As the Federal Reserve continues shrinking the U.S. economy’s money supply, the credit union industry continues riding it out — one wave at a time. This week, Callahan and Associates’ Fourth Quarter 2023 TrendWatch webinar revealed deposit, loan, investment/asset and capital/earnings trends that will echo into 2024 as credit unions transition into springtime and summer.
From December 31, 2022 – December 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):
Highlights (Annualized)
By the fourth quarter of 2023:
- Deposits remained near $1.9 trillion (down from a record high in early 2023), rising 1.7 percent (compared to 3.3 percent in the year-ago period prior).
- Assets reached $2.28 trillion, rising 4.1 percent (compared to 5.1 percent in the year-ago period prior).
- Loans reached $1.62 trillion (a new record), rising 6.4 percent (compared to 19.9 percent in the year-ago period prior).
- Investments dropped to $565 billion, declining -1.4 percent (compared to -20.6 percent in the year-ago period prior).
- Capital (retained earnings for net-worth purposes) rose to $232 billion, increasing 12.2 percent (compared to -5.9 percent in the year-ago period prior).
- Membership reached 140.7 million (a new record), rising 3 percent (compared to 4.3 percent in the year-ago period prior).
Deposit Trends (Annualized)
U.S. credit union deposits reached $1.9 trillion (down from a record high in early 2023), rising 1.7 percent (compared to 3.3 percent in the year-ago period prior). By the fourth quarter of 2023:
- In fourth-quarter 2023 versus fourth-quarter 2022: 63 percent versus 19.7 percent (certificates of deposit); 3 percent versus -1.1 percent (IRA/Keogh); -16 percent versus -3.2 percent (money market); -3.3 percent versus 4 percent (checking); -11.8 percent versus 1.5 percent (savings) — and 7 percent versus 3.3 percent (total annualized deposit change).
- Deposit growth in 2023 was the slowest in the past 20 years (deposit growth historically has an inverse correlation with the stock market).
- Certificates of deposit products posted extraordinary growth in 2023, helping to both retain existing shares and attract new deposits.
- Credit union members shifted $189 billion to certificates of deposit in 2023, while lower-paying core-deposit balances declined by $159 billion.
- Short-term certificates of deposit made up 79 percent of CDs at year-end 2023.
Liquidity Trends (Annualized)
By the fourth quarter of 2023:
- Borrowed funds increased $38 billion over the past year (and increased to 6 percent of assets).
- Cost of funds rose significantly in 2023.
- The gap between the mean and median interest expense widened in 2023 as larger credit unions paid higher funding costs.
- The need for funds is greater in larger credit unions, as seen in the gap between the mean and median loan-to-share ratio.
Loan Trends (Annualized)
U.S. credit union loans reached $1.62 trillion (a new record), rising 6.4 percent (compared to 19.9 percent in the year-ago period prior). By the fourth quarter of 2023:
- In fourth-quarter 2023 versus fourth-quarter 2022: 24 percent versus 37.3 percent (combined HELOCs/home equity loans); 13 percent versus 24.2 percent (business/commercial loans); 2 percent versus 22.2 percent (new autos); 3.5 percent versus 18.8 percent (used autos); 10.5 percent versus 15.5 percent (credit cards); 4.1 percent versus 16.5 percent (first mortgages) — and 6.4 percent versus 19.9 percent (total annualized loan change).
- Loan originations fell to 2019 levels in 2023.
- Mortgage originations declined4 percent, below the 2019 level (housing affordability is a national issue).
- Growth slows across the loan portfolio.
- Smaller credit unions’ liquidity advantage resulted in solid loan growth in 2023.
- With liquidity tighter, credit unions are focusing on core members.
- Member growth slowed in 2023.
- Loan delinquency and charge-offs returned to pre-pandemic levels.
- Credit card delinquency and used auto delinquency diverged from other major loan products.
Asset Quality Trends (Annualized)
Assets reached $2.28 trillion, rising 4.1 percent (compared to 5.1 percent in the year-ago period prior). By the fourth quarter of 2023:
- Loan and investment portfolios continued to reprice, driving strong revenue growth.
- Non-interest income rose 1.2 percent.
- Both asset yields and funding costs rose.
Earnings, Capital Trends, and Expenses (Annualized)
U.S. credit union investments dropped to $565 billion, declining -1.4 percent (compared to -20.6 percent in the year-ago period prior). Credit union capital (retained earnings for net-worth purposes) rose to $232 billion, increasing 12.2 percent (compared to -5.9 percent in the year-ago period prior). By the fourth quarter of 2023:
- Net interest margin (NIM) is moving higher after reaching historic lows in 2021.
- The industry’s operating expense ratio is also rising, although it remains historically low.
- Loan loss provision expenses jumped due in part to Current Expected Credit Loss (CECL) regulations and rules (potential loan losses are well-covered by reserves).
- The industry’s return on assets (ROA) is lower in 2023, as higher operating and provision expenses offset a wider net interest margin (NIM).
- The capital ratio improved by 70 basis points.
Takeaways and Closing Thoughts
- 2024 will likely be another slow-growth year as credit unions manage liquidity and margins, pressure on non-interest income, the credit cycle, and increased fraud.
- Many member households aren’t feeling great about their financial situation. They need hope.
- Credit union “success” is different in this environment. It’s not as much about traditional performance measures such as growth and earnings. It’s more about member and community impact — the reason credit unions exist.
- Strategic trade-offs will likely need to be considered. Credit unions can take the long view and look at the financial services environment with a telescope more than a microscope.
All trends were obtained from the Fourth Quarter 2023 TrendWatch webinar hosted this past week (view the slide presentation here) by Washington, D.C.-based Callahan & Associates.
