The Innovation Series is celebrating 2026 with a diverse slate of finalists whose breakthroughs are reshaping member experience, data and business intelligence, lending, employee engagement, fraud prevention, and digital member engagement — all with the power to help credit unions thrive in a rapidly evolving marketplace. Register for the Innovations In Reimagining The Lending Experience webinar  on Thursday, March 12th at 2PM EST.

Read on to learn more about this year’s finalists in lending:  Cloudvirga, Enable Technologies, Fuse, Suntell.

Cloudvirga:

Describe your Innovation:

Tropos is a configurable loan point-of-sale (POS) platform that sits in front of the loan origination system, connecting the core and third-party services through a unified, API-driven experience. The platform manages borrower and sales staff interactions, data intake, document collection, and real-time validations while seamlessly passing clean, structured data into the LOS. By acting as an intelligent engagement and integration layer, Tropos improves data quality, reduces rework, and enables credit unions to deliver faster, more consistent digital lending experiences without modifying their core or downstream systems.

What opportunity or challenge does it address?

Credit unions face increasing pressure to deliver modern, digital-first lending experiences while operating on fragmented legacy systems that were not designed to work together across all loan types (residential mortgage, consumer, auto, etc). Disconnected cores, LOS platforms, and third-party services often create inconsistent member experiences, duplicate data entry, and operational inefficiencies that slow decisioning and funding. Tropos addresses this challenge by acting as a flexible point-of-sale layer that unifies borrower and staff interactions, standardizes data capture, and integrates seamlessly with existing systems — allowing credit unions to modernize lending experiences, improve data quality, and scale efficiently without costly core or LOS replacements.

How does it increase member value?

Tropos increases member value by removing friction from the lending experience and giving members a faster, more transparent path from application to funding. By unifying data capture, document collection, and third-party integrations within a single point-of-sale experience, Tropos reduces repetitive questions, minimizes errors, and shortens turnaround times. Members benefit from intuitive digital interactions, real-time status visibility, and fewer follow-ups — while credit unions deliver a consistent, high-quality experience that reinforces trust, loyalty, and long-term member relationships.

What differentiates this innovation from competitors?

Tropos is differentiated by its role as a true system-agnostic point-of-sale layer that decouples the member experience from the underlying LOS, core, and third-party providers. Unlike POS solutions that are tightly coupled to a single LOS or require time-consuming and expensive customization, Tropos uses easily configurable workflows, API-driven integrations, and real-time customizations to adapt to each credit union’s existing ecosystem. This allows credit unions to modernize the member experience, maintain flexibility to change downstream systems, and avoid vendor lock-in—while preserving control over data, compliance, and operational processes.

Enable Technologies:

Describe your innovation.

Enable is redefining origination by bringing deposits and loans together on a single, AI-driven platform. We’ve built a unified experience that works seamlessly across digital, branch, and call center channels, powered by AI that guides both end users and frontline staff in real time. It’s not incremental improvement but rather it’s a fundamental shift in how financial institutions originate full long-lasting relationships.

What opportunity or challenge does it address?

For years, credit unions have been forced to operate with fragmented systems. One for deposits, another for lending, whereby creating friction for members, staff, and operations teams. Enable eliminates that disconnect. We address the growing need for speed, simplicity, and intelligence while helping institutions keep pace with rising expectations, compliance complexity, and competition from larger banks and fintechs.

How does it increase member value?

Members and business owners get faster decisions, fewer handoffs, and a more intuitive experience whether they’re opening an account, applying for credit, or bundling products in a single journey. Behind the scenes, AI helps surface the right products, answers questions instantly, and reduces errors which ultimately translates into better service, stronger relationships, and higher satisfaction.

What differentiates this innovation from competitors?

Most platforms still treat deposits and loans as separate workflows. Enable was built from day one as a unified platform with AI embedded at the core – not bolted on. As a member of the executive leadership team, I’ve had the great privilege of seeing Enable evolve rapidly alongside our amazing client partners — such as Nuvision Federal Credit Union ($3.9B, Huntington Beach, CA) and Meriwest Credit Union ($2.1B, San Jose, CA) — incorporating real-world feedback into smarter automation, conversational AI, and flexible configuration. That pace of innovation and our ability to deliver value quickly is what truly sets Enable apart. What further differentiates Enable is the experience behind the platform. Our founders and executive leadership team bring decades of hands-on experience partnering with more than 50+ credit unions with a proven track record of delivering on commitments and turning vision into reality. That history of execution exellence and the long-standing trust we’ve built with innovative credit union partners is something we take great pride in and continue to earn every day.

Fuse:

Describe your Innovation:

Fuse is an AI native loan origination system (LOS) and account opening (AO) for credit unions and other consumer lenders. Fuse is backed with $25M+ from the top-tier investors behind Chime and Alloy, being used by 100+ institutions including Navigant Credit Union ($4.1B, Smithfield, RI) and is the one LOS that FIS re-sells to top 50 banks (selected after reviewing 10+).

