Credit risk, balance sheet management, and risk to earnings and net worth are among the top supervisory priorities for the federal credit union agency in the new year, it said in a letter to the institutions is supervises Tuesday.
The National Credit Union Administration (NCUA), in its first Letter to Credit Unions of the year (25-CU-01), said 2024 showed signs of financial stress on credit union balance sheets – although it maintained that credit unions, as a whole, remain stable and “relatively resilient against economic disruptions.”
“Aggregate loan performance began to deteriorate in 2022, and the trend has continued through 2024,” the agency wrote. “The overall loan delinquency rate is currently at its highest point since year-end 2013, while the rolling 12-month net charge-off rate is at its highest point since the second quarter of 2012. Additionally, the return on average assets continues to experience pressure from the interest rate environment and provision for loan and lease loss expense.”
On credit risk, the agency reported that loan growth slowed last year while overall delinquencies and charge-offs increased. “Most notably, the performance within credit card portfolios has deteriorated much more rapidly than other aspects of federally insured credit union loan portfolios,” the NCUA stated.
The NCUA said performance of loans for used vehicles, for example, materially deteriorated, with the delinquency rate and rolling 12-month net charge-off rates for the loans at their highest levels ever.
The agency said its examiners would prioritize in 2025 review of the sufficiency of loan underwriting standards, collection programs, allowance for credit losses reserves, charge-off practices, management and board reporting, and management of any concentrations of credit risk.
On balance sheet management and risk to earnings and net worth, the NCUA said the primary market risk element is interest rate risk. The agency said the rising interest rate environment over the past few years increased some credit unions’ cost of funds faster than the returns on loans and investments, which squeezed the net interest margin.
However, the agency also noted that interest rates have started a gradual decline – which can lead to prepayments on higher-yielding loans and investments, thus reducing interest income. “Any increase in operating expenses or further decline in loan performance could put earnings and net worth at risk,” the agency noted.
The NCUA said its examiners would “weigh the current and prospective sources of earnings and the composition of net worth” relative to a credit union’s approved plans and thresholds. “This approach will help examiners focus on trends in earnings and develop a better understanding of concentration risks for both earnings and net worth,” the NCUA wrote.
Other supervisory priorities for the new year identified by the agency included cybersecurity, consumer financial protection (including an eye on overdraft protection programs, fair lending and mortgage lending disclosures), lending to members of the military, and electronic payments.
Additionally, the agency said in 2025 it would:
- Update its exam flexibility initiative to provide an extended exam cycle for credit unions with more than $1 billion in assets where the agency rated the credit union a CAMELS composite 1 or 2 with no change in CEO since the last examination. It stated that those institutions would now be eligible for a 12- to 16-month exam cycle. Additionally, the extended exam cycle for eligible federal credit unions (FCUs) will be shortened from 14 to 20 months to 14 to 18 months.
- Continue conducting he defined scope Small Credit Union Exam Program in most FCUs with assets of $50 million or less, and risk-focused examination procedures for all other credit unions. Examiners will continue to perform examination and supervision activities onsite and offsite, as appropriate, the NCUA said.
Letter to Credit Unions 25-CU-01/NCUA’s 2025 Supervisory Priorities
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