Performance data through Sept. 30 paints the picture clearly. Loan growth reached 4.6%, share growth climbed to 5.2%, and member growth — after more than two years of deceleration — finally began to bend upward again at 2.0%. Even the median credit union, contending with changing demographics and intensified competition, held its ground with membership falling just 0.5%.

Notably, all this growth occurred without leaning on indirect lending, which remained essentially flat at 0.1% even as direct member engagement continued to rise.

Saving patterns further reinforced this engagement trend. Member share balances grew faster than the U.S. national savings rate. The types of share products reflect a membership keen on saving. Certificates and money markets carried more weight —  46.6% of total shares — even as members kept term lengths short and flexible.

On the lending side, the rebound was even more pronounced. Total originations jumped 17.7%, led by a surge in first mortgages, which accounted for 54.3% of real estate originations. Refinance activity climbed to 33% of total originations, its highest level since early 2022. Meanwhile, auto lending shrank slightly, declining 0.9% on balance sheets, reflecting tariffs, affordability pressures, and deliberate pullbacks from indirect channels.

Of course, numbers only tell half the story. The direct impact credit unions have on the lives of individual members is evident everywhere, including in these success stories:

• DuGood FCU offers 0% tool loans to trade-school students.
• Lake Trust guides new entrepreneurs through business-readiness training.
• Hello Credit Union partners with United Way’s 211 helpline to support families in crisis.
• Wright-Patt Credit Union reshapes access to affordable housing in Dayton.
• New Orleans Firemen’s FCU deploys 100% LTV mortgages to counter systemic barriers.

These aren’t anecdotes — they’re the operating system of cooperative finance.

Risk metrics held their own as well. Delinquency plateaued at 0.94% of total loans, with most categories dropping below where they were a year earlier. Charge-offs declined to 0.76%, reinforcing member resilience despite rising costs. Commercial real estate loans remain an area to monitor, with delinquency at 1.08%, high relative to the past five years but still manageable relative to historical norms.

Earnings were a standout. Total revenues reached $112 billion year-to-date, powered by higher loan yields and stable funding costs. The gap between the net interest margin and the operating expense ratio widened to 27 basis points, the largest opening in more than two decades, as more balance sheets shifted toward higher-yielding, member-driven lending. Operating expenses continue to rise — now at 3.11% of assets — but current margins offer rare strategic breathing room.

Technology trends added another layer of optimism in the third quarter. Credit unions aren’t using AI to shrink their workforce; they’re using it to sharpen the human edge. Marine Credit Union is applying AI to strengthen underwriting and risk modeling, whereas Premier America is using simulated dialogues to train branch staff in empathy, rapport, and confidence — proof that technology can amplify connection rather than replace it.

Capital remains robust, with net worth at 11.3%, supported by declining unrealized losses and strong earnings. Liquidity tightened somewhat as cash balances fell to 7.7% of assets, but available credit lines of $574 billion offer wide runway for funding if demand spikes.

The through-line across all of this is simple: credit unions perform best when conditions are hardest. Banks might excel in calm weather, but cooperatives are built for turbulence — for furloughs, sudden expenses, rising rates, and members who need someone to stand in their corner.

In a volatile year, credit unions didn’t chase the spotlight. They kept the lights on. And that steady glow continues to guide the communities they serve.

Trendwatch 3Q25 Is Available On-Demand

Callahan & Associates takes a look at third quarter credit union performance trends, exploring where the movement stands today and where opportunities lie for tomorrow.

Watch Now On-Demand

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Deposit Growth: Signs Of Stability

Credit union leaders have focused heavily on liquidity and deposit growth the past several years. Lagging share growth made for a challenging environment in 2023; however, that trend reversed course in 2024. Credit unions reported a 4.3% increase in share balances for the year, more than twice the pace of 2023. Although certificates remained a crucial driver of growth, core deposits — such as money market and share draft accounts — began to rebound.

This shift suggests credit unions are not only effectively competing for deposits but also benefitting from an improved savings rate among members. A decline in short-term borrowings further heralded the return to more balanced liquidity conditions, signaling a more stable funding base.

YEAR-OVER-YEAR SHARE GROWTH
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

Some credit unions are taking innovative approaches to differentiate deposit products. For example, a checking account from Langley Credit Union ($5.4B, Newport New, VA) allows members to select options based on usage patterns and financial goals, reinforcing engagement while maintaining financial stability.

Lending: Strategic Shift In Focus

Loan growth in 2024 slowed compared to prior years, particularly in consumer lending. Auto loan balances declined as credit unions competed against aggressive manufacturer financing offers and many intentionally pivoted away from indirect lending. These credit unions have instead focused on deepening relationships with existing members, aligning lending strategies with long-term sustainability rather than volume-based growth.

