ALEXANDRIA, Va.–Despite the strong overall performance of credit unions as seen in NCUA’s first quarter data, the agency’s chairman sees potential red flags for CUs to watch in delinquencies and other areas, while adding NCUA has also increased its scrutiny of a number of large credit unions feeling particularly strong liquidity pressure.
As CUToday.info reported, lending was up nearly 20% at credit unions in Q1, with every asset category reporting loan growth, according to NCUA’s new Quarterly Credit Union Data Summary for Q1. CU membership, however, grew only at CUs of more than $1 billion in assets or more, with every other asset category showing declining membership.
Also during the first quarter, total assets rose by $93 billion (4.4%) to $2.21 trillion, while insured shares and deposits rose $39 billion (2.3%) to $1.73 trillion, from one year earlier, the agency said.
“All of this is good news,” said NCUA Chairman Todd Harper, who noted a shift can be seen in the composition of insured deposits, as represented by the 22% quarter over quarter increase in share certificates, which now stand at a total of $362 billion.
Digger Deeper
But by digging deeper into that data, Harper said what can also be found are “numerous warning signs that are flashing on the horizon.”
In particular, he pointed to larger balances in home equity lines of credit and higher delinquency rates. Many consumers have been tapping their growing home equity to either pay down bills or even pay everyday expenses.
“Mortgages secured within junior lien rose by more than 40% during the year ending with the first quarter and the overall delinquency rate rose by more than 10 basis points over the year to reach 53 basis points,” said Harper. “This may mean we have returned to a more difficult economic environment…and it may be an early signal of potential economic difficulties in the months ahead.”
An Atypical Q1
The data also show some members have drawn down most of their savings, although that could be due in part to those who paid off holiday bills during the first quarter, he added. But even that scenario is complicated, with Harper noting the typical pay down of card debt during the first quarter each year did not happen in 2023, and balances have remained high.
“These data points suggest credit union member household budgets are experiencing stress as they continue to manage higher interest rates and inflation,” Harper said.
The chairman called on credit unions to “remain visible and be prepared to work with their members to navigate through any economic challenges.”
In addition, he said credit unions should also prepare for increases in delinquencies and charge-offs in the months ahead, adding that credit unions overall are well-positioned to absorb the losses, with CUs’ overall capital ratio at 10.49%.
Other Issues Covered
During a call with the media, Harper, along with NCUA Chief Economist Andrew Leventis and Director of Examination and Insurance Kelly Lay, also addressed:
Liquidity
While nearly all credit unions have been feeling the squeeze on liquidity, there are “rising number” at which liquidity is particularly acute, according to the agency. Harper and Lay said the agency and its regional offices have been devoting additional resources to those CUs that have the “clearest issues on their balance sheets.”
Harper said it’s those CUs in the $1 billion in assets and above category that pose the greatest risk to the share insurance fund, and it is those within that peer group that are feeling liquidity pressures that are getting the agency’s attention.
“We saw with a number of credit unions over the last year that had an originate-to-sell model in which they were originating and then selling (loans) elsewhere within the system,” Harper said. “As interest rates rapidly rose, some credit unions that have that model held on to them too long. Some of those credit unions even doubled-down and continued to do that and that multiplied their problems.
“We're working with those credit unions. I would say we are seeing a steady rise in credit unions in (downgrading) components of the CAMELS rating,” he continued.
In response, Lay said the agency is providing increased supervision and examinations and spending more time on-site at those CUs. It has also transferred more credit unions to its Division of Special Actions.
Charge-Offs
While NCUA is eyeing the rising charge-offs, the overall industry delinquency ratio of 53 basis points is actually a reversion to the traditional industry mean average—for now.
“It is something we're watching very, very closely,” said Harper. “One thing that is very telling is we saw more than double the number of charge-offs year over year.”
Harper said other factors that make for a cloudier picture in measuring loan quality and the data include the transition to CECL.
“If we get closer to 1% delinquency range, that is where we will start having more concerns,” said Lay.
Commercial Loans
Banking industry analysts have been pointing to red flags in the commercial lending space, particularly with banks, as more companies abandon or scale back their office space needs and allow workers to continue working from home.
While NCUA joined with other federal banking regulators earlier this year in updating guidance related to commercial real estate, the picture for CUs is somewhat different, Harper reminded.
“Much of our commercial loans are in the one-to-four family homes, which behave differently than office buildings or strip malls,” said Harper. “It's an area we are watching, but we have not seen significant changes at this time to cause us concern.”
Membership Growth (And Lack Thereof)
The NCUA Q1 data also reveal credit unions in every asset size category below $1 billion saw negative membership growth in the first three months of this year.
“It is an indication of potential problems for a credit union,” said Harper. “We have found that over the long term (membership growth is) especially important, as the members coming in need to be those in their prime borrowing years. It is something we would generally talk with the credit union about, such as what are its plans to return that membership growth.”
Added Lay, “I agree wholeheartedly. We do see smaller credit unions sometimes with aging memberships that trend more toward savings, or smaller credit unions that aren’t as sophisticated and can’t offer the newer products and services.”
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