Credit unions need to automate to compete with the fintechs and top 10 banks. All traditional LOSs say their platform can deliver “up to 100% automation,” but since that has not materialized in decades, credit unions are rightfully skeptical. This is why Fuse sells its proactive automation money-back guarantee:

• Proactive: Many CUs stall on automation because their staff is overwhelmed with the needs of the day to day. We know people are 71% more likely to go to the gym if there’s a personal trainer nudging them, and Fuse implemented a similar nudge. Every two weeks, the CU meets with a Fuse automation specialist who showcases the automation opportunities identified by our Proactive AI Lending Copilot, and the aligned automations get implemented by either Fuse’s team or the CU. The goal is to get 1%+ more automated every week, leading to >60% true improvements year on year.
• Money-Back Guarantee: CUs are skeptical of being promised opportunities that then do not materialize. That is why Fuse implemented the first industry money-back guarantee in both product capabilities and company practices. Our contract incorporates guarantees so they do not need to rely on salesmanship or nice words. Some examples:
  • Product Capabilities: The system is able to decision on 100% of their core data and board 100% clean applications to their core without post-boarding clean up. The system can lead to 100% auto-decision based on any field or source of data.
  • Company Practices: Integrations are free forever (install and maintain), can be self-built by the client in a 100% open ecosystem or built by Fuse with a guarantee of delivery in under one month, and can be bought directly from partners rather than through mark-ups of up to 2x.
  • Implementation risk coverage: Fuse deploys its own team to run the full implementation rather than relying on CU staff, and assumes the risk on timelines by tying commercial commitments to agreed go-live dates, including covering additional costs from the prior LOS if those contracts need to be extended.
  • Ongoing improvements: After go-live, Fuse contractually commits to meeting every two weeks to review and implement new automation opportunities and provides real-time chat support with short SLAs and an assigned team that knows the institution’s configuration and can unblock issues quickly.

What opportunity or challenge does it address?

The core issue is automation skepticism arising from failed vendor promises, forcing CUs into costly manual processes that hinder staff focus and member experience. Fuse counters this with an AI-native LOS platform offering proactive automation with a money-back guarantee. This shifts risk to Fuse, ensuring guaranteed, measurable improvements in efficiency, staff utilization, and member satisfaction through modern technology.

How does it increase member value?

• Streamlined process with no rekeying: Fuse pulls data directly from the core, so members are not asked to enter the same information twice.
• Flexible channel hopping: Members can start an application online and finish it in the branch, or the other way around, without losing progress.
• More valuable staff interactions: With staff work reduced two- or three-fold, employees can focus their time and energy on sharing advice and cross-promotions.

What differentiates this innovation from competitors?

• • Model: Legacy LOS deliver a system, then rely on tickets and internal bandwidth. Fuse takes ownership for automation outcomes, not just feature delivery.
  • Technology: Our AI copilot continuously scans underwriting and funding workflows in production to surface concrete automation opportunities. Institutions can move toward near-total automation while setting their own pace and risk thresholds.

• Operating cadence: Every two weeks, our team meets with the credit union, reviews real data and brings specific rule, workflow and integration changes, then helps implement them so improvements actually go live.
• Alignment with credit unions: We do not charge for integrations and keep an open ecosystem, so credit unions can use the partners and tools they prefer without extra friction or hidden costs.

Suntell:

Describe your Innovation:

Square 1 Credit Suite is Suntell’s purpose-built credit lifecycle platform for member business lending at credit unions. It was designed specifically to help institutions bring MBL in-house and scale it responsibly, rather than relying on adapted bank systems, outsourced workflows, or external decisioning models.

Square 1 standardizes how business credit is evaluated, documented, and reviewed, allowing lending teams to make faster loan decisions while maintaining consistent credit standards. By creating clarity across lenders, reviewers, and leadership, credit unions are better able to explain decisions, support exam expectations, and deliver a more predictable experience for business members.

The innovation behind Square 1 is its focus on credit discipline as a growth enabler. Credit unions retain ownership and control of their lending process, enabling them to modernize MBL operations in a way that strengthens member relationships rather than outsourcing them.

What opportunity or challenge does it address?

Credit unions face increasing demand for member business lending, but many struggle to grow MBL without slowing decisions or losing consistency. Manual processes, fragmented tools, and lender-to-lender variability often lead to longer turnaround times and difficulty clearly explaining outcomes to members, boards, and examiners.

To manage this complexity, institutions often rely on manual workarounds, spreadsheets, email-driven processes, or disconnected systems to bridge gaps in the lending process. While these approaches can help in the short term, they can limit control, reduce transparency, and make it difficult to scale MBL in a sustainable way.

Square 1 addresses this challenge by giving credit unions a structured framework to manage business credit internally. The opportunity it unlocks is responsible growth. Institutions can move faster, maintain disciplined credit standards, and deliver more consistent experiences for business members without introducing unnecessary complexity.

How does it increase member value?

Square 1 increases member value by improving how credit unions respond to business lending requests. By standardizing credit analysis and credit file content, lending teams reduce rework and delays, resulting in faster loan decisions and clearer communication with members.

For business members, this creates a more predictable and transparent experience. Decisions are based on consistent credit standards rather than individual interpretation, which builds trust and confidence in the credit union as a reliable financial partner. Members spend less time waiting for updates and more time focusing on their businesses.

By enabling credit unions to manage member business lending internally, Square 1 also strengthens long-term relationships. Credit unions maintain direct ownership of decisions and outcomes, allowing them to support local businesses with dependable access to credit while staying true to their cooperative mission.

What differentiates this innovation from competitors?

Square 1 is differentiated by how it aligns with the operational reality of member business lending at credit unions. In many institutions, MBL teams operate with distinct workflows and priorities that differ from enterprise-wide banking systems.

Square 1 was designed to deliver value within that environment by providing a cohesive credit lifecycle framework for underwriting, credit file consistency, and portfolio oversight. Institutions are able to improve credit discipline and decision speed without first undertaking complex, enterprise-scale integration projects.

This allows credit unions to strengthen member business lending without overengineering their technology environment. Teams can focus first on credit consistency, decision quality, and adoption, while maintaining flexibility to evolve processes and integrations over time as needs change.

Check Out The Other Innovation Series Categories

• Employee Enablement
• AI-Powered Member Experience
• Data And Decision Intelligence
• Fraud Prevention And Resolution
• Digital Member Engagement

The post Meet The Finalists For The 2026 Innovation Series: Reimagining The Lending Experience appeared first on CreditUnions.com.

