Glatt Consulting founder Tom Glatt, Jr delivered a live video stream release of Glatt Consulting’s third quarter 2012 Credit Union Industry HealthScore. Tom discussed the surprising trends in the data that buck conventional wisdom and conflict with common industry talking points. To learn more about the credit union community’s health drivers and detractors for the 3rd quarter, and where we might be headed in 2013 – watch the embedded video below.
This is a transcript from the HealthScore video.
Hello everyone. I am Tom Glatt Jr, founder of Glatt Consulting. Welcome to today’s release of the 3rd Quarter 2012 credit union Industry HealthScore.
Real quickly I would like to share a couple of housekeeping items with you. First, this is a live program – and we would like to take questions. If you are viewing this program live on our YouTube channel or via the glatt consulting website – feel free to send in your own questions via twitter to my username @tglatt. For those of you watching via Google+ use the chat feature – and at some point if I can remember how to do it I will allow for direct questions via your own video feed.
Now… on to the score details. Before I announce our latest score and share a bit of commentary related to the score, let me provide some background on the HealthScore for you. Glatt Consulting’s Credit Union Industry HealthScore is a composite financial performance score reflecting the overall financial health of US-based credit unions. The score range is based on a 5-point scale, with 5 being the most healthy and 0 being the least healthy. The score is published as a means to spark industry discussion on the strategic direction of the credit union movement.
The GC CU Industry HealthScore declined to 2.390 from a 2nd quarter score of 2.446. Factoring in the decline in the composite HealthScore were declining component scores for asset growth, delinquency, member deposits, earnings, efficiency, operating expenses, and member growth.
Notable improvements for the quarter were score increases for charge offs, loan to share, member loans, and net worth.
So… what does this mean? Is this bad news? It would seem so since our score went down, but there is actually a positive trend I’d like to talk about right now. One of the best ways to look at health overall is to determine whether we are doing better or worse than the same period a year before. The reason is that credit unions have some degree of seasonal trends impacting our numbers. We tend to be impacted by the same basic trends year after year (though not always to the same degree).
In any case, the trend I see is this: When we look at the percent change in our score from the prior period we see performance quite improved over the 3rd quarter of 2011. In fact our score is nearly 5.5% higher for Q3 2012 than Q3 2011. This is a sign of an industry on the mend. Now, we have some major problems that could derail us, which I will get to in a minute, but first and foremost it appears that we are getting healthier overall.
In fact, this is our seventh straight quarter where our health was better than the same quarter the year before. Compare that to the health trends we saw through the recession in which 12 of 13 quarters were worse than the same period the year before. That is three years and one month of ever-declining performance – yet now we have our seventh straight quarter of prior-year improvement in a row.
Where’s the champagne!
Now to a few stark challenges. Even as we improved our health overall over the last seven quarters, we lost 411 credit unions. That is 5.5% fewer credit unions – again even as we improved our health. In the 3rd quarter alone, around 73 credit unions went away – either liquidated or merged out of existence. To be even more depressing, Q3 2012 had the 9th highest loss in terms of total credit unions looking as far back as 2002, the 1st quarter of this year was the worst. Finally in the last decade alone we have declined 28% in terms of total credit unions. In some respects, we are improving our health through the death of the least healthy.
Here is another challenge. Many of the major problems of the last few years that conspired to contribute to poor industry health are improving with the economy and through upgrades in credit union operations. Chargeoffs and delinquency are MUCH better than they were.. Loan relationships are much deeper than they were before – meaning that our existing members are back borrowing. We do, however, have one lingering problem – membership growth. I know you can’t believe it given the headlines we’ve seen of late regarding membership growth.
Consider this one published just yesterday by the NCUA itself:
Third-quarter statistics show … consumers increasingly chose credit unions as their financial services providers. Membership grew by almost 743,000 during the quarter, up nearly 2.1 million for the year.
While true, here’s the cold hard fact: 49% of all credit unions had zero to negative membership growth. In the midst of growth so stellar that it warrants a press announcement from the industry regulator, 49% of all credit unions had zero to negative membership growth. The truth… the growing keep growing and the shrinking keep shrinking – and the problem is most acute for small credit unions.
In fact, the great “average” improvements we are seeing, whether health-based, membership based or other, are really being driven by those credit unions at the top. Larger credit unions, credit unions that were healthy to begin with, that were growing to begin with … those are the credit unions whose performance is carrying the industry.
Consider this data. Last week we took a quick look at 2nd quarter data for membership growth by peer group asset ranges. These ranges are:
- Group 1: Credit unions with assets less than $2,000,000
- Group 2: Credit unions with assets from $2,000,000 to less than $10,000,000
- Group 3: Credit unions with assets from $10,000,000 to less than$50,000,000
- Group 4: Credit unions with assets from $50,000,000 to less than$100,000,000
- Group 5: Credit unions with assets from $100,000,000 to less than$500,000,000
- Group 6: Credit unions with assets $500,000,000 or more
The trends are pretty much the same for Q3.
Credit unions in peer group 1 have an average membership growth of -2.07. Peer group 2 is -1.01. Peer group 3 is .46. Where is the real growth? Peer groups 4, 5, and 6 which means credit unions with assets $50M or greater. As for health, we see a similar trend, with the average health score for peer groups 1-6 at 1.64, 2.06, 2.40, 2.67, 2.89, and 3.33 respectively.
Now I have always maintained that small credit unions can be healthy, to include health in membership growth. To prove my point, the max HealthScore for peer group 1 is 3.545 – substantially above the average HealthScore for the industry. For peer group 2 it is 4.273. It goes up from there as we get into the larger peer group ranges – but what is clear is that small credit unions can be healthy, and can grow membership.
Now lest this be construed as a ham-handed attack on small credit unions, I would like to point out that large credit unions can be unhealthy too. The lowest HealthScore for peer group 6 is 1.636. That’s right, there is a credit union out there with more than half a billion dollars in assets whose health score is less than the average score for credit unions in peer group 1. Of course at that size such credit unions often have far greater reserves to withstand periods of poor health. Again, my point was only to suggest that health and size are not bi-polar. Regardless of your size, you can be healthy.
So… to wrap this up I see these things:
1: Credit union health, the health of our industry, is improving quarter by quarter. We are strong overall. For that we should celebrate.
2: We have lost a lot of credit unions in the last few years. Many good people have lost jobs as a result. For those that lost their jobs because their credit union leadership chose to ignore persistent declining health, we should be outraged.
3: Small credit unions can be healthy. We should want small credit unions to be healthy. For those small credit unions that aren’t, we should push them to do better – and help them when they falter.
4: Finally, membership growth is not the bright feather in our cap that some would make it out to be. Membership growth is the delight of a hair over half of our industry – and truly the greatest growth is going to the largest among the nation’s credit unions.
Going forward… if we continue to see leaps and bounds improvement in credit union health, including membership growth, across the credit union community then our future is indeed bright. If, on the other hand, we continue to see declines in the membership roles of nearly half of the institutions making up our industry, then truly the future is only half bright.
I’m hoping for the former.