Outstanding subordinated debt at US credit unions skidded to a near halt in the second quarter.

The credit union industry had $3.65 billion in outstanding subordinated debt at June 30, up slightly from $3.61 billion in the first quarter. That was just a 0.9% increase quarter over quarter, a stark difference from at least 4% sequential growth every quarter since the second quarter of 2020.

Credit union subordinated debt levels have climbed every quarter since the beginning of 2020 when the industry began increasingly using the funding options as a means for growth. But now, as financial institutions focus less on growth and subordinated debt has grown more expensive due to higher interest rates, credit unions are holding off on new issuances.

"Obviously for banks and credit unions, it was extremely cheap a few years ago. But unfortunately, it's very expensive today," Charley McQueen, president and CEO of McQueen Financial Advisors, said in an interview. "It becomes very expensive just to sit on your books."

McQueen said he has seen a "substantial slowdown" in new inquiries about subordinated debt.

Credit unions with the most subordinated debt

Self-Help FCU and Self-Help CU topped the list of credit unions with the most outstanding subordinated debt in the second quarter with $409.0 million and $301.0 million, respectively. That made up the majority of both credit unions' total borrowings.

Subordinated debt has grown in popularity in recent years after a rule change by the National Credit Union Administration expanded the number of credit unions that can access it.

The industry has also become more aware of the funding option. Historically, credit unions have largely relied on retained earnings to fuel growth given their limited funding sources compared to banks. But now, credit unions have increasingly utilized subordinated debt, which is one of the only options for growing capital outside of retained earnings, to fund both organic and inorganic growth.

Bank acquisitions are an attractive use for some credit unions. Among the top 20 credit unions with the most outstanding subordinated debt in the second quarter, two have announced bank acquisitions since the start of 2022. Another two have announced acquisitions since 2021.

One of those credit unions is Five Star CU, which had $50.0 million in subordinated debt at June 30, and struck two banks deals in one week last month.