Credit unions braced for expected interest rate cuts in the third quarter and prepared for changing member needs in the new landscape. At the same time, revenue hit record highs, driven by loan and investment income. Meanwhile, asset quality declined for most major products. Although these trends are possibly a continuation of second quarter performance, coming rate cuts are likely to further change industry dynamics.
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Key Takeaway: Asset Quality Continues To Worsen
ASSET QUALITY
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates
- Asset quality continued to decline in the third quarter. Delinquency jumped to 0.91% from 0.72% one year ago. Meanwhile, net charge-offs as a percentage of assets rose 23 basis points to 0.78%.
- According to FirstLook data from Callahan & Associates, credit card delinquency ticked up substantially to 2.15% as of Sept. 30. Commercial lending aside, delinquency for all other loan products rose quarter-over-quarter. Delinquency in residential real estate alone rose 7 basis points to 0.68%.
- Year-over-year, delinquency in commercial lending was up 45 basis points to 0.89%.
Key Takeaway: Credit Card Spending Stabilizes
TOTAL CREDIT CARD LINES AND UTILIZATION
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates
- After multiple years of post-pandemic increases, the rise in credit card utilization has plateaued around 28.8%. The amount of outstanding credit card loan balances also has stabilized. It has grown just 1.2% since the fourth quarter of 2023.
- When inflation was outpacing wage growth, many Americans relied on credit cards and home equity to cover day-to-day expenses. Although many people are still struggling, the reliance on credit cards has stabilized for credit union members. Although higher credit utilization does result in higher outstanding credit card loans, the rate of growth has stabilized.
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Key Takeaway: Total Revenue Reflects Higher Yields
TOTAL REVENUE YTD
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates
- Strong gains in loan and investment income underpinned a 16.6% annual increase in year-to-date revenue. Loan income, the largest source of income, accounted for $70.9 billion of the industry’s total $104.9 billion, whereas fee income contributed $11 billion. On a percentage of assets basis, they make up just 0.42%, down from a high of 0.87% in the third quarter of 2008.
- Net interest margins also have improved, with interest income rising 66 basis points year-over-year, outpacing the 59-basis-point rise in interest expense. However, higher provisioning and operating expense have offset these gains, leading to a 6-basis-point decline in ROA.
Key Takeaway: Capital And Net Worth Continue To Grow
NET WORTH AND OTHER CAPITAL
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates
Q: What Is Other Capital?
A: The remainder of net worth after subtracting capital.
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- Net worth and other capital both increased at credit unions in the third quarter. Consequently, the net worth ratio increased to 11.2% while the deficit of other capital dropped to -$7.5 billion, much less than one and two years ago.
- Capital increased 9.2% annually as credit unions added to their allowances. Overall, this increase better prepares credit unions for bumpy waters.
- Why the boost in capital? Namely, unrealized losses are not weighing down investment portfolios as much. Investments are repricing in the face of anticipated rate cuts. This time last year, unrealized losses were $41.1 billion. In the third quarter of 2024, they were $22.1 billion.
Key Takeaway: The Gap Between Loan Growth And Share Growth Narrows
QUARTERLY LOAN GOWTH VERSUS QUARTERLY SHARE GROWTH
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates
- Shares ticked up to 0.46% quarter-over-quarter even as loan growth slowed slightly to 0.83%. Year-over-year, share growth outpaced loan growth, growing by 3.2% compared to 2.6% for loans.
- Share certificates have underpinned share growth. Year-over-year, share certificates grew 24.1%. However, this is a sharp decline from one year ago, and declines have waned at other, lower-yielding share types such as share drafts.
- Meanwhile, loan originations were down 8.7%, a sign that credit unions are still feeling the pinch of higher interest rates. However, positive loan balance growth indicates credit unions are holding onto the loans they do make. They sold 31.5% of loans on the secondary market, a steady clip but down from pre-pandemic levels.
Watch Trendwatch On-Demand
Looking for the latest industry insights? Tune into Callahan’s Trendwatch 3Q24 on-demand webinar for an in-depth analysis of credit union performance trends from the second quarter. We’ll explore key financial and operational metrics, including growth, penetration, lending, deposits, member relationships, and more. Ready to elevate your knowledge and drive your strategy forward?
