System Signals — Q4 2025
System Signals — Q4 2025
Signal 1: The 1% Threshold Has Been Crossed
The system-wide 60+ day delinquency ratio reached 1.02%, up 8 bps from Q3's 0.94% and crossing the 1.00% mark for the first time in the dataset. This is the third consecutive quarterly increase. The over-$10B cohort is carrying a 1.49% rate — 46 bps above the system average and the widest spread recorded. (The Ledger — Asset Quality )
The deterioration is structural, not seasonal. The year-over-year trajectory confirms it: Q4 2025's 1.02% compares to 0.97% in Q4 2024 and 0.83% in Q4 2023. The seasonal sawtooth pattern — Q1 dips on tax-refund curing, Q4 peaks — remains visible, but the peaks are ratcheting higher each year.
The over-$10B cohort's outsized delinquency reflects its concentration in consumer lending — particularly indirect auto and credit card portfolios where delinquency migration has been most pronounced. Used vehicle loans with terms of 72–84 months, originated at elevated rates, are experiencing rapid asset depreciation that pushes borrowers into negative equity. When collateral value drops below loan balance, there is no refinancing path and no workout — the loan ages in place until it charges off.
Crossing 1% will draw outsized attention — it is a round number, not a risk threshold, but boards and examiners anchor to it. The more important signal is the aging composition. Net charge-offs came in at 77 bps for the full year, essentially unchanged from 2024's 79 bps. That means delinquent loans are not converting to realized losses at the expected rate — they're accumulating in late-stage buckets. This growing backlog represents future charge-offs that have not yet hit the income statement.
The provision lag — the gap between rising delinquency and the provision expense needed to fund adequate reserves — is the mechanism by which this credit deterioration eventually reaches earnings. (Under the Surface — The Provision Lag)
Delinquent loans are accumulating in late-stage buckets rather than resolving — a growing backlog of future charge-offs that have not yet hit the income statement.
What to watch
- Pressure: Q1 2026 seasonal test — Q1 always dips on tax-refund curing. If the Q1 2026 floor exceeds Q1 2025's 0.79%, the structural ratchet is confirmed
- Pressure: ACL coverage ratio — ACL / delinquent loans 60+. If this ratio is declining while delinquency rises, reserves are falling behind the pipeline
- Watch: Used vehicle values — Manheim index; further depreciation widens the negative equity trap and extends the aging cycle
Signal 2: NIM Expansion Has Stalled
Full-year NIM reached 3.34%, up just 1 bps from Q3's 3.33%. Technically the eighth consecutive quarterly increase, but the trajectory tells the real story: the margin gained 15 bps in Q1, 4 bps in Q2, 5 bps in Q3, and 1 bps in Q4. The expansion is decelerating to zero. (The Ledger — Earnings )
The asset yield repricing cycle is effectively complete. New loan originations are pricing at or near the existing portfolio average — meaning each new loan no longer pulls the average yield higher. Meanwhile, deposit costs continue their slow grind upward as share certificates originated at lower rates mature and renew at current market rates. The gap that drove the recovery — assets repricing up faster than liabilities — has effectively closed.
The deceleration pattern was visible as early as Q2 (when we flagged it as a signal to watch). The question then was whether NIM would plateau or compress. The Q4 data answers: it's plateauing. Whether it tips into compression in 2026 depends on the Fed path and competitive deposit pricing.
NIM at 3.34% is healthy by historical standards — the problem is not the level but the loss of momentum. The 2025 earnings recovery was powered by a widening spread: NIM expanded 25 bps from Q4 2024 to Q4 2025, driving a 30% increase in net income ($18.9B vs. $14.5B). That tailwind is now exhausted.
With NIM flat, earnings growth can only come from two sources: loan volume (which grew 1.97% QoQ — strong, but the credit quality of that growth matters) or expense discipline. Neither is a reliable substitute for a widening margin. The earnings trajectory in 2026 will be determined by whether provision expense — which has been rising — consumes the remaining margin advantage.
NIM expanded 25 bps over the course of 2025, driving a 30% increase in net income. That tailwind is now exhausted — and the next move is flat or down.
