362 in 2006 even as overall membership has increased.

A credit union is a collective, cooperative financial institution created and owned by its members for their own benefit. Credit unions collect members' savings and make loans to members from these accumulated savings. Unlike commercial banks, credit unions are nonprofit organizations. The formation of credit unions was encouraged by a broad cooperative movement in the early years of the industrial revolution that focused on providing affordable financial services to people of modest means.

Membership in a credit union is limited to individuals or groups who are members of the organization (employer, association, residence, etc.) specified in its charter. These membership criteria are collectively known as the common bond provisions. Individuals qualified under these provisions may submit an application and, if approved, become members with voting rights similar to those of shareholders in public corporations.

The system of credit unions in the United States is quite extensive. In 2006, some 5,189 credit unions were chartered under federal law and 3,173 chartered under state laws.

According to industry statistics, there were 8,088 credit unions in December of 2008 employing 226,970 people on a full-time basis and another 34,324 part-time employees. By June 2010, both full and part-time credit union employees fell by 0.3 percent and 4.7 percent, respectively.

Throughout the mid- to late 2000s, the total number of credit unions continued to decline. From 8,396 credit unions in December 2007, the total fell to 8,088 in of December 2008 and 7,831 by December of 2009. As of mid-2010, there were 7,717 credit unions, which 4,650 were chartered under federal law and 3,067 under state laws. Additionally credit union memberships totaled 92.6 million, with assets that exceeded $923 billion. Total credit union savings stood at $796 billion, while outstanding loans totaled $581 billion.

Organization and Structure

Credit unions are organized according to a general philosophy called the Rochdalian Principles. This doctrine emphasizes self-help, a mutual form of organization, and "one-person, one-vote" democratic rule.

The credit union industry is supported by the Credit Union National Association (CUNA), the professional society for credit union executives, which collects, processes, and disseminates information on credit unions and engages in advocacy and publicity for the industry as a whole. Eighty-nine percent of all credit unions were members of CUNA in 2004.

A number of bodies are charged with ensuring the financial soundness of the nation's credit unions, including at least one state regulator and an array of local regulators in each state. The National Credit Union Administration (NCUA), created in 1970, oversees the system of federally charted credit unions. It has six major functions: to promote self-help security through privately owned and democratically controlled federal credit unions; to stimulate systematic savings to provide capital and cash reserves for credit union membersl; to make credit available to individuals with modest means for reasonable purposes; to help stabilize the U.S. economy by promoting sound thrift, savings, and personal financial management practices; to study the financial problems of individuals with modest means to determine the benefits of cooperative savings and loans and to publish the results; and to insure the accounts of members of all federally chartered credit unions and those of state credit unions that apply for insurance and are qualified.

These goals are achieved through four primary means: chartering, supervising, and examining credit unions, as well as providing an insurance system for federal and state use.

Credit unions encourage savings on the part of their members. The board of the credit union then creates guidelines for loaning these accumulated savings back to the credit union's members. These board members are elected by the credit union's members at an annual meeting, which is similar to a shareholders meeting. Each member has one vote, regardless of the number of shares owned. This board then elects the credit union's officers from its own membership and appoints a supervisory committee. The board, officers, and supervisory committee usually serve on a volunteer basis.

Any net earnings realized are distributed to the members in the form of dividends.

Background and Development

Credit unions first began operating in Germany in 1848 and were promoted by Hermann Schulze-Delitzsche and Friedrich Wilhelm Raiffeisen. The idea spread to Italy and then to North America by 1900. Credit unions were first popularized in the United States in Boston by a local merchant named Edward E. Filene.

The Federal Credit Union Act of 1934 established federally chartered credit unions in the United States. Initially, the administration of the act was the responsibility of the Farm Credit Administration. In 1942 Executive Order 9148 transferred the administration of the act to the Federal Deposit Insurance Corporation (FDIC). In 1948 Congress gave all responsibilities for credit unions to the Bureau of Federal Credit Unions, which was part of the Federal Security Agency. This bureau became a department of the Social Security Administration. Finally, the oversight of credit unions was charged to a new independent agency of the executive branch, the National Credit Union Administration (NCUA), in March 1970, just as the number of credit unions peaked at 23,900 nationwide.

In 1980 the Depository Institutions Deregulation and Monetary Control Act brought all depository institutions under the control of the Board of Governors of the Federal Reserve System. This act created the Depository Institutions Deregulation Committee (DIDC), which included the chairperson of the NCUA Board as one of its members. The mission of the DIDC was the elimination of limitations on dividend rates and interest paid by deposit institutions.

The Monetary Control Act of 1980 allowed depository institutions to offer negotiable order withdrawal (NOW) accounts for individuals and certain nonprofit organizations. Credit unions were authorized to charge a maximum of 15 percent annually on loans, and the NCUA was authorized to increase this rate for a period not to exceed 18 months. Federally insured credit unions were authorized to offer share draft accounts. Federal deposit insurance was raised to $100,000 per account for all depository institutions.