Despite the decline in consumer lending, real estate loans — especially home equity products — showed strong growth. This is especially notable given the lack of housing and inflated prices across the United States. Heritage Family Credit Union ($772.9M, Rutland, VT) is stepping up efforts to support affordable housing by partnering with local government and leveraging its not-for-profit model. Efforts like this underscore the critical role credit unions play in addressing housing challenges.

YEAR-OVER-YEAR LOAN GROWTH
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

Another notable shift occurred in commercial lending. As some credit unions expanded their business loan portfolios, others made the strategic decision to refocus. University Federal Credit Union ($4.0B, Austin, TX), for example, made the bold decision to exit its commercial lending and insurance services businesses. CEO Michael Crowell described the move as a way to sharpen UFCU’s impact on consumer banking — allowing the institution to be great at what it does best rather than spreading resources too thinly.

Great Strategy Requires Trade-Offs. Hear from UFCU CEO Michael Crowell as he talks with Callahan & Associates about the cooperative’s decision to exit commercial lending and insurance services. Watch today.

Asset Quality: A Watchful Eye On Financial Health

Although the U.S. consumer balance sheet remains strong on average, some members are struggling. Delinquencies and charge-offs have risen across nearly every loan category, surpassing pre-pandemic levels. Inflationary pressures on household expenses — ranging from groceries to utilities — have stretched budgets and compounded financial distress.

Credit unions, however, are responding with risk management strategies as well as proactive support. At Suncoast Credit Union ($17.8B, Tampa, FL), a micro-business lending initiative provides financial education alongside capital access. By focusing on long-term financial health, credit unions continue to differentiate themselves from traditional lenders.

ASSET QUALITY
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

The Role Of Credit Unions In An Evolving Economy

Retaining healthy balance sheets and growth metrics in a difficult economic environment hasn’t prevented credit unions from playing a vital role in their communities. In fact, their cooperative model positions them to provide financial stability in uncertain times. From micro-branches serving remote communities to resource centers connecting local nonprofits with individuals in need, credit unions remain deeply mission-driven.

The challenge ahead lies in balancing financial strength with broader service. With strong capital positions and resilient business models, credit unions have the flexibility to invest in their future — whether through technology, branch expansion, or new products.

Looking To 2025 And Beyond

Credit unions are posting steady growth but must remember growth is not the ultimate measure of success. Growth is the inevitable outcome of achieving goals based on the right strategic focus. Not coincidentally, the right strategic focus also helps credit unions deliver lasting, positive impact in addition to sustainable growth.

To guide the next chapter of cooperative success, credit unions are deepening member relationships, refining business models, and building community prosperity. Credit unions are built to weather uncertainty — it’s in their design. By maintaining a clear sense of purpose and embracing change with intention, the industry is well-positioned to serve the financial needs of members today and for generations to come.

The post A Year In Review And What Lies Ahead For Credit Unions In 2025 appeared first on CreditUnions.com.

How Does Your Asset Quality Compare? Book a free 1:1 session to benchmark your credit union against two to three peer groups of your choice. You’ll receive a detailed report with key insights to guide your team’s decision-making. With Callahan, it’s never been easier to leverage industry data to assess credit union performance, uncover new opportunities, and strengthen your strategic initiatives. Book now.

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Credit unions have now pulled back on efforts to draw in new members through channels such as indirect lending and are instead focusing on core members. This has had a knock-on effect on auto lending and loan growth.

Fortunately for credit union members, share growth has risen. That bump could have positive ramifications for personal finance moving forward. Read on to see what other trends appeared in the fourth quarter credit union performance data.

Takeaway 1: Higher Delinquency Has Arrived

DELINQUENCY BY PRODUCT
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Credit union leaders have worried about rising delinquency across products for the past several quarters. However, the fact that delinquency was normal in the context of pre-pandemic performance allayed many fears. That is no longer the case. Total industry delinquency climbed to 0.97% in the fourth quarter, surpassing pre-pandemic norms.
• Delinquency in all but one lending product rose in the fourth quarter. Commercial lending was the lone exception in the credit union portfolio. Most worrying perhaps is the rise in residential real estate. Delinquency in this product has traditionally been low; however, it reached 0.78% in the fourth quarter.