What to watch
- Watch: Q1 2026 NIM — a negative reading would confirm the expansion is over and compression has begun
- Pressure: Provision-to-NII ratio — if provision expense growth outpaces net interest income growth, ROAA declines regardless of NIM direction
- Watch: Deposit cost trajectory — the lagging indicator. Certificate repricing will continue through 2026 even if the Fed cuts further
Signal 3: Earnings Held Up — The Credit Bill Is Deferred, Not Paid
Full-year ROAA came in at 0.78% — up roughly 10 basis points year-over-year, a second straight year of recovery. The widely-cited "dip" is a comparison artifact: the full-year figure sits 2 bps below Q3's nine-month annualized 0.80%, but those are different bases — a full year against an annualized partial year — not a real decline. Measured like-for-like against 2024, profitability rose. (The Ledger — Earnings )
Crucially, the gain was not borrowed from reserves. Provision expense was essentially flat for the year (up about 1%), and as a share of net interest income it fell — so the margin recovery, not under-provisioning, is what lifted earnings. ROAA measures what's left after provisioning, and in 2025 there was more left, not less.
The net worth ratio reached 10.36% in Q4 — the highest in the dataset and about 70 bps above year-ago levels — capital built by genuine retained earnings, comfortably 336 bps above the 7.00% well-capitalized mark.
The catch is timing, not the current numbers. Charge-offs stayed flat near 0.77% while delinquency crossed 1% (Signal 1); when that pipeline converts, provisioning rises and ROAA gives back part of this year's gain. That is a 2026 risk, not a 2025 reality — the subject of Under the Surface — The Provision Lag.
The 2025 earnings gain was not borrowed from reserves — provisioning stayed flat while the margin did the work. The credit bill is deferred to 2026, not paid in 2025.
What to watch
- Pressure: ROAA trajectory — a reading below 70 bps in Q1 2026 would signal that the flywheel is losing momentum; below 60 bps would signal earnings stress
- Watch: Net worth ratio direction — flat is manageable; a decline would be a regime change not seen since the 2023 deposit surge diluted capital
- Watch: Provision catch-up risk — if ACL coverage ratios are declining, the eventual catch-up will come as a sudden earnings hit rather than a gradual adjustment
How These Signals Connect
The three signals are not independent — they are the same story told through different parts of the income statement:
- Credit deterioration is structural and accelerating (Signal 1). The 1% breach is the headline, but the aging composition is the leading indicator — future charge-offs are accumulating in the pipeline.
- The margin tailwind that masked the credit costs for six quarters has stalled (Signal 2). NIM at 3.34% is healthy, but the expansion is over. There is no more room to grow into.
- The collision has not yet reached ROAA (Signal 3). Provisioning has tracked realized losses, which are still low, so full-year earnings rose. The catch-up is deferred — it arrives when the aged delinquencies convert, not before.
Two outcomes frame 2026. In the benign case, NIM holds above 3.30%, charge-offs peak by mid-year, and ROAA settles in the mid-60s bps with the capital buffer intact. The stress case is the mirror image: deposit repricing pulls NIM down while the delinquency pipeline converts to losses faster than it has been provisioned, and ROAA slides toward the 50–55 bps range it last touched in Q4 2023, stalling the capital build. The Q1 2026 data is the first real test — a seasonal delinquency floor above Q1 2025's would confirm the structural ratchet, and a flat NIM print would mark the end of the expansion.
Cycle Positioning: CCPI and CUFSI
The Credit Cycle Position Indicator (CCPI) remained in Contraction territory for the second consecutive quarter, driven by the acceleration in delinquency velocity and the deceleration in NIM growth. The Credit Union Financial Stress Index (CUFSI) reached 68, its second-highest reading in the dataset, with the Credit Quality pillar (30% weight) at its maximum stress level.
The CCPI's contraction phase began in Q3 2025. Historical contraction phases have lasted 3–6 quarters. The current phase is at quarter 2 — early, with the charge-off acceleration still ahead. The key condition for transition to the most severe phase (Stress) would be a combination of NIM compression, rising NCO ratios, and declining capital — none of which have occurred simultaneously yet, but all three are trending in that direction.