Through the 1980s, the Interstate Banking and Branching Act and other moves toward deregulation led to large-scale encroachment of commercial banks on credit unions' business. Credit unions responded by consolidating in order to pool resources and offer more services. The median U.S. credit union's membership grew by 45 percent in the 1990s, while asset-holdings increased 105 percent. The number of credit unions with less than $5 million in assets, meanwhile, fell 53 percent in the 1990s, as those with over $200 million in assets increased by 93 percent.

While credit unions fended off intensifying competition from commercial banks, the expansion of the variety of services credit unions offered mirrored their expanding size. The 285 credit-union mergers in 1999 represented an increase of 33 percent from 1998; most of those credit unions absorbed maintained less than $5 million in assets. The NCUA further reported that 1999 also delivered near-record low numbers of liquidations (15) and failures (23), of which the majority also involved credit unions with less than $5 million in assets.

Many credit unions, meanwhile, had opened several branches and began offering automated teller machines (ATM) and other sophisticated customer services. According to the NCUA, 45 percent of all credit unions offered credit cards in late 1999; 47 percent offered ATM cards; 40 percent provided first mortgages; and 30 percent maintained debit-card programs. The late 1990s also saw credit unions begin to offer online services, including loan applications and approval and check imaging.

In keeping with the relaxed regulatory environment throughout the financial services industries, the federal government prepared a relief package in 1999 for federally chartered credit unions that exhibited financial soundness and healthy business practices, a description that applied to perhaps half of all federally chartered credit unions. The package mandated fewer regulatory examinations and permitted heightened discretion in credit union investment activities.

Credit unions spent the late 1990s and early 2000s diversifying their range of services in order to attract new members and maintain current ones amid intensifying competition from commercial banks. By the start of the twenty-first century, the 1999 repeal of the Depression-era Glass-Steagall Act had fostered the development of "financial supermarkets," as banks expanded into and merged with insurance operations and securities brokerages. Because customers in the early 2000s were increasingly conducting most or all of their financial business with a single firm, credit unions faced the complicated pressure of promoting their unique benefits, while simultaneously assuming more characteristics of commercial banks.

While at a slower pace than in the late 1990s, consolidation among credit unions continued into the early 2000s. As a result, the number of credit unions declined from 10,316 in 2000 to 9,984 in 2001, while assets rose from $438.2 billion to $501.4 billion, an increase of 14 percent. In 2002, the number of credit unions with less than $5 million in assets fell by 11 percent, while the number of credit unions with more than $500 million in assets grew 23.5 percent. Along with fostering larger credit unions, consolidation also allowed credit unions to achieve great economies of scale, which helped push total net income for the industry up 10.8 percent during the same period. The sluggish economy of the early 2000s, which prompted many members to opt for savings and money market accounts over higher risk investments like mutual funds, also helped bolster the industry's performance.

As credit unions moved to expand the services offered to their customers, some conflicts arose, particularly among those institutions that offered financial planning and brokerage services. Some of the concerns included the tension between increased service portfolio and the possible loss of credit union savings, the fear of taxation, and member-trust issues. Resolving these conflicts remained one of the primary challenges facing the industry in the early 2000s, as the line between credit unions and other financial service institutions dissolved following the passage of the Gramm-Leach-Bliley Act, also called the Financial Services Modernization Act, in November 1999. By the start of the twenty-first century, the major difference between credit unions offering these services and commercial banks in the same field was the former's emphasis on service as opposed to profit.

The 10 percent loan growth experienced by federally insured credit unions during 2004 was primarily fueled by first mortgage loans, which accounted for 31 percent of all loans, followed by auto loans, which accounted for 20 percent of all loans. Home equity lines of credit also increased by 23 percent. Return on assets was 0.92 percent. Also helping the industry was a low rate of loan delinquency, which was 0.64 percent during the first quarter of 2005. The success of the credit union industry during 2004 was based primarily on historically low interest rates and a revived economy. During the second half of 2004 and into 2005, the Federal Reserve began to increase the interest rate incrementally, reaching 3 percent in May 2005.

At 4.8 percent, the share growth of federally insured credit unions in 2007 was set to exceed loan growth (2.4 percent) for the first time in six years. Meanwhile, asset growth increased from 4.6 percent in 2006 to 8.7 percent through June 2007.

Share certificates were the principal reason for the surge in share growth in the first half of 2007, increasing 7 percent to account for almost half of the total share growth.

Although a weakened housing market caused a slight decline in overall real estate loan growth, first mortgages continued as the bulk of loan growth. First mortgage real estate loan growth was 5.7 percent in the first half of 2007, while other real estate loans showed 2.4 percent growth. New auto loan lending declined by 1 percent over that time.

