Credit Union Industry HealthScore Continues to Show Credit Union Stress

Wilmington, North Carolina, March 9, 2011 — The Glatt Consulting, LLC Credit Union Industry HealthScore for Q4 2010 declined to 2.263, a -2.85% change from Q3 2010 and a -5.34% change from Q4 2009. The industry’s highest score over the last ten years, 3.321, came in Q1 2001. Until this quarter’s HealthScore calculation, the lowest industry HealthScore over the last ten years was Q3 2009’s score of 2.329.

Glatt Consulting, LLC’s Credit Union Industry HealthScore is a composite score reflecting overall industry health. The score is based on a 5-point scale, with 5 being the most healthy and 0 being the least healthy. The score components include:

  • Earnings
  • Capital
  • Growth
  • Member Relationship
  • Liquidity
  • Asset Quality
  • Efficiency

Overall health continues to be dragged down by poor scores for growth, efficiency, and earnings, though the earnings component showed signs of improvement.

Of concern is the long-term impact of recent legislation on various sources of fee income, on operating expenses and, consequently, on overall credit union health. Score analysis shows a disconcerting trend of declining component scores tied to related income and expense measurements.

On a positive note, scores tied to capital continue to improve, and lending measurements suggest stability in portfolio credit quality. In addition, assets at risk (total assets in the bottom 10% of score distribution) decreased, from $6.5B in Q3 to $6.1B in Q4.

Score Trends vs. Total Credit Unions Since 03/31/2008

The following chart showcases quarterly industry HealthScores cross-referenced with the total number of federally-insured credit unions, 03/31/2008 to 12/31/2010.

Q4 HealthScore Trends
Q4 HealthScore Trends

Score Ranges

Three credit unions share the highest composite HealthScore of 4.545. These credit unions are located in Ohio, Texas, and Minnesota respectively. The lowest score, .091, is held by a credit union in Missouri.

There are 807 credit unions in the bottom 10%, meaning a composite score equal to or less than 1.273. Total assets for this group of credit unions is $6.1B. The largest credit union in the list has assets in excess of $350M, the smallest is slightly less than $13K.

There are 867 credit unions in the top 10%, meaning a composite score equal to or greater than 3.273. Total assets for this group of credit unions is $412B. The largest credit union in the list has assets in excess of $40B, the smallest is slightly more than $600K.

4th Quarter HealthScore Observations

Small Credit Unions

Small credit unions face a daunting future. When analyzing score data based on assets, the top 10% of credit unions in assets have an average HealthScore of 3.026. The bottom 10% have an average HealthScore of 1.497. Many of the 750 credit unions in the bottom 10% of asset distribution present a near-term risk of failure in the worst case, or will be forced to merge in the best case scenario.

Regional Scoring

While all regions suffered a decline in overall HealthScore from Q3 to Q4, Regions II and III performed below the Industry HealthScore, with Region II scoring the lowest of all regions. Region IV has the highest score of all regions.

  • Region I
    • Q3 2010: 2.357
    • Q4 2010: 2.297
  • Region II
    • Q3 2010: 2.210
    • Q4 2010: 2.112
  • Region III
    • Q3 2010: 2.326
    • Q4 2010: 2.253
  • Region IIII
    • Q3 2010: 2.359
    • Q4 2010: 2.307
  • Region IV
    • Q3 2010: 2.470
    • Q4 2010: 2.435

Problem Credit Unions

Though not in the bottom 10% of score distribution, there are 12 large credit unions with substantially depressed scores. Though about half of these troubled institutions are relatively stable (little change in score from Q3), the other half are showing disconcerting declines that are sure to be keeping regulatory authorities awake at night. Total assets for this group of 12 credit unions is $11B.

About the Glatt Consulting, LLC HealthScore

Score Formation and Use

Glatt Consulting, LLC is often called upon to aid credit unions in identifying suitable merger partners and to facilitate merger discussions between interested merger parties. The HealthScore system was developed in 2008 as a means to quickly identify and rank the overall “health” of potential merger candidates on behalf of client credit unions.

The sophistication of the scoring process has been enhanced on a number of occasions since 2008. The most recent enhancement was the implementation of a new database system for rapid score calculation, storage and tracking.

The benchmark performance criteria has not changed since the score was first developed (see below for calculation criteria).

General Score Calculation Process

Glatt Consulting, LLC’s HealthScore system is based on best-practice performance benchmarks for the following key categories:

  • Earnings
  • Capital
  • Growth
  • Member Relationship
  • Liquidity
  • Asset Quality
  • Efficiency

Individual credit union performance is analyzed against each of the benchmark performance categories, resulting in category performance scores. An aggregate score, based on overall category performance, is then determined. Such scores are logged for every federally-insured credit union.

An aggregate score reflecting overall industry health, as well aggregate scores for each performance category, is also determined. This score is published as Glatt Consulting, LLC’s Credit Union Industry HealthScore.

The score is published as a means to spark industry discussion on strategic direction. Because strategy development is a dynamic challenge/response process, the score cannot be relied upon as a determinant/predictor of future industry performance. It can, however, show key areas of strategic concern to be mitigated, or strengths to be leveraged.

About Glatt Consulting, LLC

Thomas A. Glatt, Jr. and Jennifer L. Glatt established Glatt Consulting, LLC in November, 2006. The firm was created to provide management consulting resources for the credit union community, and is driven by its mission to deliver strategic consulting services that improve clients’ financial performance and competitive standing.

Credit Unions primarily turn to Glatt Consulting, LLC to:

  • Facilitate management and board strategic planning sessions;
  • Identify and analyze merger and other growth opportunities, such as charter expansion;
  • Analyze and improve management team and board effectiveness.

The company is headquartered in Wilmington, North Carolina, a base from which it serves credit union clients across the United States and its territories.

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