It’s more expensive for members to take out loans. It’s more expensive for credit unions to acquire the funds to support lending, too. And as members struggle to balance budgets amid higher expenses, credit unions must respond by setting aside more money to cover potential defaults on the loans they do make.

Unfortunately, it’s not just higher rates that are wreaking havoc. Operating costs — including staff compensation and professional service costs — are on the rise. Thanks to all these expenses, the industry has generated less net income in 2024 than in years prior, even with greater loan income.

The look back isn’t so great. But with the Federal Reserve poised to cut interest rates in the coming year, the near-term outlook for the earnings model is much more promising.

INTEREST INCOME VS. INTEREST EXPENSE
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Interest Income: Credit union interest income has increased alongside the Federal Reserve’s recent interest rate hikes. Credit unions have repriced loan and investment portfolios as members have paid off old, low-rate loans. As a result, interest income as a percentage of average assets has climbed — 66 basis points year-over-year to 4.99% — primarily from interest on loans. During the same period, the average loan yield increased 54 basis points to 5.78%.
• Interest Expense: Interest expense has increased in nearly equal measure with interest income the past two years as loans have hung on the balance sheet and core deposit growth has slowed. But things changed in 2024. Loan growth decelerated, matching sluggish share growth and reducing the need for costly funds. Consequently, the cost of funds flattened as credit unions paid down borrowings and slowed certificate promotions. For now, credit unions are not taking on any new, expensive funding, opting instead to maintain operations using existing liquidity. When the Fed cuts rates, acquiring funds will be cheaper, which will help credit unions manage their margins.

OPERATING EXPENSE RATIO VS. NET INTEREST MARGIN
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Net Interest Margin: The net interest margin expanded modestly year-over-year. However, in the third quarter alone it increased 9 basis points to 3.09% thanks to higher yields and a flat cost of funds.
• Operating Expense: Unfortunately, inflation and business costs also ticked up, and the 9-basis-point gap between the net interest margin and the operating expense ratio remained unchanged year-over-year.
• Culture And Member Service: Credit unions can cover primary operations purely through core interest channels, but doing so could prove detrimental to culture and member service. Consider:
  • Annual growth in new hiring slowed to just 0.7% in the third quarter.
  • The average full-time equivalent employee handled 405 members and $6.6 million in assets. That workload might be working for the time being, especially as membership growth as well as loan growth has slowed, but leaders should carefully weigh efficiency against member service and staff burnout.
  • It is historically rare for the net interest margin to exceed the operating expense ratio. Operational efficiency is important, but it’s also important to ensure cuts are made in the appropriate places.

NON-INTEREST INCOME AS A PERCENTAGE OF AVERAGE ASSETS
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Non-Interest Income: If interest channels cannot adequately cover operating expenses, credit unions will need to increase their reliance on non-interest income channels. While the net interest margin and operating expense ratio have moved in lockstep, NII streams have improved slightly. That said, NII is way down from pandemic peaks mainly because credit unions are selling fewer mortgages to the secondary market.
• Fee Income: Fee income comprises slightly more than one-third of NII. Despite being a hot button issue, fee income has been on the decline for decades. The average credit union member can expect to pay approximately $70 in fees in 2024.

CREDIT UNION EARNINGS MODEL
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Provision For Loan Losses: Provisions for loan losses — the money set aside for future defaults — has been ticking up on a quarterly basis. CECL is partially to blame, but asset quality also has been worsening. Thanks to this provisioning, however, the coverage ratio sits at a comfortable 140.9%. This is important because it helps credit unions hold off on charging off delinquent loans, which, in turn, helps members in need.
• Return On Assets (ROA): All told, operating expenses and provisions have suppressed net income growth. Consequently, ROA has declined 6 basis points year-over-year to 0.69%. Paying down borrowings and pulling back on certificate offerings improved the net interest margin and helped offset rising operating expenses and provisions, but ROA is still lower than historical norms, which have hovered around 0.75%.
• Interest Rates And ROA: Changes in the interest rate environment will affect ROA, and many credit unions are managing balance sheets with the explicit goal of maximizing flexibility, staying nimble enough to adjust to whatever the future might bring.

BANK VS. CREDIT UNIN COMPARISON
FOR U.S. BANKS AND CREDIT UNIONS
SOURCE: Callahan & Associates

• Loans: Banks are charging borrowers more for loans than credit unions; they’re also paying more for the funding to do so. Both metrics are beholden to rates set by the Federal Reserve, so banks are simply borrowing more to maintain a loan-to-deposit ratio in the low 70s, as they have done since the start of last year. Interest expenses topped $576 billion in the third quarter, up from $158 billion prior to the pandemic. These higher expenses have resulted in banks’ net interest margin dipping to 2.89%, lower than credit unions’ 3.09% margin in the third quarter.
• Net Interest Margin Versus Operating Expenses: At 45 basis points, the gap between the net interest margin and the operating expense ratio was much wider for banks than for credit unions. This is unsurprising given banks’ focus on efficiency and profitability versus credit unions’ focus on member service. That said, banks’ operating expense ratio is their biggest advantage when it comes to the earnings model. Scale certainly helps here, as does streamlined online and self-service products.
• Mission: Banks also don’t have the same mission to serve the underserved. That means they can work primarily with borrowers who have high credit scores and lower chances of defaulting. With less risk on the books, banks don’t need to set aside as much to cover credit losses, an expense that has severely impacted credit union earnings the past year.
• Taxation: Although banks pay income taxes, the industry still reported an annualized return on assets of 1.13% in the third quarter. That’s 44 basis points higher than the average credit union ROA and 2 basis points higher than the industry’s all-time record ROA. In sum, banks are making their profits even as credit unions serve more members.

