From Calm to Chaos: Credit Union Failures Hit a 7-Year High in 2025

After a year of remarkable stability in 2024, when no credit unions failed, the first eight months of 2025 have seen six liquidations, the most since 2018.

These failures were concentrated in Q2 and Q3 and highlight vulnerabilities that small and mid-sized institutions face when credit quality, profitability, and governance break down simultaneously.

While the overall credit union system remains healthy, with 87% of credit unions reporting positive net income through Q2 2025 and the number of CAMELS 4 and 5 institutions actually declining, the spike in failures is a stark reminder that collapses happen at the margins of the system — not at its core.

This paper explores why 2024 was calm, why 2025 brought a sudden spike, and what lessons boards and executives should take away.

The Calm of 2024

2024 was unusual: it was the fi rst year in nearly a decade without a single NCUA liquidation. Yet, this stability masked building risks.

System performance remained solid. NCUA data show that federally insured credit union assets rose by $52 billion (+2.3%) in Q4 2024, insured shares grew $58 billion (+3.4%), and net worth increased nearly $14 billion (+5.9%). At the same time, membership continued to climb, and the number of credit unions reporting positive net income reached 84%.

Delinquency edged up but stayed manageable. The system delinquency rate stood at 0.98% at year-end 2024, up 15 basis points from 2023, and the net charge-off ratio rose to 0.80%. These were early signs of stress, but not yet alarming in a historical context.

Earnings were resilient. Median ROAA remained at 61 basis points in 2024, and systemwide net income topped $14 billion. In addition, system capital levels strengthened, with the aggregate net worth ratio well above the regulatory minimum.

Interpretation: 2024 was a “lag year.” The pandemic-era liquidity surplus was still cushioning balance sheets, consumer credit remained stable, and rising deposit betas had not yet fully squeezed margins. Under the surface, however, rising delinquencies and competitive pressures were preparing the ground for what would come in 2025.

THE SPIKE OF 2025

In sharp contrast to the calm of 2024, the first eight months of 2025 brought six credit union failures, all concentrated between April and August. According to S&P Global’s September 2025 analysis, this was the largest cluster of failures in seven years, ending a nearly two-year stretch without any liquidations.

Unilever Federal Credit Union (NJ) was the first to fall, liquidated on April 30 without conservatorship. The credit union’s net interest margin collapsed to just 1.28%, compared with a 4.26% industry median. Its efficiency ratio ballooned to 154.8%, nearly double peer levels. Sustained negative returns on both assets and equity since 2023 confirmed a business model that had become untenable.

Soul Community FCU (GA) was a cautionary tale of over-optimism. Chartered in December 2024, it failed within six months, with the NCUA citing insolvency and unsafe practices. As former NCUA Chair Todd Harper noted, new credit unions are particularly vulnerable when “business plans are overly optimistic” and governance frameworks are immature.

Aldersgate FCU (IL) demonstrated how quickly conditions can deteriorate. After three years with zero delinquencies, its delinquency ratio suddenly spiked to 28.98% of total loans, driving its net worth ratio from 9% to negative 166% in a single quarter. Heavy reliance on unsecured lending magnified the impact of borrower defaults.

Alliance CU (FL), already under conservatorship since late 2024, was liquidated on June 1. Its delinquency ratio of 3.27% was well above the industry median of 0.90%. Profitability collapsed to extraordinary levels, with a final quarter ROAE of –600%, underscoring structural weakness.

Butler Heritage FCU (OH), placed into conservatorship in January, was liquidated on June 30. With an ROAE of –74% and a net worth ratio of just 4.9%, financial fragility was compounded by governance disputes between management and members that spilled into court.

Members First of Maryland FCU (MD) failed on August 29 without ever entering conservatorship. Chronic asset quality issues plagued the institution for years, with delinquency ratios exceeding 1% in 28 of the prior 30 quarters. By its final reporting period, delinquent loans stood at 1.43% versus the 0.90% industry median, and net worth had eroded to 3.35%—well below the 6% “undercapitalized” threshold.

