Callahan Senior Analyst William Hunt said credit unions' second-quarter performance was healthy.

"We're doing well on the earning side, we're investing in operations and we're saving to cover some delinquencies in the future," Hunt said. "It is a good position to be in. Things are still healthy, things are still stable and there is still flexibility to do more for our members."

William Hunt

However, second-quarter originations were $149 billion, down 33% from a year earlier and up 10% from the first quarter.

Real estate originations usually rise in the spring from the winter's lull. This year they did not. They were $48 billion in the second quarter, down 45% from a year earlier and down 1% from the first quarter.

Non-real estate originations, dominated by auto loans and other consumer credit, were $101 billion, down 24% from a year earlier and up 16% from the first quarter.

One Callahan chart compared the $149 billion in second-quarter originations to the $137 billion in 2019's second quarter to show the "return to normalization." However, the 2019 originations represented 8.9% of assets, compared with 6.6% for this year's second quarter. To reach the same proportion of assets as 2019, this year's originations needed to be about $200 billion.

Average assets grew 3.5% from June 2022 to June 2023, and 1% from the first quarter to the second quarter. Income items that grew at a greater rate and expense items that grew at a slower rate helped improve the quarter's ROA:

• Net interest income grew 36% to $38.7 billion.
• Investment income more than doubled to $8 billion.
• Fee income grew 1.1% to $4.8 billion.
• Non-fee operating income grew 0.7% to $7 billion.
• Provisions for loan losses were $2.5 billion in the second quarter, up from $1.0 billion a year earlier and up 14% from $2.2 billion in the first quarter.

Hunt said the drop in ROA was influenced by higher loan loss provisions. But, again, he said the rise is bringing them back into more normal levels. The $2.5 billion in provisions in this year's second quarter is about the same as the $1.6 billion in 2019's second quarter after weighting for assets.

Credit unions ratcheted up provisions steeply when the pandemic began, but began cutting as steeply by the fourth quarter of 2020, when they realized they had over-reacted. They even went slightly below zero in 2021's second quarter, and have been rising steadily since then.

Savings were $1.91 trillion in June, up only 1.4% from a year earlier and down slightly from March.

Hunt said the annual savings growth was the slowest since at least 2000. But this year's slow growth followed a fast buildup in savings during the pandemic.

"People are still spending, people are still traveling and going out to eat and catching up from missed time back in those years," Hunt said. "We also have the impacts of inflation. It's been driving up the cost of living."

But Hunt said the U.S. savings rate has increased because inflation is slowing and wages are rising.

"There's a little bit of a lag usually before that starts to show up on savings balances, but we're looking at hopefully seeing some more savings come in soon," he said.

And loan balances are still rising even with the diminished in-flow of originations because members are taking their time and paying closer to the minimum, instead of tacking on extra payments on loans to hasten payoffs.

That, in turn, has allowed net interest income to rise. While the cost of funds has risen as credit unions ramped up certificate-of-deposit promotions to keep and attract savings, the payout on loans widened at a greater scale. As a result, the net interest margin was 3.03% in June, its highest level since December 2019.

Liquidity continued to be tight. The loan-to-share ratio was 83.1% on June 30, up from previous quarters over the past 12 months, but in line with pre-pandemic levels.

Moreover, Hunt said credit union leaders are less concerned about the tightness of liquidity.

"Three months ago liquidity was a much bigger concern than people are feeling today," Hunt said. "There's a general feeling that we're past the worst part of it, and things are starting to smooth out and be easier."

Hunt said sales of mortgages have generally been falling with originations, but in the second quarter they rose slightly. "A piece of this is credit unions selling a little bit of their mortgages, freeing up a little bit more liquidity," he said.

Loan quality continued to worsen in the second quarter from the abnormal levels prevailing during the pandemic.

But Callahan SVP Katy Slater said delinquencies is another measure that is "returning to more normal levels."

The 60-day-plus delinquency rate was 0.63% June 30, compared with 0.67% in June 2018. The net charge-off rate held steady at 0.53%, which is still lower than the 0.60% level in June 2018.

Slater said credit unions should remember that delinquencies should not just be thought of in terms of upper limits, especially among credit unions well reserved for potential losses.

Katy Slater

"Switching it around and saying you want delinquency 'no less than' is a way to make sure that you're lending deep enough into your membership base," Slater said.

"The industry remains incredibly well covered," she said. "Credit unions have nearly twice as much saved to cover potential losses as they have in delinquent loan balances."