Current Conditions

For the year ended June 2010, credit unions experienced a 0.8 percent decline in loan growth something they had not seen in some 15 years. Used auto loans slowed from a gain of 5.1 percent in June 2009, down 2.6 percent by June 2010. First mortgages loans fell from 8.1 percent in June 2009 to 2.4 percent in June 2010. Asset growth of 3.8 percent for the period ending June 2010 was just about cut in half compared to 8.2 percent growth credit unions saw the previous year. For the most part, credit unions have remained relatively strong considering the economic downturn with loan delinquencies at 1.73 percent at mid-2010.

While credit card loans, fixed-rate mortgages, and used car loans climbed, new auto loans fell 14.3 percent. Throughout 2009 business loans grew 7.6 percent; however, growth was down considerably compared to the 13.7 percent increase in 2008. Following the reported 1.20 percent loan growth for 2009, credit union lending fell 1.43 percent in 2010. More importantly, the last time lending levels fell that low was during the recession of 1980.

Additionally, credit union members grew by 0.9 percent for the year that ended June 2010, a decline from 1.8 percent in 2009. The total number of credit unions fell as well by 3.2 percent. Those credit unions with assets under $50 million shed credit unions, while credit unions with assets over $1 billion grew by 8.4 percent. Compared to 9.4 percent in 2009, credit unions with assets under $5 million climbed 9.4 percent in 2010. By mid-2010 credit union assets were an estimated 74 percent of total FDIC-insured savings institution assets and an estimated 8 percent of total FDIC-insured commercial bank assets.

Industry Leaders

Federal credit unions vary in size from the very large, with assets in the billions and employees numbering in the thousands, to smaller institutions with only a few employees. The size of a credit union depends on the size of the organization that it represents. Not surprisingly, the largest credit unions represent federal government workers, state employees, or the employees of large corporations.

The largest credit union in the United States in 2007 was the Navy Federal Credit Union in Merrifield, Virginia, which represented U.S. Navy employees and personnel and includes some three million members. Chartered in 1947, it reported 2006 sales of $1.9 billion. With about 200 branch locations in the U.S. and overseas, Navy Federal Credit Union reported revenues of nearly $2.9 billion in 2009 with 7,600 employees. Other leading federal credit unions were the State Employees' Federal Credit Union, the Pentagon Federal Credit Union, Golden 1, and the Boeing Employees Credit Union.


One distinctive feature of the employees of credit unions is that they are often also employees of the organization that they represent. Many credit unions depend upon the volunteer efforts of these workers to remain in operation. Credit unions employ from four to 3,700 workers. Between 1992 and 2001, U.S. credit union employment grew 47 percent, from 138,300 to 203,300 workers. In 2005, the credit union industry employed more than 235,000 people. There were a reported 226,970 credit union employees in December 2008.

America and the World

Cooperative savings banks are common financial institutions around the globe. These institutions were created to address the credit needs of workers who were ignored by commercial banks during the industrial revolution. The World Council of Credit Unions, Inc. (WOCCU) reported that the international credit union movement was growing steadily, despite strong competition from commercial banks as they focused increasing attention on consumer services. The United States is by far the leader in credit-union membership. Financial industries in Europe and other industrialized economies tend to be far more centralized than in the United States. Nonetheless, the WOCCU membership reached 123.5 million, with 40,421 participating credit unions by the end of 2003. The total assets of these institutions equaled $578.4 billion.

The concept of cooperative banking originated in Germany during the mid-nineteenth century under the guidance of Friedrich Raiffeisen and Hermann Schulze-Delitzsche. In the mid-2000s, its system was one of the most sophisticated in the world. The cooperative banks tended to merge into larger institutions to increase their branch office network and as a rule made loans to agricultural customers, small- and medium-sized companies, and local cooperative societies.

The cooperative banking system is highly developed in France. Some of France's largest financial institutions, including Credit Agricole, Credit Mutuel, and Banques Populaires, are co-operative banks. These banks are capable of offering services similar to those offered by commercial banks.

Eastern Europe.
In all of the East European countries, there is one major institution to handle the banking system for the population as a whole. In general, with the exception of Poland, cooperative banks have been unimportant in Eastern Europe. Major changes can be expected in this region as these countries make the transition to market-based economies.

There are three types of cooperative banks in Japan, each stringently regulated by the Japanese authorities: Sogo banks, which conduct business for small and medium sized factories, wholesalers, and retail stores; Shoko Kumiai Chuo Ginko banks, which facilitate the finance of cooperatives of small and medium sized enterprises; and Norin Chukin banks, which service agriculture and forestry.

The Developing World.
Savings banks in the newly industrialized countries (NICs) have experienced a number of unique problems. For example, the habit of saving may not be as established as it is in developed nations. Some banks have developed nontraditional means to overcome these problems. Caixa Economica Federal in Brazil operates the state lottery as well as the national soccer pool, channeling the revenues into socially positive projects.

In general, cooperative banks in developing countries face four similar challenges: poor infrastructure, difficulty in mobilizing funds, inadequate resources, and a shortage of qualified managers. Despite these challenges, cooperative banks have made some progress in these areas since the 1970s.

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