A New Economic Environment Demands New Perspectives

Credit unions have experienced unprecedented shifts in the operating environment over the past four years. In 2020 alone, an influx of pandemic stimulus funds resulted in share deposits skyrocketing at a pace that was nearly four times the historical average annual growth rate. Just a few years later, 2023’s 1.7% share growth rate was the slowest in more than 20 years.

Loan growth has also whipsawed, with loans outstanding posting growth rates at or below the 7.4% 20-year average in 2020 and 2021. These “normal” growth rates were recorded despite posting record originations as members directed their excess savings to paying down debt. In 2022, however, credit unions originated three years’ worth of loans in just 12 months, creating a liquidity-management challenge that remains a focus for many institutions.

Earnings over this period also fluctuated, with 2020’s return on assets dropping to 70 basis points – the lowest level in a decade as credit unions set aside reserves for expected pandemic-related loan losses. The following year, that figure jumped to 1.06% – the highest level in nearly two decades – as those expected losses never materialized.  

While there have been swings in growth rates and earnings throughout credit union history, hitting long-term highs and lows within such a short period has never been seen. The rapid changes in growth and earnings dynamics are occurring as credit unions continue to evolve both member service and workplace strategies, navigate a more intense and complex competitive environment, and manage a business model that is under increased pressure from regulatory and market forces. 

Credit union leaders must navigate changes in the macro environment, and addressing the unique set of challenges over recent years has taken significant time, thought, and resources. Keeping the board and employees apprised of so many changes has been part of the effort throughout the past few years, but communicating how a rapidly changing macro environment impacts credit union activities and results can be difficult. 

Communicating Expectations And Results In A Changing Environment

For many credit unions, 2023 results ended up being better than expected at the beginning of the year. That said, slower share growth and related liquidity pressures, along with asset quality concerns, resulted in many credit unions pulling back on certain lending activities, including indirect lending. Mortgage lending also slowed significantly as interest rate increases removed refinancing opportunities and low housing inventory reduced home purchases. For lending teams that had been going full throttle for three years, given the excess liquidity across credit unions, the sudden downshift was jarring. At some credit unions the interest rate increases and liquidity constraints moved faster than internal changes to policies and goals, creating disconnects within the organization. 

In 2024, the expectation for most is a continuation of the shifts experienced in 2023: slower growth, lower earnings, and pressure on credit quality. For board members and employees who experienced rapid balance sheet growth and strong earnings within the past few years, communicating how changes to the external environment are resetting expectations for the credit union is critical to keeping the organization aligned. 

Financial services is a cyclical business that is impacted by economic and interest rate cycles. There are unanticipated shifts that are beyond the control of any management team. The key is being positioned well to respond to the inevitable shifts, including when they happen as rapidly as we’ve seen in recent years. Credit unions are able to take a longer-term view than many competitors, which is why the industry often makes its greatest impact on consumers during challenging times. The resiliency of the credit union business model is important, but the cycles that impact the business model still need to be communicated effectively to stakeholders. Setting appropriate expectations based on the current environment builds trust across the organization. 

When the pandemic emerged, communications typically focused on what was happening in the near term – month-to-month, if not week-to-week results. The rapid changes in operating and workplace norms necessitated this kind of narrow lens. 

In 2024, credit union leaders are evolving how they communicate trends and results. A few of the changes Callahan is seeing include: 

• A Longer-Term View – The swings in credit union results over the past few years reflect the unusual and changing operating environment. By taking a longer-term view and elongating the performance trends being shared, leaders can show just how unusual the environment has been. Reaching record highs followed by record lows is not the norm. A longer-term look at these results provides context on growth and earnings dynamics while reinforcing the cyclical nature of the business. It also communicates that what is being navigated now isn’t permanent. It is just a cycle that needs to be managed through. 
• Broader Performance Comparisons – Rather than just looking at an individual credit union’s results, it can be helpful to show the results of credit unions on a local, regional, or national level. While an individual credit union’s results may be down from recent years, the results may very well be better than those of its peers. Another helpful comparison is relative to bank performance. For example, although 2023 growth slowed across the credit union space, the slowdown was worse for banks. The lowest credit union share growth in more than two decades was stronger than the 2% decline in bank deposits recorded in 2023. Credit unions’ 6.4% loan growth tripled the 2.1% growth in banks’ loan portfolio. Even in a slower-than-normal growth period, credit unions could be gaining market share versus competitors. 
• “What If” Scenarios – Some of what has occurred over the past few years could not have been anticipated. Even if what is coming cannot be predicted, having discussions about potential scenarios can be very helpful. Scenarios that incorporate different economic environments are a starting point. Some credit unions incorporate shifts in the competitive landscape or consumer behaviors, as well. Regardless of the scenarios envisioned, simply having discussions around these potential situations help to expand board and management perspectives. Even if the environment does not shift to one that has been discussed, scenario discussions lay the groundwork for adapting to whatever may come. 
• Redefining “Success” – The slowing growth reflects the reality of economic forces at play. The Federal Reserve raised interest rates to slow the economy and tamp down inflation. Inflation has reduced household savings and higher rates influenced consumer borrowing decisions. Growth expectations should of course be lower in this environment. With growth expectations lowered, earnings expectations can also be lowered, as net worth levels can be maintained with a lower return on assets. In addition, this environment is an opportunity to go beyond traditional financial metrics and re-focus on the impact credit unions are having on their members. Financial results are important, but at a time when household budgets are stretched, how is the credit union helping members through their challenges? In what ways are we helping them manage debt better? How are we helping members save and build financial resiliency? What is happening with their credit scores? By focusing on questions such as these and tracking different measures of success, credit union leaders are reinforcing their mission with their stakeholders. 

This year will challenge credit unions, but the industry has a strong capital base, is managing liquidity constraints, and has effectively navigated extreme swings in the environment over the past few years. 2024 is likely to be more about deepening existing member relationships than driving member growth higher. That is simply the reality of where we are in the economic cycle. Refocusing expectations and efforts on member impact may be the best way to evaluate our success this year.