NEW YORK—Credit Union lending remains strong overall, especially with increased commercial lending, but there are factors that could create challenges moving forward, Forvis Mazars reports.
Key data trends affecting credit unions now and in the near term, according to Forvis Mazars:
- Annualized loan growth in the U.S. credit union system of 1.9% through the first quarter of 2025, led by loans and lines of credit (LOCs) for one- to four- family portfolios (first liens and junior liens)
- Credit unions with total assets below $10 billion loan portfolios continue to mostly consist of one- to four- family loans (first liens and junior liens). Commercial loans, secured by real estate and by non-real estate, have increased by $33 billion from year-end 2022 to the first quarter of 2025
- A dramatic rise in loan yields and funding costs
- Asset quality metrics remain steady, although some weaknesses can be seen
Recent interest rate cuts and a return to a positively sloped yield curve have led to an improved environment for credit union net interest margins. The cost of funding, while high, has decreased from its peak and may continue to decline further throughout 2025, stated the international audit, accounting and consulting business, which added the company’s study data is drawn from NCUA Call Reports.
“The speed of the decline will depend on how quickly credit unions can decrease their rates and the time it takes for CD specials to mature. The Fed cuts had an immediate effect on loans indexed to Prime; loan pools such as commercial and industrial (C&I) lines of credit saw a 100-basis point decrease in yield,” the company explained.
New, longer-term CRE loans should maintain rates well above 7% as their rates are determined by the long end of the U.S. Treasury curve, Forvis Mazars noted.
“In this dynamic rate environment, it is crucial to understand the value of the complete member relationship and how to help mitigate and monitor risks,” asserted Forvis Mazars. “New commercial loan rates should only be quoted after factoring in the profitability of the members’ existing loans and deposits.”
“Management should consider member cost of funds in their analysis of loan pricing, including comparing members with high-cost deposits to borrowers who have low- or no-cost deposits. A disciplined loan pricing model will indicate how competitive each new loan request is,” Forvis Mazars explained.
Monitoring local and national economic factors related to occupancy, rental rates, and project absorption can help mitigate potential risks for these projects and reduce asset quality issues, Forvis Mazars said.
“There is a gradual deterioration in asset quality metrics, evidenced by increasing early-stage delinquencies and nonaccrual loans specifically related to the consumer portfolio. Delinquencies and nonperforming loans remain elevated, requiring close monitoring by credit unions,” Forvis Mazars said. “In addition, the growth in commercial lending increases risks and requires more robust monitoring. Early risk detection and continued portfolio monitoring are crucial components of risk management. Proactive management of delinquencies and nonperforming loans is essential to maintaining financial stability, alongside closely monitoring local and national economic factors related to unemployment, inflation, occupancy, and rental rates,” the company said.
The Details
As of March 31, 2025, there were $1.668 trillion in loans outstanding at a total of 4,500 credit unions. This was an increase of $7.9 billion from year-end 2024 and $50.2 billion from the end of 2023.
Among credit unions with assets less than $10 billion, loans outstanding grew by $5.0 billion, or 0.41% in the first quarter of 2025. The loans and LOCs secured by one- to four-family portfolios (first and junior liens) grew by $5.2 billion, or 0.96%. Commercial loans secured by real estate grew by $3.6 billion, or 2.7%. Alternatively, new and used vehicle loans decreased by $0.8 billion, or 0.2%, the report states.
“Given the growth trends for credit unions under $10 billion, the portfolio mix has shifted over the last few years. Total one-to-four real estate (RE) loans now make up 44.4% of total loans, up from 41.8% at year-end (YE) 2022. Also, commercial real estate (CRE) loans now make up 11.3% of total loans, up from 10.4% at YE 2022. At the same time, vehicle loans have decreased to 30.9% of total loans, down from 34.6% at YE 2022. Credit card loans remained unchanged at 3.2% of total loans, and other secured non-RE loans decreased to 4.5% (as of March 31, 2025) from 5.0% at YE 2022,” Forvis Mazars said.
Loan Yields vs. Funding Costs
Since the Federal Reserve’s Federal Open Market Committee began raising the federal funds rate in early 2022, credit unions with total assets less than $10 billion saw a dramatic rise in both loan yields and funding costs. Loan yields continued to increase in the first quarter of 2025, while the cost of funding decreased for the first time since 2021. The fed funds rate matched its lowest point in history from March 2020 to March 2022; since that time, loan yields have increased 151 basis points from 4.30% to 5.81% in the first quarter of 2025. This increase has been tempered by a rapid decline in loan prepayments and slower loan growth, the report states.
“The cost of funding for credit unions under $10 billion tends to lag the changes to loan yields during times of both rate increases and decreases,” Forvis Mazars said. “The cost of funding bottomed out at the end of 2021 at 0.45% and increased to 2.07%, or 162 basis points, as of the end of 2024. In the first quarter of 2025, the cost of funding decreased nine basis points to 1.98%.”
The loan yield/cost of funds spread decreased from a peak of 3.88% at the end of 2021 to 3.50% at the end of the first quarter of 2024. In the last four quarters, the spread has increased and now sits at 3.83% as of the end of the first quarter of 2025. This increase was due to the cost of funds plateauing while loan yields continue to increase as maturities are replaced with new loans at much higher rates, Forvis Mazars explained.
“Asset quality metrics remain steady, although some weaknesses can be seen. For credit unions with total assets below $10 billion, loans 60+ days delinquent to total loans increased from 0.51% at year-end 2022 to 0.68% through the first quarter of 2025,” the report states. “In addition, net charge-offs to average loans have increased from 0.24% at year-end 2022 to 0.62% through the first quarter of 2025. During the same period, provision expense to average assets increased by 26 basis points to 0.44% of average assets, while the allowance for credit losses to loans increased by 38 basis points to 1.04%. The increase in allowance for credit losses includes the noted rise in charge-offs as well as the new CECL accounting standard for financial institutions, which introduced a more forward-looking and lifetime of losses approach to estimate the reserve.”
Although delinquency remains moderate, the increase in charge-offs indicates underlying weaknesses in portfolios. The lower levels of charge-offs in 2022 are likely due to pandemic circumstances and are beginning to return to normal levels.
Loan Portfolio Composition
“In addition to asset quality, changes within the composition of loan portfolios are important to monitor as higher-risk portfolios such as CRE loans can increase the potential for delinquency or problem loans,” Forvis Mazars said. “While credit cards and auto loans are typically drivers for delinquency, it is also important to monitor commercial real estate loans.”
Concentrations within CRE loans can lead to over-concentration in certain industries, geographic regions, or borrower types, reducing diversification and increasing exposure to sector-specific downturns, Forvis Mazars explained.
“With credit unions traditionally focusing on consumer lending, a shift into commercial lending may stretch underwriting and risk management capabilities, potentially leading to weaker loan quality,” the company noted.
For credit unions with total assets below $10 billion, commercial loans and lines of credit have increased by $33 billion from year-end 2022 through the first quarter of 2025, now representing 12.2% of total loans.