Your Performance Packet Is Ready. It’s Time To Take Your Credit Union To The Next Level. Sit down with a Callahan advisor to review your tailored performance packet, and we’ll show you how your credit union measures up against peers in revenue, expenses, ROA, and more. Armed with this knowledge, your leadership team can make better plans and set stronger goals. What are you waiting for? Request your session today.

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One of the biggest shifts has been how lending and finance leaders consider qualitative and environmental factors in anticipating loss reserves.

CECL adoption drove huge increases in allowance for credit losses (ACL), and it came at a time when earnings were drying up due to economic factors such as inflation and rising interest rates. Delinquencies and charge-offs are consequently on the rise, making the job of allowing for credit losses even more challenging.

“For ages and ages, and for ages yet to come, how you measure credit on the balance sheet is really important,” says Daniel Smith, CFO at Wright-Patt Credit Union ($8.6B, Beavercreek, OH). “It’s one of the most critical measures, but it’s also one of the most judgmental measures. No matter how much people try and box it into a model number — old method, new method — at the end of the day it still requires management oversight and analysis.”

The move to CECL accounting helped shine the light on lifetime losses in portfolios, which will help credit unions recognize credit losses in a more timely fashion through the use of an expected-loss model instead of an incurred-loss model. CFOs say CECL has created clear processes, more collaboration between finance and lending, and more focus on forecasting — but it has also added more work to an age-old process.

“It is a little bit more work, but when you think about an organization with a balance sheet where 90% of our assets are in loans, this is what we do,” says Rhonda Pavlicek, executive vice president of finance and risk and chief financial officer at University Federal Credit Union ($4.2B, Austin, TX). “We have to be on top of managing that risk and making sure we’re pricing and reserving those appropriately. Banks implemented CECL in 2018 and 2019. We’ve had a lot of opportunities to learn from the banking industry’s experience.”

Both Wright-Patt and University moved to CECL on Jan. 1, 2023, and the impact on was immediate: Loss reserves doubled at University and increased 41% at Wright-Patt. Additionally, Wright-Patt experienced nearly $1 billion in loan growth in the past 18 months, so its credit reserves-to-loans ratio grew from 0.81% to 1.45% reflecting both the adoption of CECL as well as portfolio changes.

“Part of that growth came from volume, but part of that also came from changes in credit risk – some good, some not so good,” Smith says. “Credit card losses, for instance, are higher now than they were at the time we made the transition, as are our auto losses. Commercial, on the other hand, is probably the same, or a little bit better, based upon the mix of credit that that we actually have.”

What’s Inside The ‘Black Box’?

The transition to CECL was a boon for financial consultants and specialized modeling software, but off-the-shelf products can only go so far. For example, the consultant University worked with provided multiple options for models and calculations.

“The team did a lot of work to really try to understand which methodology we should use for which portfolios,” Pavlicek says. “They sliced and diced it multiple ways. We didn’t do an across-the-board approach; we did different types of modeling and different types of approaches for different portfolios.”

By contrast, Wright-Patt initially used a vendor’s model and compared the results to in-house estimates. However, Smith says some results didn’t seem consistent with what it expected the credit risk in the portfolio to be, based on different alternate views. For example, the credit union used static pool losses for its auto loan portfolio, and the results were not consistent with the third-party model.

Wright-Patt ended up using a combination of both vendor-provided and in-house models, and often uses the alternate views as a challenger to provide a reasonable balance. The problem? The model was too opaque to justify.

“It’s the infamous ‘black box,’” Smith says. “At the end of the day, we’re responsible for all the numbers that go onto our balance sheet, black box or no black box. So, that proved to be difficult for us to address.”

Smith says the credit union reviews loss experience going back 10 years or more for various loan types, looking at changes for both the current month and on an annualized basis. He also uses Peer Suite from Callahan & Associates to pull in proxy data as well as charge-off rates at small community banks, Blue Chip Economic Indicators reports, and the Wall Street Journal Economic Forecasting Survey.

When you think about an organization with a balance sheet where 90% of our assets are in loans, this is what we do. We’ve got to be on top of managing that risk and making sure we’re pricing and reserving those appropriately as we need.

Local and national unemployment rates are also key indicators, Pavlicek says, and University considers inflation, consumer spending, and other factors in its calculations, including trends in home and car prices.

“As we know, when someone goes into delinquency and charge-off, the prices could impact those pieces,” she says. “So we use that for all macro views to determine where there’s some risk, and then we determine how we use that within the qualitative components.”

The mix of loans within the portfolio impacts the sensitivity to these economic changes. For example, nearly 42.6% of University’s portfolio consists of new and used auto loans, which carry shorter terms and are less susceptible to economic swings. In comparison, first mortgages and other residential loans account for 42.9% of the portfolio.

“The model is one input that we use, and we think about our loan portfolio and the attributes within that,” Pavlicek says. “As an organization, has our risk shifted? Has underwriting shifted? We anchor to what internally is going on from a micro level, and then we look at the macro environment. And that’s where the qualitative and the environmental factors come in.”

At Wright-Patt, auto lending makes up 38.5% of the portfolio, compared to mortgages and other residential loans (36.7%) and commercial loans (12%).

“You need to have a good, reliable model that takes into account not just your loss estimates, but all the other things that happen — like prepayments and so on — that can have an impact on how much you need to reserve,” Smith says. “That’s especially important for longer-tenure products.”

