Credit unions generally did quite well in 2025, but the bulk of the credit goes to abnormally high net interest income that is bound to be fleeting, according to industry consultant Mike Higgins.
Higgins' "Cooperative Clout Report" sent out Saturday said high returns and high efficiencies ratios can mask flagging productivity.
"That will not last, and you will be exposed. It's time to get your ship in order. Do it while you can," he said.
The NCUA's standard efficiency ratio divides operating expenses by the sum of net interest income and non-interest income. But Higgins said that also puts too much weight on the vagaries of interest rates.
Instead, he uses a ratio he calls "economy of operations," which is: [Non-interest expense – non-interest income] / [the sum of loan and member share balances].
The smaller the ratio, the fewer resources the credit union expends to build its loan and share balances. He said it removes interest rates from consideration
"When trended over time, it tells me if economy is being realized as someone scales. You can't cheat the metric," he said.
The ratio has slightly, but steadily deteriorated over the past three years from 1.09% in 2022 to 1.25% in 2025, according to NCUA data pulled from Callahan's Peer Suite.
Higgins said high net interest margins have resulted from an "extremely rare" confluence of events: Asset yields rose, while the cost of funds fell.
Yields and costs typically move in the same direction, "but 2025 was an unusual year." The yield on earning assets rose 16 basis points in 2025 as the cost of funds fell 11 bps.
"The result," he said, was "the highest industry net interest margin in 20 years!"
This happened because loans made at the tail end of the era of low rates are rolling off and new loans have been put on the books at much higher rates. Despite the Fed lowering rates off their recent highs, he said loan yields today are still over 125 basis points higher than 2020.
When the Fed lowers rates, non-maturity funding sources reprice downward almost immediately. Also, maturity deposits are rolling off at 12-to-18-month highs and are being renewed at much lower rates.
Finally, he said rates have not fallen enough to make refinancing attractive.
"So, if you were productive, you had record levels of earnings in 2025. Enjoy it for now. It was a fantastic year, but reversion to the mean is likely to occur.
"If you are not productive, then to quote Will Ferrell in 'Elf' when he realizes that Santa at Gimbels department store is not the real Santa: 'You sit on a throne of lies!'"
Higgins also noted some worrying trends in fourth-quarter results:
- Net charge-offs were 82 bps, an increase of 8 bps over last quarter.
- Non-accruals (loans sitting on the doorstep of net charge-offs) this quarter were 72 bps, an increase of 6 bps over last quarter.
- Delinquent loans 60+ days (loans 30 days away from being non-accrual) are at 103 bps, an increase of 8 bps over last quarter.
- Operating profit (replacing provision expense with actual net charge-offs) this quarter was 74 bps, a decline of 15 bps versus last quarter "due to the aforementioned higher loan losses and non-interest expense growing faster than net revenue."
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