Credit Union Earnings Fell to Record Low in 2023, Callahan Data Shows

A closer look at Callahan & Associates data showed that the fourth quarter of 2023 was one of the worst three months in years for credit union earnings and loan originations.

The credit union company based in Washington, D.C., reported Feb. 15 that credit unions’ return on average assets was 0.68% for the 12 months ending Dec. 31.

That was the lowest full-year ROA since it was 0.67% in 2011, two years after the end of the Great Recession. ROAs during the Great Recession were 0.63% in 2007 (the recession began late that year), -0.04% in 2008 (its worst year), 0.20% in 2009, when it officially ended, and 0.50% in 2010.

Excluding 2007 through 2011, ROAs ranged from 0.71% to 1.07% from 2000 through 2022.

But the full-year ROA Callahan presented during its quarterly Trendwatch webinar mixed three months of new data with nine months of history.

Subtracting NCUA results for January through September from Callahan’s numbers revealed net income for October through December was only about $2.6 billion, or 0.46% ROA — the lowest in at least six years.

Since the fourth quarter of 2017, the previous lowest ROA was 0.53% in the first quarter of 2020. COVID-19 was declared a pandemic on March 11, 2020, and credit unions responded to the threat by taking massive loan loss provisions.

Callahan blamed the adoption of CECL accounting standards for increasing provisions in 2023, which were a major factor in the lower returns.

Jay Johnson, Callahan’s chief collaboration officer, said the provisions have raised credit unions’ loan loss allowances to $1.53 for every dollar in delinquent loans.

“That’s very high historically,” Johnson said. “So credit unions are very well reserved for any potential losses.”

For the three months ending Dec. 31, provisions were an annualized 0.69% of average assets, setting another record. Provisions were a larger factor in earnings in 2023’s fourth quarter since at least 2019’s fourth quarter. The next highest level occurred with the massive provisions taken in the second quarter of 2020 which were 0.64% of average assets.

The Top 10 credit unions by assets had a fourth-quarter ROA of 0.47%, with provisions accounting for most of the drop. When using an alternative measure that replaces provisions with net charge-offs, the Top 10’s operating ROA was 0.78% for the fourth quarter.

Seeing the trend requires watching results in shorter increments. Not only did the fourth quarter set record lows, but it followed five quarters in a row of declining earnings.

Perhaps more alarming was the fourth quarter’s drop in originations to $125 billion, down from $160 billion a year earlier and $142 billion in the third quarter. Total originations have generally been falling from quarter to quarter since the second quarter of 2022.

Again, Callahan reported originations for the full 12 months, which it reported was about the same amount of money as 2019. Equally true was that the $501.1 billion originated in 2023 was twice as much as credit unions produced in 2008.

But when comparing values over more than a few years, the value needs to be adjusted to account for inflation and the overall growth of business.

Credit unions do this by weighting values against average assets.

The $501.1 billion originated for the full year of 2023 showed originations were 25% of average assets — the lowest ratio going back to 2000. The previous lows in this century were 28% for both 2010 and 2011. In the other 21 years, the ratio ranged from 32% to 44%. The 32% was in 2008 and 2009 —during the Great Recession — and 44% was in 2003 at the launch of the mortgage boom that preceded it.

CU Times has several questions about the health of credit unions ahead of the NCUA’s release of data files for all credit unions, which would typically be in early March. Those questions include:

• How broad-based are the fourth-quarter ills? CU Times has reported on an unusually large number of credit unions with losses exceeding $10 million for the quarter, but that was just from checking a sample of Call Reports.
• Were numbers dragged down by credit unions with certain business patterns? Those with high loan-to-value ratios? High dependence on indirect lending? Higher borrowing? Something else?
• Have layoffs expanded? There was a pickup in layoffs last year through September and some credit unions in the Top 10 reduced their employee counts from September to December. Did the trend continue or diminish in the fourth quarter?
• How much is auto lending a factor in falling originations? First mortgage originations should be bottoming out, but credit unions also started losing share last year in auto loans.