Delinquent loan, net charge-off ratios surge to 5-year highs at credit unions

Credit quality continued deteriorating at US credit unions in the third quarter, with delinquent loan and net charge-off ratios reaching cyclical highs, according to S&P Global Market Intelligence data.

Like their banking counterparts, credit unions recorded sequential loan growth along with deposit contraction.

Credit quality trends

In the third quarter, the industry aggregate for annualized net charge-offs (NCOs) as a percentage of average loans was 0.61%, up 7 basis points on a linked-quarter basis and to the highest point since a marginally higher 0.61% in the second quarter of 2018. The 15-year high is 1.32% in the fourth quarter of 2009. The bulk of the increase in NCOs for the most recent quarter was in non-credit card unsecured loans and used vehicle loans.

Delinquencies greater than or equal to 60 days as a percentage of total loans rose to 0.72% at Sept. 30 from 0.63% at June 30. The majority of the increase in 60-plus day delinquencies was from the 90- to 179-days bucket. The delinquency ratio, which has been under 1% since 2014, is at its highest level since 0.81% at the end of 2017.

Looking ahead, the delinquency ratio could be up again at the end of 2023 based on the earliest-stage delinquencies that are not part of the calculation. Loans that are delinquent for one to two months increased 15.2% quarter over quarter to $12.34 billion.

Among the 20 largest credit unions by total assets at Sept. 30, Tysons, Va.-based Pentagon FCU had the highest NCO ratio and the second-highest delinquency ratio. The NCO ratio vaulted 96 basis points from the second quarter to 2.47%. The company's delinquency ratio fell 9 basis points to 1.52%.

All 20 credit unions reported a higher NCO ratio and/or a higher delinquency ratio. Only four institutions — Vienna, Va.-based Navy FCU, far and away the largest credit union; Raleigh, NC-based State Employees CU; Jacksonville, Fla.-based VyStar CU; and North Liberty, Iowa-based GreenState CU — improved their NCO ratio. And just three credit unions — Pentagon FCU; Bethpage, NY-based Bethpage FCU; and Anchorage, Alaska-based Global FCU — had lower delinquent loans/total loans ratios.

Balance sheet changes

Although down from the torrid pace set in 2022, growth in loans and leases remains strong at credit unions. The industry is averaging 1.8% quarterly growth in 2023 versus the prior year's 4.7%. In the third quarter, one-to four-family loans, both first-lien and junior lien, were responsible for the majority of the increase.

Both San Antonio-based Security Service FCU and Navy FCU expanded their lending portfolios by more than 4% during the third quarter.

Navy FCU is causing a disproportionate impact on the industry aggregate. With just 7.6% of total credit union loans and leases at Sept. 30, it accounted for 19.7% of the industry's growth. The institution's $5.57 billion increase in the third quarter alone exceeded the total lending balance of all but 42 credit unions.

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Total shares and deposits for the industry, on the other hand, inched down 0.1% from June 30, representing the third decline in the last four quarters. Money market deposit accounts were $343.14 billion, down 3.2% quarter over quarter and 18.0% year over year.

San Jose, Calif.-based First Technology FCU bucked the industry trend, growing its shares and deposits 6.0% quarter over quarter. Higher balances of share certificates and non-member deposits fueled the increase.