HealthScore Identifies Potential Weakness Even As Credit Unions Strengthen Overall

Glatt Consulting’s Credit Union Industry HealthScore, updated to include 3rd quarter 2015 credit union financials, is 2.601. The score represents a .52% decline from the previous quarter’s score, but a 2.92% improvement in score from the same period one year earlier. Though scores continue positive year-over-year trends overall, the number of credit unions with scores reflecting underlying weaknesses has increased.

About the HealthScore

The Credit Union Industry HealthScore is a composite financial performance score reflecting the financial health of US-based credit unions. The HealthScore system calculates overall credit union health by scoring/grading credit union performance across eleven different key ratios including Net Worth, ROAA, Operating Expense, Efficiency, Charge-Off, Delinquency, Loans, Deposits, Loan-to-Share, Asset Growth, and Membership Growth. Grading is based on a five-point scale, with 0 reflecting poor health and 5 reflecting exceptional health.

The HealthScore is published quarterly and is used by Glatt Consulting, individual credit unions, and media professionals alike to track, report on, and respond to industry-wide trends affecting credit union health.

Q3 2015 Trends

Stellar Performance Continues

CU Industry HealthScore Year-Over-Year %Change
CU Industry HealthScore Year-Over-Year %Change

If you’ve read any of our past posts about the HealthScore you might recall that we like to compare current score data to the same period the year prior. This is something akin to retailers tracking “same store sales” to compare holiday sales performance at similar stores from one year to the next. In any case, when looking at the year-over-year credit union HealthScore data for Q3 2015 we see some great trends!

As noted in the leading paragraph of this post, the overall HS has improved to 2.601 over 2014’s 2.527. This is not only our highest post-recession score, but it is the 7th straight quarter showing a year-over-year score increase. And like previous quarters,  we see that this improvement is due to improved health in each of the eleven performance categories included in our score. The credit union community looks very healthy. Let the good times roll!

Trouble on the Horizon?

We did find some cause for concern, however, but before we identify that concern it helps to have some backstory perspective. During the recession we tracked the concentrations of the number of credit unions falling into specific score buckets – and evaluated how those buckets changed over time. For example, we looked at how many credit unions scored from 0-1, from 1-2, etc., and then looked at how the numbers changed from one quarter to the next. This helped us understand whether the credit union recovery was uniform, or more driven by a select few. For whatever reason, once we got through the recession we stopped looking closely at that data in favor of focusing on broader score changes.

We do a lot of strategic planning facilitation, and for this year’s planning material we resurrected the score distribution chart, using it to spark dialogue about what the future credit union “industry” might look like in terms of size, numbers of credit unions, etc. – and also to drive discussion about what is necessary to attain above average performance levels.

The data served its purpose in terms of sparking in-depth board/management team discussion. We only charted the most recent data at the time(Q2), but that data showed a startling number of credit unions with scores of 2 or lower (23% of all credit unions). The chart acted as a catalyst for conversations ranging  from whether a merger with an “unhealthy” credit union is worth the time and effort, to the purpose and/or need for growth.

Now to this quarter’s data. We once again sorted scores into the respective score buckets, but we also compared the changes in the number of credit unions in each bucket to the prior quarter. In looking at these changes we find a “blip” … and a possible cause for concern.

What is a blip? When we compare Q3 2015 to Q3 2014 we see a nice migration of credit unions “up the scale” (e.g. moving from 2-3 to 3-2). However, when we look quarter to quarter (Q2 vs Q3) we see 7% growth in CUs scoring 2 or less – and it isn’t due to credit unions moving up the scale (from 0-1 to 1-2) but down the scale (from 3-4 to 1-2).

What’s contributing to this “down the scale” movement? A slight decrease in scores for delinquencies, asset growth, and operating expenses.

At the end of the day this may not be an indication of any real trouble, but it is a trend worth keeping an eye on for this reason: the less healthy credit unions are the less competitive they become, and the less competitive they become the more likely they are to fail. Also, if the number of credit unions in the lower-tier ranges was small then it would be of no concern, but 25% of all credit unions, or 1,536, fall into that category. That’s a big number.

Hopefully this number recedes, with those credit unions faltering in Q3 returning to a path of improved health in Q4 and beyond.

Ending on a Positive

So that we don’t end this post on a down note, we will point out one more really nice improvement – and reflect on the score buckets to do so. While the percent of credit unions scoring 2 or less has grown, so too has the percent of credit unions scoring over 4. Attaining a 4 is no easy feat, so to see 11% growth is gratifying!

Score Tier Breakdown

Data for your reading pleasure…

Score Tier Breakdown
0-1 1-2 2-3 3-4 4-5
Total CUs Q3 2015 126 1,410 2,908 1,593 179
% of Total 2.03% 22.68% 46.78% 25.63% 2.88%
Average Assets $4,237,975 $16,761,231 $75,072,136 $419,448,677 $1,588,178,951
Average Members 1,220 2,535 7,816 34,943 119,049

Want Your HealthScore?

Get a HealthScore Report for your credit union, and a spreadsheet containing key Q3 2015 financial and ratio data for all federally-insured credit unions, for free! Your credit union’s executives and volunteers alike can use the HealthScore report to benchmark performance against industry leaders and laggards at national, asset peer, state, and local levels – and use the spreadsheet to rank and research individual credit union performance according to your own interests.

To order the HealthScore report and spreadsheet for your credit union, simply complete the form below.

Custom Project Reporting

We also run custom reports for credit unions, vendors, and media professionals. Our custom reports have been used by credit unions to identify potential merger partners, isolate growing markets, track local competitors, and to report on strategic performance. Vendors have used our reports to define target markets based on degrees of credit union health. Media professionals have used our reports to track general industry health, and the impact of proposed regulations on industry health.

Custom reporting is offered for a nominal fee, with fees determined by project scope. Contact Glatt Consulting to discuss custom reports for your organization.

Photo Credit: “Worm and Apple” by Andy Langager is licensed under CC BY 2.0

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