ALEXANDRIA, Va.–While the topline numbers at the end of Q3 may look good for credit union performance, NCUA’s top officials are flagging concerns over the sharp increase in delinquencies in some categories, while also noting large and growing share of CU assets “now reside in institutions with potential safety and soundness issues” as declines take place in CAMELS codes.
As CUToday.info reported here, new data for CU performance through Sept. 30 show total loans outstanding in federally insured credit unions increased $132 billion, or 9.1% , over the year ending in the third quarter of 2023, to $1.59 trillion. Total assets rose by $79 billion, or 3.7%, to $2.23 trillion during the same period, while insured shares and deposits increased $23 billion, or 1.4% , to $1.72 trillion, from one year earlier.
But the new NCUA data for Q3 also shows the industry delinquency rate for Q3 was 72 basis points, up 19 basis points from one year earlier.
During a media call, NCUA Chairman Todd Harper cited the positive growth numbers, but also emphasized the particularly sharp increases in delinquencies in credit card and auto loan portfolios at credit unions.
‘Worrying Trend’
“While there is cautiously good news in the third quarter data, there has been worrying trend in the last few quarters, as well,” said NCUA Chairman Todd Harper. “Those trends point to growing signs of financial strain on credit union balance sheets and household budgets. (When releasing the) first and second quarter data results I had expressed concern about rising delinquencies and charge-offs. The pre-existing patterns in those two economic indicators carried into the third quarter.”
Specifically, Harper pointed to the nine-basis-point increase in delinquencies in just the last quarter, which he said is “well above anticipated quarterly changes and represents nearly half of the 19 basis point annual increase.”
48% Increase
He noted the amount of delinquent loans reported by federally insured credit unions has grown 48% from $7.7 billion a year ago to $11.4 billion as of the end of the third quarter.
While real estate delinquencies have also returned to historic averages and stood at 49 basis points, there are two delinquency metrics he said “need to be watched closely.”
“The credit card delinquency rate rose to 190 basis points from 130 basis points one year earlier,” said Harper. “That's an increase of 60 basis points for the year, including a 36-basis-point rise in the last quarter, which is well above historic averages. “The auto loan delinquency rate also increased by 25 basis points over the year to stand at 78 basis points overall. As a result, auto loan delinquencies have also been above recent averages.”
Harper said the delinquencies in auto loans are being led by loans for new automobiles, although both new and used have jumped.
Noting delinquencies typically lead to increased charge-offs, Harper said the Q3 data show that was exactly the case, with charge-offs for all federally insured credit unions at 56 basis points as of Sept. 30, up 25 basis points compared with the third quarter of 2022.
“In all, net charge-offs within the system have more than doubled during the last year, rising from $4.1 billion one year ago to $8.6 billion as of September 30,” Harper said, adding that in response total CU provisions increased by $5.5 billion, or125.5%, to $9.9 billion.
Decline in CAMELS Codes
As NCUA has also been noting following releases of earlier quarterly data and during its board meetings, there has been a steady decline in the quality of balance sheets, as reflected in the rising number of CAMELS Codes 3, 4 and 5 credit unions.
Harper particularly pointed to the increase of CAMELS Code 3 ratings among complex credit unions with more than $500 million in assets.
“In fact, the number of large complex credit unions with composite CAMELS Code 3 ratings increased by nine credit unions to a total of 51 credit unions in the third quarter of 2023,” said Harper. “Assets in the CAMELS Code 3 group for credit unions of all sizes also increased to $131.7 billion, a nearly 45% jump from the previous quarter’s results. We have also seen credit unions fall into composite CAMELS codes four and five during the second and third quarters. This means a large and growing share of the credit union system’s assets now reside in institutions with potential safety and soundness (issues) that require immediate attention and remediation.”
‘Cannot Emphasize This Enough’
Those factors, along with economic forecasts for 2024 are the reason NCUA has looked to grow the NCUSIF’s liquidity position to $4 billion, he said. It hit that mark in September.
“I cannot emphasize this enough,” Harper said. “Credit union executives, supervisors and boards of directors must remain diligent in managing the potential risk on their balance sheets. (The) credit union balance sheet requires active, not passive, management by all.”
In response to a question from CUToday.info, Harper said NCUA has increased its supervision and oversight of credit unions that are falling into CAMELS codes ratings of 3, 4 and 5.
“We want to make sure that these credit unions don't turn into fours and fives, and instead return to twos,” Harper said.
According to NCUA, the delinquencies being reported on both auto loans and credit cards are higher than what was seen prior to the pandemic.
“The 36% basis point gain in the credit card delinquency rate was the largest that we've seen in at least two decades,” said Harper. “The increase in auto delinquencies is about double of what we would typically see in a typical quarter. So, those are matters that were watching quite closely.”
Rachel Cononi, deputy chief economist with NCUA, noted the delinquency increases being seen among credit unions are trending with those at other financial institutions, and she expects credit unions will be posting higher loan losses overall.
Small CUs Lead Way (But There’s an *)
Meanwhile, in what NCUA described as a “break with long-running trends,” credit unions with less than $10 million in assets reported the strongest growth in loans and net worth over the year ending in the third quarter of 2023, outpacing larger CUs.
But that performance deserves some context, said NCUA’s director of Examination and Insurance, Kelly Lay.
“Part of that is loan growth at the largest credit unions over the last few years has been tremendously high and as they've started to see liquidity pressures, they've begun to pull back on some of their lending,” Lay said. “That doesn't mean they stopped lending by any means. They still have healthy increases in lending. The smaller credit unions have been much slower and have much more capacity. In fact, their loan-to-share ratios are much lower and some of what we’re seeing is they're catching up to the median.”
Harper also noted that many MDI credit unions, which are also smaller in assets, have also been performing strongly.
Liquidity Pressures
Lay acknowledged CUs of all sizes across the country are feeling pressures related to liquidity and interest rate risk management, and that while a decline in interest rates might relieve some of that pressure, timing is going to be key.
“One of the things we've taken a look at is interest margin, which is relatively healthy right now,” Lay said. “It looks like credit unions are resilient and are repricing their loans accordingly. But what we don't know yet is the timing on how much they'll have to reprice their shares. They'll have to continue to reprice those shares and those loans that have already been repriced. We might see some more squeezes. Even though interest rates may fall I think we're still going to see the fallout of what's happened over the past couple of years play out.”
Growth in Certificates
Harper pointed to the “tremendous growth” in certificates, which were up 70% year over year in the new data.
“We’ve not seen any signs of that growth abating,” he said. “That's going to create, long term, potentially costs on the credit union balance sheet, especially if those time deposits are in the area of two, three, four and five years.”