What’s Your CECL Strategy? Dig into your loan performance and asset quality trends to determine if your credit union has enough reserved in its allowance for credit losses. Callahan & Associates can help you perfect your performance research, identify areas of improvement, and prepare for exams. Request a free performance scorecard session diving into the metrics of your choice today. I Want My Free Scorecard.

An Ongoing Dialog With Lending

The transition to CECL has also spurred a closer working relationship between finance and lending. Both credit union CFOs meet at least quarterly with their respective chief lending and risk officers. University also formed a CECL council that meets quarterly. It is made up of the chief risk officer, chief lending officer, and vice presidents of operations, finance, retail, and lending.

“We have a cross-functional group across the organization looking at this to make sure if there’s anything we need to be thinking about or approaching from an analytical perspective,” Pavlicek says. “We’ve got the qualitative dialogue happening. That’s been our approach, and it’s served us well so far through the last 18 months.”

It’s also important to keep the board informed of any changes to the model, adds Smith.

“We have a quarterly reporting channel where we provide that information, but [if something happens] where we have a big change, we’ll escalate that not only to the CEO but also to the board so that they’re aware,” he says.

Looking Ahead

The shift to CECL has spurred University to not only actively review pricing but also work closely with the collections team to understand headwinds that could cause problems for borrowers.

“It’s working both within lending and the collections team to really to make sure we’re being prudent and lending appropriately but also not putting people in positions that really can’t afford,” Pavlicek says.

Although the data being reviewed is in the past, Smith says he hopes to apply CECL to more forward-looking decisions. Historically, the credit union has offered a product and then waited to see how it performed in the marketplace.

“I’d rather be at the point of saying, ‘Well, let’s see, we want to go and help serve this segment, so I wonder how that will impact for credit reserves?’” he says. “We need to advance that, and we’re not there yet. But it starts with examining what has happened when you make decisions and then looking at the subsequent results.”

The move to CECL has prompted credit unions to look at their loan portfolios in new ways. For example, although University isn’t segmenting its portfolio by age, it is looking at the potential impact of economic changes on credit cardholders ages 18 to 24, who experience higher delinquency rates.

Was moving to CECL worth the effort? Well, it’s a mixed bag, Smith says.

“I love the fact that we are looking at a lot more data and talking about credit in a much deeper fashion, but it does consume a lot of resources and a lot of time to go through that,” he says. “I guess that’s the blessing and the curse: You get a lot more great information that you have to look at. I think we’re still learning at this point. Actually, I dare say we’ll always be learning.”

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Over the course of my career, credit unions — and all banking institutions — often found themselves having to revise their ALL methodology based on economic conditions and underwriting quality issues that became apparent as loan portfolios seasoned. These economic events played havoc with earnings; further, since ALL accounting is somewhat subjective, it wasn’t unusual to see some level of earnings management result from the ALL methodology implemented.

Fast forward to 2024. The current expected credit loss model (CECL) has totally changed the method by which credit unions measure loan losses. Credit unions adopted CECL throughout 2023, and virtually all had implemented it by Dec. 31. Now that the first quarter 2024 call report data is available, some important metrics provide a critical perspective on adoption methodology.

ALL Versus CECL Basic Theory

ALL theory — also referred to as the “incurred loss model” — essentially requires institutions to recognize loan losses when loan impairment characteristics have already developed. The balance of the ALL is not a measure of total lifetime loan impairment.

From a practical standpoint, credit unions calculated a historical loss ratio as a proxy for impaired loans. For example, if net charge-offs averaged 0.5% of loans outstanding for the past several years, that same ratio was applied to the balance of the portfolio. A $100 million portfolio might have had an ALL balance of approximately $500,000. That same portfolio would experience lifetime losses significantly exceeding this amount.

Under CECL standards, the allowance for credit losses (ACL) must measure the amount of expected lifetime losses in the portfolio regardless of whether an impairment event has already occurred. Lifetime losses result in an amount much greater than what would be derived using the loss ratio approach described above.

The magnitude of the difference between ALL versus ACL is highly dependent on the composition of the loan portfolio. For example, if a credit union’s loan portfolio was composed mostly of consumer loans — auto and credit card — and small amounts of residential real estate, then the lifetime losses of an existing portfolio could easily be two to three times greater than 0.5% (1.0% to 1.5%). The previously calculated ALL balance of $100,000 could increase to $300,000 or more under CECL, depending on other economic trends. However, if the portfolio were highly concentrated in residential real estate loans with minimal loss exposure, the difference between ALL and CECL would be comparatively lower.

Table 1 summarizes total ALL balances by peer group as of Dec. 31, 2022 — the last ALL reporting period before credit unions began to adopt CECL — to ACL balances as of March 31, 2024. This table indicates the largest credit unions realized a much more significant increase in their ACL balance as compared to the smaller credit unions. But as noted in Tables 3 and 4, delinquency and charge-offs for the larger credit unions increased by significant amounts in the first quarter of 2024, perhaps accounting for much of this difference.

TABLE 1: TOTAL ALL/ACL BALANCE

Setting Basic Expectations

Based on the above basic understanding of ALL versus CECL standards, the following expectations are reasonable.

TABLE 2: EXPECTATIONS AND RESULTS

Rising Delinquency And Charge-Off Impacts CECL Calculation

It is important to note both delinquency and charge-off trends have increased since the inception of CECL accounting as noted in Graph 1 and 2 below. Of particular interest is the significant rise in both delinquency and charge-off levels for credit unions with more than $20 billion in assets.

Given the rise in both of these metrics, it is reasonable to assume ACL balances should have increased since CECL inception, assuming no major changes in the amount or composition of the loan portfolio. As noted in Graph 3, it does appear the ACL has increased since CECL inception, so from a directional perspective, this expectation of increasing ACL has been achieved. But this provides directional perspective only, and the magnitude of the increase is not reflected in this metric.

