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 carries a 1.49% rate, 46 bps above the system average and the widest spread recorded. (The Ledger — Asset Quality)

Each fourth quarter has been higher than the last, which we read as structural rather than seasonal: Q4 2025's 1.02% compares to 0.97% in Q4 2024 and 0.83% in Q4 2023. The seasonal sawtooth, with Q1 dips on tax-refund curing and Q4 peaks, remains visible, but the peaks are ratcheting higher each year.

We read the over-$10B cohort's higher delinquency as reflecting 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, lose collateral value quickly, which pushes borrowers into negative equity. When collateral value drops below the loan balance, there is no refinancing path and no workout, and the loan ages in place until it charges off.

The 1.00% mark is a round number, not a risk threshold. Net charge-offs were 77 bps for the full year, essentially unchanged from 2024's 79 bps, while delinquency rose. We read that as delinquent loans not converting to realized losses at the expected rate and accumulating in late-stage buckets instead, a growing backlog of future charge-offs that have not yet reached the income statement.

We read the provision lag, the gap between rising delinquency and the provision expense needed to fund adequate reserves, as the mechanism by which this credit deterioration eventually reaches earnings. (Under the Surface — The Provision Lag)

We read delinquent loans as accumulating in late-stage buckets rather than resolving, a growing backlog of future charge-offs that have not yet reached 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%, 1 bp above Q3's 3.33% and the eighth consecutive quarterly increase. The margin gained 15 bps in Q1, 4 bps in Q2, 5 bps in Q3 and 1 bp in Q4, and we read the expansion as slowing to zero. (The Ledger — Earnings)

We read the asset-yield repricing cycle as effectively complete. New loan originations are pricing at or near the existing portfolio average, so each new loan no longer pulls the average yield higher, while deposit costs keep rising slowly as share certificates originated at lower rates mature and renew at current market rates. On that reading, the gap behind the recovery, assets repricing up faster than liabilities, has effectively closed.

We flagged the deceleration as early as Q2, when the question was whether NIM would plateau or compress. The Q4 data show a plateau. Whether it tips into compression in 2026 depends on the Fed path and competitive deposit pricing.

At 3.34%, NIM is high by historical standards, but its widening has nearly stopped. It expanded 25 bps from Q4 2024 to Q4 2025, alongside a 30% increase in net income ($18.9B vs. $14.5B), and we read the widening spread as the main source of the 2025 earnings recovery. That tailwind is now exhausted.

With NIM flat, earnings growth has two sources left: loan volume, which grew 1.97% in the quarter, though the credit quality of that growth matters, and expense discipline. We read neither as a reliable substitute for a widening margin. Whether provision expense, which has been rising, consumes the remaining margin advantage will set the earnings trajectory in 2026.

NIM expanded 25 bps over the course of 2025, alongside a 30% increase in net income. That tailwind is now exhausted, and we read the margin's next move as 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, and the Credit Bill Has Not Come Due

Full-year ROAA was 0.78%, up roughly 10 basis points year-over-year and a second straight year of recovery. The full-year figure sits 2 bps below Q3's nine-month annualized 0.80%, but a full year and an annualized partial year are different bases, and the gap is not a decline. Measured like-for-like against 2024, profitability rose. (The Ledger — Earnings)

Provision expense was essentially flat for the year (up about 1%) and fell as a share of net interest income, so the rise in earnings came from the margin, not from provisioning less. ROAA is measured after provisioning, and in 2025 more was left.

The net worth ratio reached 10.36% in Q4, the highest in the dataset, about 70 bps above year-ago levels and 336 bps above the 7.00% well-capitalized mark. We read that capital as built by retained earnings.

Charge-offs stayed flat near 0.77% while delinquency crossed 1% (Signal 1). We read the risk as one of timing: when that pipeline converts, provisioning rises and ROAA gives back part of this year's gain in 2026. Under the Surface — The Provision Lag takes up that question.

Provisioning stayed flat while the margin widened, so the 2025 earnings gain did not come at the expense of reserves. We read the credit cost as arriving in 2026.

What to watch

• Pressure: ROAA trajectory — a reading below 70 bps in Q1 2026 would signal that the earnings recovery is slowing; 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

We read the three signals as one development seen through different parts of the income statement:

1. Credit deterioration is structural and accelerating (Signal 1). The aging composition is the leading indicator: future charge-offs are accumulating in the pipeline.
2. The margin tailwind that offset credit costs for six quarters has stalled (Signal 2). NIM at 3.34% is high, but the expansion is over.
3. 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 arrives when the aged delinquencies convert.

We frame 2026 with two cases. 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. In the stress case, 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 are the first 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, as delinquency velocity accelerated and NIM growth decelerated. 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.

Contraction began in Q3 2025, and historical contraction phases have lasted 3–6 quarters. The current phase is at quarter 2, which we read as early, with the charge-off acceleration still ahead. The condition for transition to the most severe phase (Stress) is a combination of NIM compression, rising NCO ratios and declining capital, which have not occurred together.