System Signals — Q1 2025

FINASENSE Research · June 14, 2025

Data: Q1 2025 Fed Funds: 4.33% · 10Y: 4.23% · 2Y: 3.89%

Seasonal cover for a structural drift: The seasonal Q1 pattern delivered its usual gifts — tax-refund curing pulled the 60+ day delinquency ratio down to 0.80%, and a deposit surge lifted liquidity to its healthiest level in three quarters. The underlying dynamics are less reassuring. NIM expanded for the fifth straight quarter, yet ROAA barely moved as soft fee income and higher operating costs absorbed the gain. And the year-over-year delinquency floor is no longer falling — the seasonal dip is doing the work, not genuine improvement.

Signal 1: Seasonal Curing Masks a Floor That Stopped Falling

The 60+ day delinquency ratio dropped to 0.80% from Q4 2024's 0.97% — an 18 bps improvement that looks dramatic but follows the predictable Q1 seasonal pattern. Tax-refund season temporarily cures early-stage delinquencies, particularly in consumer lending.

The Q1 dip is mechanical: IRS refunds arrive in February and March, borrowers catch up on missed payments, and 30–60 day balances cure before migrating to 60+. This happens every year. The signal is in the year-over-year comparison: Q1 2025's 0.80% is 2 bps above Q1 2024's 0.78% — the seasonal trough has stopped falling, even if it is not yet ratcheting sharply higher.

If the seasonal dip is mistaken for stabilization, boards may defer provisioning decisions. The cleaner read than the eye-catching quarterly drop is that flat-to-higher year-over-year floor: the underlying credit trend is no longer improving, and the largest credit unions continue to carry the heaviest delinquency — the over-$10B cohort sits at 1.13%, well above the 0.80% system figure.

What to watch

Pressure: Q2 delinquency rebound — if it exceeds Q2 2024's level, the floor is ratcheting, not just holding
Watch: Late-stage aging — the share of delinquency in the 360+ day bucket; the back end of the pipeline is the leading indicator
Watch: Used vehicle values — collateral for the most stressed segment; further depreciation widens the negative-equity trap

Signal 2: NIM Recovery Continues, But ROAA Stalls

NIM expanded to 3.24% (annualized), up 24 bps year-over-year and extending the recovery off the 2023 trough. ROAA (annualized) came in at 0.67%, essentially flat against a year ago — but not because of credit costs.

Net interest income rose 11% year-over-year as asset yields repriced higher while the most expensive deposit vintages rolled off. What kept ROAA flat was the rest of the income statement: fee and other non-interest income fell about 7% year-over-year while operating expense rose 6%, and between them they absorbed the margin gain. Provision expense was a minor factor this quarter, up less than 4%.

The earnings recovery is real but narrow — it is riding the margin alone, with fee income and cost growth pulling the other way. A flat ROAA on a rising margin is a quality flag, just not the credit-cost one boards might assume.

What to watch

Watch: Fee income & operating leverage — non-interest income is shrinking while costs rise; until that turns, margin gains keep leaking out before they reach ROAA
Favorable: Q1 annualization noise — the Q1 figure is a single quarter multiplied by 4, which amplifies one-quarter moves; confirm the trend in Q2 before drawing conclusions

Signal 3: Deposits Surge, But the Funding Mix Is Shifting

Shares and deposits grew 3.5% QoQ — the strongest quarterly growth in over a year. Borrowings declined to $87.4 billion from $96.5 billion.

Seasonal Q1 deposit inflows (tax refunds, bonus payments) combined with continued share-certificate appetite. The wholesale deleveraging that began in mid-2024 continued — borrowings are down 34% year-over-year — as institutions used deposit inflows to pay down FHLB advances.

The funding picture improved, but the improvement is seasonal. Q2 typically sees deposit growth slow or stall. The structural question is whether the system can fund continued loan growth from retail deposits alone, or whether borrowings will need to increase again.

What to watch

Watch: Q2 deposit growth — if it falls below 0.5%, the funding gap reopens
Watch: Certificate competition — share-certificate rates vs. regular-share rates; the cost driver for funding expense
Pressure: Borrowings reversal — any uptick in wholesale funding would signal the deleveraging cycle is over

This report is provided for informational and educational purposes only and does not constitute investment, legal, regulatory, or examination advice, nor should it be relied upon as the basis for any decision.

FINASENSE is not affiliated with the National Credit Union Administration (NCUA). Financial data is sourced from NCUA 5300 Call Report filings as submitted by individual credit unions and is not guaranteed as to accuracy or completeness. Ratio definitions and account classifications reference the NCUA Financial Performance Report (FPR) Chart of Accounts. All aggregation, analysis, and derived metrics are independently computed by FINASENSE and may differ from NCUA-published figures. Interpretations reflect the views of FINASENSE and not those of the NCUA.

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