ACL Delinquency Coverage Ratio

This ratio measures the amount of coverage for delinquent loans inherent in the ACL balance (see Graph 4). The delinquency coverage ratio could be misleading when a credit union reports past due residential real estate loans that are well secured and don’t represent loss exposure. Conversely, large amounts of unsecured loans that are past due with little or virtually no collateral protection versus large amounts of auto loans that have reasonable collateral protection could have differing results.

ACL Net Charge-Off Coverage Ratio

The ratio of the ACL balance as a percentage of annualized net charge-offs is one of the most critical metrics every credit union should be measuring. As noted in Graph 5, this ratio is in steep decline for all peer groups and averages approximately 160% for all peer groups displayed. In other words, the average credit union portrayed in this graph has an ACL balance that can absorb 1.6 times the current amount of annual net charge-offs. This ratio was approximately 240% as of Dec. 31, 2023.

On the surface, this ratio looks low and the negative directional change could be indicative of an understated ACL balance.

The Averages Don’t Tell The Full Story

There are 296 credit unions with assets greater than $100 million in the United States that report an ACL net charge-off coverage ratio of less than 100%. Unless there is something unusual in the current charge-off levels, this low coverage ratio is very problematic and likely to be challenged by auditors and regulators.

There are 258 credit unions in the United States with assets greater than $100 million that report an ACL net charge-off coverage ratio of greater than 500%. This could be indicative of excess reserves that could lead to earnings management.

On the surface, the aforementioned comparatively low and high coverage ratios appear significantly out of line with the averages noted in Graph 5. There are many possible explanations for these variances, but those credit unions that are far outside the average range should review their methodology to ensure they comply with applicable accounting standards.

TABLE 1: TOTAL DELINQUENCY

TABLE 2: TOTAL NET CHARGE-OFFS

TABLE 3: ALL + ACL AS A PERCENTAGE OF LOANS

TABLE 4: ACL DELINQUENCY COVERAGE RATIO

TABLE 5: ACL NET CHARGE-OFF COVERAGE RATIO

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Other CECL Pitfalls

Credit union management and those charged with governance should be aware of the following:

1. The amount of ACL related to residential real estate loans should be carefully analyzed. Many credit unions have significant portfolios of such loans that reflect very low current loan/value metrics (LTV) and therefore minimal loss exposure. Such portfolios should be analyzed to ensure loans with low LTVs have been segregated from the higher LTV loans for loss exposure purposes.
2. Member business loans and other commercial loans should be carefully analyzed and segregated by loan type. For example, MBLs secured by office buildings have much different risk characteristics than a multi-family residential building.
3. Those credit unions that purchase participation loans from other credit unions should inquire of the lead lender what ACL metrics are applied to the residual portfolio held by the lead lender. Significant differences between the lead lender CECL requirement versus the participant credit union should be investigated.
4. Credit unions should ensure loans are charged-off in a timely manner and the credit union has appropriate title to any collateral securing the loan.
5. Credit unions should have regular meetings with their CECL vendors to ensure they understand the complexities of the model used and to take advantage of any insights the vendor has on best practices for their respective CECL systems.
6. Credit unions should ensure appropriate Q&E factors are considered for loss exposure purposes. For example, if there was a significant forecasted drop in residential real estate values, such a forecast should be considered in the determination of lifetime losses on this slice of the loan portfolio.

As with any new accounting standard, various compliance complexities will continue to surface. These complexities will be compounded by changing economic circumstances that will provide much-needed perspective on the efficacy of the lifetime loss estimates used in the early days of adoption.

It is incumbent on management to continuously evaluate such loss estimates, and — where significant changes to such estimates result — determine whether such changes are indicative of an insufficient evaluation methodology that requires modification or of changing economic conditions that were beyond management’s ability to estimate in the normal course of events.

Michael Sacher is a seasoned credit union accountant and advisor, having spent his entire career in the credit union sector. He continues to consult with credit unions in various areas such as CECL and is also available for temporary CFO assignments. Mike can be reached at mike@sacherconsulting.com   (310) 880-5323

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Delinquency and net charge-offs — especially in credit cards and used auto loans — have risen rapidly in the past year, according to Callahan & Associates’ analysis of first-quarter data from the National Credit Union Administration. Of note, however, is that delinquency rates hit record lows during the pandemic, and this deterioration represents a return to historical levels.

To better manage asset quality while still supporting members, credit unions will need to carefully monitor their loan portfolios and be prepared to take action. The following metrics offer a solid place to start.

NET CHARGE-OFF RATIO AND DELINQUENCY RATIO
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• At first glance, delinquency appears to have improved in the first quarter of 2024; however, this is largely the result of a significant spike in net charge-offs. After all, a loan cannot be delinquent if it has been written off and moved into collections. Overall, net charge-offs increased more than delinquencies fell. Consequently, the asset quality ratio climbed 13 basis points quarter-over-quarter. Year-over-year it climbed 53 basis points.
• Delinquency was down 6 basis points from the end of 2023 but remained 25 basis points higher than first quarter 2023. Net charge-offs, on the other hand, were higher on both fronts — 19 basis points from year-end and 28 points from first quarter 2023. For the first time in more than 20 years, the net charge-off ratio surpassed the delinquency ratio.

