US credit unions are grappling with a rapidly rising level of problem loans, in a similar fashion to their banking brethren.

In contrast to banks, however, the credit union industry reported slower loan growth in the fourth quarter of 2023, according to S&P Global Market Intelligence data.

Credit quality trends

The net charge-off (NCO) ratio for credit unions was 0.77% in the fourth quarter of 2023, 16 basis points higher sequentially and representing the peak since the first quarter of 2012. The majority of the $670.9 million quarterly jump in NCOs was from used vehicles and unsecured credit cards. NCOs for used vehicles were up 36.1%, or $219.4 million. Unsecured credit card NCOs increased 30.5%, or $222.7 million.

Among the 20 largest credit unions by total assets at year-end 2023, Tysons, Va.-based Pentagon FCU had the highest ratio of NCOs to average loans of 3.19%, as well as the highest quarter-over-quarter increase of 72 basis points. The used vehicle segment fueled the increase.

Even with escalating NCOs, credit unions reported a spike in loans that are delinquent for at least 60 days. The delinquent loan ratio was 0.83%, as of Dec. 31, 2023, up 11 basis points from the previous quarter and representing a tie for the highest ratio in the last nine years. Used vehicle loans comprised 27.2% of total delinquent loans and were responsible for 23.4% of the quarterly increase.

In the top-20 group, Raleigh, NC-based State Employees CU had the highest delinquency ratio at 2.25%. North Liberty, Iowa-based GreenState CU experienced the most dramatic increase, at 55 basis points.

Another metric to monitor is loans that are delinquent for one to two months, which is not part of the delinquency ratio calculation. That balance ramped up 42.8% quarter over quarter to $17.63 billion at the end of 2023. Used vehicle loans represented about one-third of those earliest-stage delinquencies.

Balance sheet changes

Total loans and leases across the industry rose just 0.8% from Sept. 30, 2023, which was the most diminutive growth rate since the first quarter of 2021. Used vehicle loans declined 0.5%, ending a streak of 50 consecutive quarterly increases. Credit unions also cut their balances of new vehicle loans by 0.7%, discontinuing a 10-quarter upward trend. Areas of growth included junior-lien one- to four-family, member business and credit card.

A handful of the largest credit unions, led by Tukwila, Wash.-based Boeing Employees' CU, attained more than 2% loan growth. Boeing trimmed its used vehicle lending portfolio while adding to its book of one- to four-family real estate loans.

On the other hand, loans at GreenState were down 3.3% quarter over quarter. The credit union slashed its balances for used vehicle loans and new vehicle loans 14.3% and 10.2%, respectively.

Following two quarters of contraction, credit union total shares and deposits were up 0.3% in the fourth quarter of 2023. The growth was from share certificates with a maturity of less than one year going up 15.4% to $385.11 billion.

Despite reporting 3.6% deposit growth, GreenState and San Jose, Calif.-based First Technology FCU still have relatively high ratios of loans to deposits: 105% for the former and 98% for the latter. The industry aggregate was 85% at Dec. 31, 2023.

San Diego County CU was at the other end of the spectrum. The San Diego-based institution decreased its deposits by 3.3% quarter over quarter, but its loans-to-deposits ratio of 72% was the lowest among the 20 largest credit unions.

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