Credit Union Earnings Remain Strong Amid Slower Loan Growth

Credit union earnings have remained strong this year despite slowing loan growth. Loan growth, annualized through the second quarter, was below 2%, but it hasn’t had a detrimental impact on earnings. Weak loan growth has been a result of members showing less appetite for spending and credit unions maintaining higher loan rates as they assess their overall risk profiles for credit, liquidity, and interest rate risk.

Credit unions should recognize their strong performance despite higher delinquencies, charge-offs, interest rate volatility, and evolving liquidity profiles. Delinquencies and charge-offs are higher now compared to unusually low rates in the past, when consumers had extra liquidity and didn’t miss making payments. 

Understanding loan portfolios: A key to success

It’s equally important for credit unions to have a thorough understanding of their loan portfolio, especially credit and loan-to-value migration. These are the evolving areas of risk, specifically within vehicle loans. Credit unions need to have those key details at their fingertips. For example, on a year-over-year basis, negative equity in vehicle loans has increased 4.2% according to a Cox Automotive report.

I encourage you to evaluate your own experiences: “Are we above, below, or the same?” Despite weak loan growth, it’s not yet time to lower interest rates on loans.

Credit spreads on consumer loans remain wide because of economic uncertainty, treasury yields rebounding higher over the last month, and tightening loan standards. On that note, I suggest you proactively adjust loan pricing as key inputs change.  

Balancing loan growth and deposit pricing

On the liability side, credit unions have experienced continued growth in term certificates, but non-term shares have remained flat. The main factor driving 18% annualized growth in certificates has been competitive pricing, especially for maturities within one year. As a result, cost-of-funds has increased close to 2%. The higher cost-of-funds has been an outlier compared to the past decade, yet it’s not surprising given the tightening liquidity environment, higher short-term yields, and a focus on growing certificates.

Despite these challenges, credit unions have effectively managed their loan and deposit pricing, with net interest margins remaining around 3%.

See the full range of customizable balance sheet solutions Catalyst has available to assist you with achieving your strategic objectives.

Steven is responsible for managing the day-to-day operations of Catalyst’s Asset Management Group and setting its long-term strategic direction. He also works directly with credit unions to assist them with their strategic financial and investment management endeavors.