Takeaway 2: Credit Unions Double Down On Members

MEMBERSHIP AND ANNUAL GROWTH
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Credit unions had 2.3% more members in the fourth quarter of 2024 than they did one year earlier. Despite the fact year-over-year growth has decreased, total membership still reached an all-time high of 143.9 million at year-end.
• The dip in growth is the result of credit unions pulling back on certificate specials and indirect lending, which are typically reliable sources of membership growth. Credit unions are reorienting products to capture the favor of members with whom they already have a primary relationship versus attracting new members who might favor rate over relationship.
• Meanwhile, the total number of credit union branches increased by 31 year-over-year. Banks, on the other hand, shed nearly 1,000 locations. As banking deserts become an issue nationwide, credit unions have stepped up to serve communities rejected for their profit potential.

Trendwatch On-Demand Is Available. Want to know what year-end data reveals about strengths and opportunities in the year ahead? Check out Callahan & Associates’ Trendwatch On-Demand to learn how today’s economic environment has impacted credit unions, what industrywide benchmarks say about performance at your shop, and more. Watch today.

Takeaway 3: Yields Outpace The Cost Of Funds

YIELD ANALYSIS
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Credit unions widened the gap between the cost of funds and the yield on investments and loans in the fourth quarter. Yield on loans moved up 5 basis points, yield on investments moved up 6 basis points, and the cost of funds moved up 3 basis points.
• Total borrowing fell to 4.2% of assets. Total borrowing balances fell more than $25 billion to $96.9 billion.
• Meanwhile, core deposit growth was stronger in the fourth quarter than in quarters past. All this means a lower cost of funds and better margins.

Takeaway 4: Auto Lending Reflects Credit Union Strategy

ANNUAL GROWTH IN LOANS OUTSTANDING
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• The loan portfolio at U.S. credit unions grew 2.8% annually in the fourth quarter. At the same time, new auto lending fell by 6.1% and used auto lending fell by 1.6%, highlighting a change in strategy that is seeing credit unions pull back from indirect lending.
• Given that change in strategy, indirect lending fell 3.6%. The tightened liquidity environment has prompted credit unions to refocus their efforts toward core members rather than sourcing loans to a potentially fickle member.
• The opportunity cost of this new direction means credit unions missed out on the recent bump in U.S. vehicle sales and subsequently lost market share. Credit union auto market share fell to 17.6% of all cars financed in 2024. They were the lowest by far of any lender type.

Takeaway 5: Quarterly Share Growth Outpaces Quarterly Loan Growth

QUARTERLY LOAN GROWTH VS. QUARTERLY SHARE GROWTH
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• If quarterly share growth surpasses quarterly loan growth, it’s typically in the first quarter when members receive tax returns. However, share growth in the fourth quarter of 2024 was greater than loan growth — 1.42% versus 1.04%, respectively.
• Although slight, this is a positive development for credit union liquidity, which has been tight in recent quarters. It’s also a positive sign for members. Annual share growth that surpasses the national personal savings rate suggests credit union members are saving more than their non-credit union counterparts.

Let’s Review Your Year-End Performance Together. Join a Callahan consultant for a complimentary 1:1 session to analyze your performance reports. We’ll benchmark your credit union against two to three peer groups of your choice and provide a detailed report of our findings at the end of the session to help your team make informed strategic decisions. Request your free session today.

The post 5 Takeaways From Trendwatch 4Q 2024 appeared first on CreditUnions.com.

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 lending, asset quality, ALM, 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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Watch It On-Demand. Tune into Callahan’s Trendwatch 3Q24 webinar for an in-depth analysis of credit union performance trends from the second quarter. Learn about broader economic forces, explore key financial and operational metrics, hear best practices from credit union leaders, and more. Tune in today.

Takeaway 1: Asset Quality Continues To Worsen

ASSET QUALITY
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• Asset quality continued to decline, according to third quarter credit union data. 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%.

Takeaway 2: 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.

Let’s Review Your 3Q24 Performance Together. Join a Callahan consultant for a complimentary 1:1 session to analyze your performance reports. We’ll benchmark your credit union against two to three peer groups of your choice and provide a detailed report of our findings at the end of the session to help your team make informed strategic decisions. Request your free session today.

Takeaway 3: 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.

Takeaway 4: Capital And Net Worth Continue To Grow

NET WORTH AND OTHER CAPITAL
FOR U.S. CREDIT UNIONS
SOURCE: Callahan & Associates

• • 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.

Takeaway 5: 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.

The post 5 Takeaways From Trendwatch 3Q 2024 appeared first on CreditUnions.com.

Clearly something is driving this interest, but what is it? In fact, there are several “somethings.”

1. This is a grindingly competitive business.

This is a fact every credit card issuer knows and feels every day. Although this always has been the case — at least in the 30 years I’ve been living in it — being a successful issuer today requires never-ending technology investment, data analysis proficiency, product management expertise, marketing acumen, cardholder servicing excellence across multiple channels, and a willingness to meet consistent calls for financial and other resources.