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DELINQUENCY BY PRODUCT
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• Delinquency was down on a quarterly basis across most of the portfolio. In addition to the charge-offs mentioned above, tax returns and more conservative post-holiday spending helped borrowers make timely payments or pay off past due loans. Commercial delinquency was up 23 basis points, the only loan type to increase since year-end.
• Delinquency increased on an annual basis, however, particularly in credit cards. Credit card delinquency surged 53 basis points annually, which might indicate members are struggling to make everyday purchases under stretched budgets. Credit card delinquency has returned to a post-Great Recession rate of 2.02%. Still, this is down slightly from the record-high 2.10% recorded first quarter 2024. In the consumer portfolio, used auto delinquency came in second place with a 24-basis-point annual increase. Delinquency in all other loan types remain well-below the peak rates of the late 2000s.

COVERAGE RATIO
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• Asset quality showed signs of degradation in the first quarter, but credit unions fired back by increasing allowances to start 2024. In the first three months of 2024, the industry added another $3.2 billion of provisions, less than the $3.9 billion added last quarter, but still one of the largest quarterly contribution amounts on record. As of March 31, the industry has set aside $1.64 for every $1.00 of currently delinquent loans.
• It is important to note the impact of CECL accounting policy on this ratio, which can be seen most dramatically in the 1Q23 jump in the above graph, following the NCUA’s full CECL implementation. Credit unions are now obliged to set aside money to cover forecasted future losses, not just cover loans that are currently struggling.
• While the current 164% delinquency coverage ratio is historically strong, this ratio could shrink quickly if asset quality degradation persists. Such a dynamic would place pressure on industry earnings and increase regulatory oversite. Credit unions must be careful to proactively build an appropriate allowance based on their respective loan portfolios, risk forecasting models, and membership’s expected financial profile over the coming years. Learn more about the industry’s CECL practices here: https://creditunions.com/highlights/cecl-a-half-baked-cake/

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Takeaway 1: Delinquency Ticked Down

DELINQUENCY BY PRODUCT
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• Delinquency remained elevated in the first quarter, although it fell slightly from its peak in the fourth quarter. Higher interest rates have made it more difficult for Americans to keep up with loan payments, particularly for credit cards. Americans are putting more purchases on credit and missing payments because of it, and credit unions are bracing for more charge-offs.
• Notably, delinquency is concentrated in just a few categories. Delinquency in new auto and residential real estate, for example, has not jumped like in credit cards. 

Takeaway 2: Provision Expense Growth Slowed

QUARTERLY PROVISION FOR LOAN & LESS LOSSES
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• Deteriorating asset quality pushed credit unions to stock up on provisions the past few quarters to guard against future losses. In the first quarter, however, credit unions added $3.2 billion in provisions — a drop from the $3.9 billion added in the fourth quarter of 2023 but still well above the $2.2 billion added in the first quarter of 2023.
• The increase in PLL has dragged down ROA, which dropped from 0.81% in the first quarter of 2023 to 0.66% one year later.

Takeaway 3: Credit Unions Were Less Reliant On Borrowing

BORROWING TO ASSETS
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• With a loan-to-share ratio of 82.7%, credit unions are feeling the liquidity pinch.
• Borrowing as a percentage of assets increased throughout 2023 as the strategy became a viable alternative to share growth to raise liquidity. However, borrowing is getting more expensive. In the first quarter, the cost of borrowing reached 5.31%, and borrowing dipped slightly.
• Instead, cash from maturing investments became a more alluring option to boost liquidity. In the first quarter, cash as a percentage of assets reached 9.32%.

Takeaway 4: Higher Interest Rates Suppressed Originations

YEAR-TO-DATE LOAN ORIGINATIONS
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• The pinch of high interest rates forced credit union members to pull back on borrowing in the first quarter. With 30.1% fewer loans made than one year ago, credit unions originated only $113.6 billion — the lowest first quarter origination total in five years.
• This marks the second straight year of sizeable declines; however, the slowdown in real estate mortgage originations ebbed slightly. It fell 9.0% year-over-year, a stark comparison to the 49.5% drop one year ago.

Takeaway 5: Revenue Continued To Climb

TOTAL REVENUE
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© CALLAHAN & ASSOCIATES | CREDITUNIONS.COM

• Despite the slowdown in loan originations, revenue at credit unions expanded 18.6% year-over-year in the first quarter. Cooperatives capitalized on higher loan yield, and income from loans jumped $22.7 billion. Investment income also climbed 30.2%, a sign that investment securities are repricing at higher rates. All of this means a better starting point for credit union earnings.
• Revenue rose in the first quarter, but so did operating, interest, and provision expenses. Subsequently ROA fell despite the bump in revenue. Keep an eye out for the remainder of 2024 to see how credit unions take advantage of this revenue boost while weathering headwinds.

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QUARTERLY PROVISION FOR LOAN AND LEASE LOSSES VS. COVERAGE RATIO
FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.23
© Callahan & Associates | CreditUnions.com

The coverage ratio, the allowance for loan losses to delinquent loans, measures how well a credit union can cover potential losses. Should all delinquent loans suddenly default, can a credit union’s reserves cover the loss?

• The PLL — provision for loan and lease losses — is money every credit union reserves every year to fund its allowance account. Quarterly PLL represents how much money a credit union adds to the allowance account every quarter.
• Delinquency at U.S. credit unions is on the rise. It hit 0.72% in the third quarter of 2023, according to FirstLook data from Callahan & Associates. This is up 19 basis points from one year ago and up 30 basis points from the record low reported in the first quarter of 2022. It is important to note that although delinquency has increased during the past year, it is returning to historic, pre-COVID norms.
• In response, credit unions are increasing provisions to bulk up allowance accounts. As of the third quarter, the industry allowance stood at $19.0 billion — a near all-time high. The only time the allowance account has surpassed $10 billion was when the pandemic hit in early 2020.
• Still, delinquency rates are increasing faster than allowance balances and the coverage ratio is falling. Coverage remains at a healthy 165.4%, or $1.65 reserved for each $1 delinquent, but if delinquency continues on its sharp upward trajectory, credit unions will need to increase provisions to properly fund the allowance account.