The pattern across all six cases was clear: each was a relatively small institution, the largest with just $58.5 million in assets, and each combined some mix of weak profitability, deteriorating credit quality, and governance or compliance deficiencies.

HIGH-IMPACT AREAS TO EXPAND NON-INTEREST INCOME

Areas to Expand Non-Interest Income

The failures of 2025 cannot be seen in isolation they reflect broader economic and industry dynamics. NCUA supervisory priorities for 2025 highlighted credit, liquidity, and market risks, underscoring the importance of balance sheet management and governance.

Credit Quality: The median delinquency rate in Q2 2025 stood at 0.65%. The 12-month net charge-off ratio reached 0.81%, the highest since 2012. Used auto loans and unsecured credit were primary stress points. Institutions with chronic delinquency, like Members First, or sudden spikes, like Aldersgate, were most vulnerable.

Profitability: Deposit competition drove up betas, squeezing margins. Smaller institutions struggled without advanced pricing frameworks. Unilever and Alliance showed how quickly weak profitability becomes existential when margins collapse and efficiency ratios balloon.

Governance: Fraud and mismanagement remain the most common causes of failures. Butler Heritage’s governance battles and Soul Community’s immaturity demonstrate how governance lapses magnify financial stress.

Structural Headwinds: Rising technology costs, regulatory compliance burdens, and heightened competition continue to accelerate consolidation. As noted in the S&P analysis, “the operating environment is not going to get easier… it’s only going to get more competitive.”

STRATEGIC LESSONS

Stop Normalizing Weak Returns
Chronic weak ROAA (below 0.50%) or efficiency ratios above 90% are not just “tough years”. They highlight broken revenue models or serious expense control issues, they are failure predictors. Boards should set hard thresholds for intervention.

Benchmark Credit Quality Relentlessly
If peer delinquency medians are under 1% and your CU is consistently above that, it’s not “business as usual.” Chronic delinquency must trigger board-level strategy sessions, not just management reports.

Governance Training = Risk Mitigation
Annual governance audits, independent compliance reviews, and mandatory board training reduce risk. Governance lapses are as lethal as credit losses.

Liquidity & Scale Matter More Than Ever
Small institutions must prepare for higher reliance on wholesale funding as deposits normalize. Strategic partnerships or merger evaluations should be ongoing agenda items, not last-resort considerations.

Regulatory Thresholds Are Predictable
NCUA is quicker to conserve institutions with governance potential but will liquidate those with irreversible financial profiles. Knowing these thresholds helps boards self-diagnose before the regulator steps in.

Differentiate Between Chronic vs. Acute Risk
Institutions can live with chronic issues for years, but that doesn’t mean they’re safe. Acute shocks show why scenario testing (e.g., sudden delinquency spikes) must be part of planning.

BOARD-LEVEL TAKEAWAYS

• Calm ≠ Health: The absence of failures in 2024 was not proof of resilience, but rather a pause before stress manifested.

• Chronic Delinquency: Elevated delinquency, if sustained, is a warning siren. Boards should demand peer benchmarking each quarter.

• Profitability Discipline: Negative ROAA or efficiency ratios above 100% demand immediate corrective action. Profitability weakness should be addressed before reaching this point.

• Governance: Fraud, weak controls, and disputes remain leading drivers of failure. Annual governance reviews and compliance refreshers are essential.

• Scale Matters: The largest CU to fail in 2025 had just $58.5M in assets. Subscale institutions must weigh partnerships, mergers, or new revenue strategies to stay viable.

• Liquidity Vigilance: With pandemic-era deposits gone, reliance on wholesale funding is increasing. Liquidity planning and stress testing are critical.

CONCLUSION

The U.S. credit union system remains fundamentally strong, with capital levels rising and delinquency rates below 1%. Yet, 2025 has proven that micro-failures are on the rise at the margins. For executives and boards, the imperative is clear: invest in early-warning analytics, disciplined deposit pricing models, and governance capacity.

Failures will not come from systemic contagion, but from institutions that ignore red flags until it is too late.

Interested in strengthening your institution’s non-interest income strategies? Reach out to Ceto today to learn how our solutions can help your bank build resilience and growth in any environment.