The baseline requirements for success are as burdensome as we’ve ever seen. Being a credit card issuer is hard — and it’s getting harder.

2. Growing a program is more difficult than ever.

From 2007 through 2018, credit union card portfolios grew at a faster rate than bank portfolios in 12 of those 13 years. This is true even if we exclude Navy FCU. That kind of performance is pretty good and a fine reason to believe credit unions could compete effectively. However, in three of the past five years, banks grew faster than credit unions. That’s not great. What’s more, in 2023, fully 86% of credit unions underperformed market growth rates — i.e., they fell behind competitively. That’s the highest level since I started tracking this stat approximately 20 years ago.

3. Credit risk levels have moved in two unsettling directions at once.

Losses have been escalating for credit card issuers across credit unions and banks alike. Overall charge-off rates increased from 2.0% in 2022 to 3.5% in 2023 and now to 4.7% in the first half of 2024. But a perhaps even more trouble dynamic is the performance of banks versus credit union programs.

Prior to 2022, charge-off rates at credit unions had always been lower than at banks, sometimes by hundreds of basis points. This was a significant, and rare, competitive advantage for credit unions. But things changed in 2022: Charge-off rates at credit unions exceeded those at banks. This worsened in 2023 and is continuing even more starkly in 2024.

The credit union gross charge-off rate for credit cards reached 5.7% in the first quarter of 2024 (second quarter data is not yet reported at the time of publishing). For a segment that often mentally benchmarks credit card charge-off rates in the 2-3% range, this is a sea change that requires fundamentally rethinking basic assumptions around product design and pricing. It is also leading some credit unions to rethink how deeply into their member base they are willing to approve accounts.

4. Regulatory burdens are real.

The move to risk-based capital has placed credit card balances in the highest-burden category, where banks have long recorded credit card balances. When deciding on how best to use capital, credit unions must take this dynamic into account.

Then there is modelling CECL loan loss allowance requirements. This has been a significant change for many credit unions, particularly in a time of steeply increasing credit losses. But at least all issuers have to deal with those elements together, even if some of this is new to credit unions.

5. Credit unions are competitively disadvantaged.

The NCUA has mandated a rate cap of 18% on credit card interest rates, which applies to the approximately 60% of all credit union credit card balances owned by federal credit unions. In a market where consumers very much prefer reward value proposition over lower interest rates, even if it’s not a mathematically rational preference, this constraint deeply disadvantages federal credit unions looking to compete in the reward card space — which roughly rounds to “all of them.”

Big bank credit cards generally have rates that start at prime plus 10%, which is higher than 18% on even their lowest risk applicants and go up to nearly 30%. Leaving aside any ethical questions, these higher rates enable market level reward propositions and promotional incentives for those applicants who prefer them. Which brings us too …

6. Consumers expect a lot because they can get a lot.

Although big bank rates are higher, their reward propositions (2% of purchase volume is widely available); up-front incentives ($200 in reward value, more than 12 months at 0%); variety of bells and whistles; and strong digital application, issuance, and servicing platforms are compelling to the market. This is particularly true of younger consumers, a segment critical to any credit union looking ahead more than a few years. Couple this with deep marketing and analytic skills — which are pretty darn good at delivering product offers tailored specifically to the recipient’s interests — and it can be daunting for modestly sized issuers.

Does this mean all credit unions should sell their portfolio and opt for an ongoing agent issuing (i.e., white label) option? Of course not. Approximately 65% of credit unions report issuing their own credit cards; that increases to more than 90% for the larger credit unions. By contrast, only 16% of banks issuer their own credit cards.

Deciding whether to pursue the agent issuing option requires deep analysis, considering factors such as financial outcome (which can vary), risk-profile impacts, product set options, member impacts, and the implications for strategic goals and resource prioritization. Getting this analysis right is complicated and has many potential missteps if taken too casually (i.e., “Sure, I’d love to get a bid … here’s all my data.”); how to do this correctly is a conversation for another day.

Make no mistake, though, most prudent, thoughtful, focused, invested credit unions can maintain a successful and sufficiently profitable credit card program. But it doesn’t happen by accident, and it requires more than just being in the market. Hopefully, this list of challenges can serve as a platform to think through your program’s performance and set a plan to compete effectively with eyes wide open. If not, an agent program could be worth a look.

The post 6 Reasons Credit Unions Are Selling Their Credit Card Portfolios appeared first on CreditUnions.com.

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

Is Your CECL Strategy Fully Baked? 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.

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

The post CECL: A Half-Baked Cake appeared first on CreditUnions.com.

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
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• 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
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• 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
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• 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
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• 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
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• 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
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• 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
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• 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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