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Although these trends have had a significant impact on the credit union industry, many of them represent a return to economic normalcy. Interest rates and asset quality are both on the rise from their historic lows, whereas loan originations have fallen to pre-pandemic levels.

Indeed, the beginning of the fourth quarter is bringing with it a sense of economic normalization — albeit with uncertainty. For now, consider the following key takeaways from early performance data.

No. 1: Weaker Savings Is Impacting Share Growth

• The U.S. personal savings rate fell from 5.1% in the second quarter to 3.8% as of Sept. 30. As personal savings ties directly into deposit growth, it is no surprise share growth at credit unions remained nearly flat, expanding just 0.9% year-over-year in the third quarter.
• Increased debt load, interest payments on loans, and cost of living means American have fewer dollars to save at the end of the day. In turn, credit unions have fewer deposits to lend out and collect interest on.

No. 2: Delinquencies Are Back To Pre-Pandemic Averages

• Credit union asset quality has inched back up to pre-pandemic norms during the past 12 months. Delinquency and net charge-offs have both climbed, reaching 0.72% and 0.55%, respectively, at the end of the third quarter.
• During the pandemic, Americans built up savings and paid down debt, which improved asset quality. However, asset quality has worsened in the absence of pandemic-based economic aid.
• The resumption of student loan payments could further strain asset quality at credit unions as borrowers with student loans as well as other debt make tough decisions on which loans to repay and when.

No. 3: Credit Unions Are Diversifying Funding Sources

• Borrowings rose 59.5% year-over-year as credit unions continued their search for liquidity. Although annual growth was down from the 89.5% reported in the third quarter of 2022, borrowing continues to grow as a percentage of assets. At this point, borrowing has reached an unprecedented 5.8% of assets.
• When credit unions have to raise dividends rates to attract shares, borrowing becomes an attractive way to raise liquidity. However, elevated interest rates has increased borrowing expenses, which has lifted the overall cost of funds.

No. 4: ROA Declines Despite Record Revenue

• Return on assets fell 13 basis points year-over-year to 0.75% in the third quarter. Although interest income has risen across the industry, so have operating and interest expenses — 8.9% and 228.5%, respectively — which has compressed ROA.
• Provision expenses more than doubled during the past year. As delinquencies rose, credit unions increased their provisions for loan losses, further compressing margins and lowering ROA.

No. 5: Higher Interest Rates Have Reduced Loan Demand

• In the first quarter of 2022, the Federal Reserve started raising interest rates to combat inflation. When the federal funds rate increases, so, too, do the rates credit unions charge for loans. Consequently, the demand for loans decreases.
• Year-to-date loan originations fell 24.3% from one year ago, when the COVID-19 boom was fueling loan originations. Today — thanks to higher rates and a normalizing, post-pandemic economy — loan originations have returned to pre-pandemic levels.

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Many first quarter trends were continuations of those from previous quarters, such as low share growth, a decline in loan originations, and an increased net interest margin. Credit unions continued to add members at a record pace as consumers seek safe harbor amid a messy economic environment. Looking for a place to park their money, members opted for share certificates at levels never seen before.

No.1: Total Share Growth Drops To Record Low

• Year-over-year share growth hit 2.2% to stand at $1.9 trillion shares outstanding. Despite that impressive dollar figure, this represents the lowest annual growth rate on record. As the personal savings rate hovers near historic lows and inflation tightens budgets, members have less and less to deposit into their credit union.
• Notably, share certificates continued their rapid rise, up 50.1% year-over-year. Share certificates now make up 19.1% of total shares outstanding. The cost of deposits also rose 51 basis points to 0.99% in the first quarter as deposits garnering higher interest rates make up a larger percentage of the share composition.

No. 2: Loan Demand Declines As Interest Rates Rise

• Year-to-date loan originations declined 29.5% in the first quarter, sitting at $135.7 billion. In the first quarter of 2022 this stood at $192.3 billion. Real estate loan originations shrank 43.6% while non-real estate originations fell 18.2%.
• With the price of homes and cars continuing to rise alongside interest rates, would-be borrowers are feeling the pinch. The average new car sold for nearly $48,008 in March, according to Kelley Blue Book. Federal Reserve data shows that’s 20% higher than the average price in March 2019, one year before the pandemic, economic uncertainty, and supply chain shortages caused massive disruption to the auto market.

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No. 3: Credit Unions Stock Up On Allowances

• The allowance for loan and lease losses rose substantially in the first quarter, up to 1.13% of loans outstanding. As these allowances are designed to cover losses on loans, new CECL charge-off methodology caused credit unions to stock up to ensure they provide coverage for loans deemed unrecoverable.
• This rise in allowances brings the coverage ratio – the amount set aside in allowances for every dollar of delinquent loans – to 215.4%, or more than double the dollar amount potentially needed. This comes at a time when asset quality is worsening throughout the credit union industry.

No. 4: Net Interest Margin Gains Continue For Second Straight Quarter

• The credit union industry’s net interest margin (NIM) continues to climb, outpacing the operating expense ratio. The current NIM level represents an improvement over the record low hit during the first quarter of 2022, as interest income continues to grow faster than interest expense.
• While operating expenses as a percentage of average assets has also grown, that metric has lagged the NIM growth rate, allowing the NIM to surpass the operating expense ratio. Now, the credit union industry has more flexibility on income streams and can keep the lights on with less non-interest income. Consequently, non-interest income has fallen year-over-year over the past two years.

No. 5: Membership Continues To Grow With Average Member Relationship

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