System Signals — Q1 2026

Signal 1: The Seasonal Delinquency Low Came In Higher Again

The 60+ day delinquency ratio fell to 0.85% from 1.03% at year-end, an 18 basis point drop. Q1 improves every year, which we read as tax refunds curing past-due balances, so the year-over-year floor is the better comparison: a year ago the Q1 floor was 0.80%, and this year it is 0.85%. A seasonal low above last year's is the test the Q4 report set for a structural ratchet, as distinct from ordinary cyclical noise, and the quarter meets it.

Each recent Q1 has reset to a higher floor, 0.78%, 0.80% and now 0.85%, while the seasonal drop recurs. We read that steady lift in the baseline as credit normalization working through the portfolio rather than a one-off shock.

By size, credit unions above $10 billion in assets carry a 1.12% delinquency rate, the mid-tiers between $500 million and $10 billion sit near 0.72%, and the smallest tier, under $100 million, runs 0.93%. We read the large-CU rate as reflecting concentration in consumer credit, indirect auto and cards, where late-stage aging has been most stubborn. The small-CU rate is a different matter, and it connects to Signal 3.

Net charge-offs annualized to 0.81%, up 4 basis points from the prior quarter and essentially flat against a year ago. With delinquency ratcheting up year-over-year while charge-offs hold roughly steady, we read past-due loans as still aging in place rather than converting to losses on schedule, and the backlog the Q4 report described as carried into 2026.

The seasonal low is higher than last year's seasonal low, for the second year running.

What to watch

• Watch: The Q2 re-acceleration — if delinquency climbs off the Q1 floor faster than the 2025 path, the ratchet is tightening, not just holding
• Pressure: ACL coverage — allowance against 60+ delinquency; the allowance fell 0.9% in the quarter while delinquent balances did not, which narrows the cushion
• Watch: Large-CU consumer books — the ＞$10B cohort sets the system trajectory; its 1.12% rate is where the pressure concentrates

Signal 2: Liquidity Rebuilt as Loan Demand Stalled

Shares and deposits grew 2.7% in the quarter, a seasonal first-quarter inflow roughly in line with the prior two Q1s, while loans grew 0.5%. That gap pushed the loan-to-assets ratio down to 69.6% from 70.7% and left credit unions holding more cash. Investments rose 3.6% and borrowings fell 9.4% in the quarter, to 14% below a year ago. When deposits arrive faster than loans, the surplus lands in the investment book and pays down wholesale funding, and the balance sheet shows both.

At 2.7%, deposit growth is ordinary for a first quarter, which carries tax-season and year-end bonus inflows. Loan demand is soft, and the borrowings paydown is not seasonal. We read members as keeping cash with their credit unions again rather than seeking yield elsewhere, as deposit rates drift down with the Fed's easing, and institutions as no longer needing to borrow for loan growth that is not materializing. A 0.5% quarterly loan gain is weak even by Q1 standards, and the weakness is concentrated rather than broad (Signal 3).

Returning deposits are cheaper and stickier funding than borrowings, and we read them as a sign of member confidence. Funding that arrives without loans to match it lowers asset yields, because the marginal dollar goes into investments that yield less than loans. The system can carry that for a quarter or two. If loan demand stays soft into the second half while deposits keep building, the same inflow becomes a drag on the margin that Signal 3 reports at a high.

Deposits arrived faster than credit unions could lend them out. For now that is liquidity; held too long, it becomes a yield problem.

What to watch

• Favorable: Borrowings trajectory — a continued paydown confirms funding comfort; a reversal would signal the deposit inflow was a one-quarter event
• Watch: Loan-to-share by tier — the system can absorb soft demand; individual tiers running low loan-to-share will feel the yield drag first
• Watch: Investment duration — where the surplus is parked determines how much rate risk the liquidity rebuild quietly adds

Signal 3: Margins Reached a Record While the Smallest Credit Unions Earned Almost Nothing

The single-quarter net interest margin annualized to 3.44%, the highest quarterly run-rate in the dataset and 20 basis points above Q1 2025's 3.24%. Annualized ROAA reached 0.83%, up 16 basis points year-over-year, and net income rose 30% against the same quarter last year. (Q1 figures are annualized at 4×, which amplifies a single strong quarter, but the year-over-year comparison, which annualization does not affect, points the same way.) At the system level, the earnings recovery the Q4 report worried had stalled has resumed.

We read the Fed's easing as reaching the liability side: funding costs are drifting down as share certificates mature and members shift toward lower-rate deposits, while loan yields on the existing book hold up. On that reading the repricing asymmetry now runs in the system's favor, and Signal 2's deposit inflow adds to it by replacing costlier borrowings with cheaper member shares.

Returns differed widely by size:

• Credit unions under $100 million, 2,466 of them and more than half the system by count, earned an annualized ROAA of 0.13%, with loan balances shrinking 1.1% in the quarter.
• Credit unions above $10 billion, 24 institutions, earned 1.04% and grew loans 4.5%.
• The tiers in between rise almost monotonically up the size ladder: 0.75%, 0.73%, 0.81%.

Equity rose 11% year-over-year, and the equity-to-assets ratio held at 10.32%. We read much of the equity gain as an other-comprehensive-income rebound as long rates eased and underwater securities recovered, not retained earnings alone. At the system level capital is ample: the regulatory net worth ratio, which excludes that OCI swing, stands at 11.24%, well above the 7.00% well-capitalized line.

A tier earning 0.13% on assets generates almost no capital internally, has no earnings buffer to absorb the credit normalization in Signal 1, and, with loans shrinking, has no growth to earn its way forward. The tier holds a small share of total assets, so its earnings do not threaten the system. We read the split as pressure toward consolidation, consistent with a population that has 161 fewer credit unions than a year ago.

More than half the system by count earned an ROAA of 0.13% while loans shrank, in the quarter the system's margin reached 3.44%.

What to watch

• Watch: Small-CU loan contraction — whether the sub-$100M tier's negative loan growth is a Q1 quirk or a trend; we examine this in Under the Surface
• Favorable: NIM durability — if the margin holds above 3.40% as the deposit surplus dilutes yields, the recovery is structural rather than a passing effect of rate cuts
• Watch: Merger pace — the consolidation rate is the release valve for the earnings split; a faster pace in 2026 would confirm the small-CU squeeze

How These Signals Connect

We read the three signals as one balance sheet under two pressures. Deposits came back (Signal 2) and the rate cycle turned in the system's favor, alongside a record margin and a revival in system earnings (Signal 3). Credit kept normalizing on a year-over-year basis (Signal 1), and the benefits of the rebound landed unevenly: almost entirely with the larger institutions that can still grow loans, and barely at all with the small ones that cannot.

We read the quarter as one of divergence. The system aggregate had a good quarter while the smallest tier, more than half of credit unions by count, did not, and the gap between the two is wider than it was last quarter.

The Q2 2026 data will test which force dominates. If loan demand revives and the small-CU tier stabilizes, the rebound broadens. If deposits keep arriving without loans, the margin starts to dilute, and the earnings split widens further before consolidation closes it.

Cycle Positioning: CCPI and CUFSI

The Credit Cycle Position Indicator and the Credit Union Financial Stress Index are not reported this cycle. The composite index build did not complete in the data refresh for this cycle, and QuarterCall Research does not publish index readings it cannot reproduce from source. We read the underlying inputs as pointing in offsetting directions, improving margins and capital against a still-rising delinquency floor, so a single composite reading would obscure more than it reveals. We expect to restore both indices in the Q2 2026 cycle.