While loans, deposits, and membership grew at a healthy pace for U.S. credit unions in the first quarter, the industry’s balance sheet trends are displaying some challenging conversations going into the second half of 2023 — including cost of funds, liquidity borrowing, delinquencies, charge-offs, loss provisions, and political discussion on Capitol Hill regarding deposit insurance for all financial institutions.
In general, the nation’s approximately 4,800 credit unions remain financially sound — growing member relationships, experiencing positive earnings, and adding to a strong capital base according to this week’s First Quarter 2023 TrendWatch webinar hosted by Callahan and Associates.
However, with inflation eating away at many household budgets, there are emerging signs of credit union members increasingly under financial stress — in particular with credit card balances and auto lending. Many credit unions are, no doubt, proactively identifying members who will eventually need financial education or financial-management assistance in the future.
Going forward, there’s uncertainty within many credit union senior management teams of how to approach any impending economic recession since it’s shaping up to play out differently than the past two recessions (the 2020 pandemic and the 2007 – 2008 financial/real estate crisis).
“Credit unions can monitor activity, listen to members, ask them questions, examine what questions they are asking you, and try to educate them,” said Alix Patterson, chief experience officer for Callahan and Associates. “Keep listening, continue monitoring, and then use this time as an opportunity to really engage members — because it pays off in the long run.”
From a bird’s-eye view, credit unions across the nation are experiencing deposit growth dropping to a record low, loan demand declining as interest rates have risen, more allowances in loan loss provisions, continued gains in net interest margin (NIM) for a second consecutive quarter, healthy growth in new memberships, and a continued increase in average member relationships (from a dollar perspective).
From March 31, 2022 – March 31, 2023 (year-over-year unless otherwise noted), U.S. credit unions experienced the following industry trends according to recent quarterly data made public by the National Credit Union Administration (NCUA):
U.S. credit unions’ average member relationship reached a record high, growing by nearly $1,938 year-over-year and driven by an uptick in lending relationships and higher individual loan balances. This metric sits at $23,812 ($13,672 in deposits per member and $10,140 in loans per member). By the first quarter of 2023:
- Membership reached 138 million (a new record), rising 4.4 percent (compared to 4.1 percent in the year-ago period prior). Approximately 5.8 million consumers joined a credit union over the past 12 months.
- Loans reached $1.55 trillion (a new record), rising 18 percent (compared to 12 percent in the year-ago period prior).
- Deposits reached $1.91 trillion (a new record), rising 2 percent (compared to 9 percent in the year-ago period prior).
- Assets reached $2.24 trillion, rising 4.5 percent (compared to 8.6 percent in the year-ago period prior).
- Investments dropped to $600 billion, declining -17 percent (compared to 3 percent in the year-ago period prior).
- Capital (retained earnings for net-worth purposes) rose to $220 billion, increasing 5 percent (compared to 1 percent in the year-ago period prior).
Loan Trends (Annualized)
U.S. credit union loans reached $1.55 trillion (a new record), rising 18 percent (compared to 12 percent in the year-ago period prior). By the first quarter of 2023:
- Total first-quarter loan growth slowed from 2022’s same-period pace.
- In 2023 versus 2022: 9 percent versus 5.6 percent (combined HELOCs/home equity loans); 22.5 percent versus 20 percent (business/commercial loans); 21.3 percent versus 3.5 percent (new autos); 16.5 percent versus 13.3 percent (used autos); 15.2 percent versus 9.7 percent (credit cards); and 12.9 percent versus 13.3 percent (first mortgages).
- HELOC/home equity lending utilization continued rising (major double-digit growth).
- Credit card utilization remained below pre-pandemic levels.
- Auto lending market share increased 2.3 percentage points.
- Contraction in both real estate and consumer lending led to a -29.5 percent decline in loan origination dollars, with first-quarter originations declining at the fastest pace on record.
- Why are originations down? The answer: changes in participation loans on the books, pay-downs on loans by members, and sales to the secondary loan market (namely first mortgages) have changed recently. Credit unions are managing their balance sheets so they can continue growing assets.
- S. credit unions’ average member relationship reached a record high, growing by nearly $1,938 year-over-year and driven by an uptick in lending relationships and higher individual loan balances. This metric sits at $23,812 ($13,672 in deposits per member and $10,140 in loans per member).
Deposit Trends (Annualized)
U.S. credit union deposits hit a record $1.91 trillion (a new record), rising 2 percent (compared to 9 percent in the year-ago period prior). By the first quarter of 2023:
- Annual deposit growth hit a record low. It fell despite an uptick in the U.S. personal savings rate.
- Certificate of deposits (CDs) rose $66.2 billion in the first quarter, offsetting declines in checking/savings accounts and money market accounts.
- CD balances jumped 50 percent year-over-year. This account product increased its portion of the entire deposit portfolio by more than 6 percentage points.
Liquidity Trends (Annualized)
By the first quarter of 2023:
- The loan-to-deposit ratio declined slightly in the first quarter, but it’s up 10.7 percentage points since the year-ago period.
- Mortgages sold on the secondary market continued to decline.
- Loan participation activity slowed down.
- Cash relative to assets rose from a year-end low point.
- Liquidity borrowings relative to assets ticked up slightly. Liquidity borrowing costs are up 279 basis points since the year-ago period.
- Uninsured deposits remain a small portion of the credit union industry’s balance sheet compared to banks.
Asset Quality Trends (Annualized)
By the first quarter of 2023:
- Net charge-offs rose, but delinquency declined (however — delinquency in general has been ticking up for a few quarters now).
- Credit cards and auto loans are driving the increase in delinquency.
Earnings & Capital Trends (Annualized)
U.S. credit union investments dropped to $600 billion, declining -17 percent (compared to 3 percent in the year-ago period prior). Credit union capital (retained earnings for net-worth purposes) rose to $220 billion, rising 5 percent (compared to 1 percent in the year-ago period prior). By the first quarter of 2023:
- Rising interest rates are reflected in balance sheet yields.
- Net interest margin is higher than the operating expense ratio for the second consecutive quarter.
- Non-interest income declined almost 1 percent.
- Credit unions increased loan loss provisions as charge-offs rose.
- Return on Assets (ROA) declined from pandemic highs as the cost of funds (deposit pricing) rose.
- Capital levels are off after previous declines.
- Allowance for loan losses jumped in the first quarter, mostly due to one-time Current Expected Credit Loss (CECL) adjustments.
Average vs. Median CU Trends
Average versus median trends as of first quarter of 2023:
- Median asset growth turned negative, as did median deposit growth.
- Median loan growth accelerated.
- Median member growth turned positive for the first time in four years.
- Liquidity is now tighter for larger credit unions.
- Interest income soared across the board as portfolios are repricing.
- Larger credit unions face tighter liquidity profiles and are thus paying more to source funds.
- There are higher interest expenses at larger credit unions, which is placing headwinds on industry spreads.
- The industry is less reliant on non-interest income (NII) as interest revenue grows and secondary market loan sales slow.
- Larger credit unions are more operationally efficient thanks to economies of scale.
- High interest expenses and loan loss provisions took a cut out of earnings for larger credit unions, even as interest income grew.
- The industry’s net worth remains healthy, though Current Expected Credit Loss (CECL) accounting changes are having a short-term impact.
All trends were obtained from the First Quarter 2023 TrendWatch webinar hosted this past week (view the slide presentation here) by Washington, D.C.-based Callahan & Associates.