The Credit Union Industry HealthScore for Q4 2019 is 5.887, a 0.41% improvement over Q4 2018. While this represents an unprecedented 24th straight quarter of year-over-year improvement, the level of improvement has tapered off substantially, driven in large part by continued notable slides in loan and membership growth scores, and a sustained decline in operating expense scores.
The Devil in the Details
Credit unions improved year-over-year in 12 of the 17 HealthScore components, most notably in asset growth, which saw a score increase of 23.92%. However, the softness in loan and membership growth, coupled with rising operating expenses, does not bode well for sustaining the record run of quarter after quarter improvement in the HealthScore itself.
Take operating expenses. The score declined by 3.87% year-over-year, but what is more noteworthy is that the score itself dropped below 5. When we constructed the score model a few years ago, we used 20 years worth of data to establish the bounds for our score ranges, and 5 is generally ‘historically average’ performance. The operating expense score sits at 4.94 – below the historical average. The last time the industry was below 5 was Q4 2012, when corporate stabilization and NCUSIF recapitalization expenses were top-of-mind concerns.
How’s your credit union doing? If you are a credit union employee or volunteer find out with a free HealthScore report subscription.
Now, add on the challenges with loan and membership growth. The loan growth and membership growth scores declined year-over-year by 24.98% and 9.42% respectively. These declines, coupled with the operating expense issues noted above, resulted in the efficiency score declining by 2.01% year-over-year. Efficiency has not declined year-over-year since that same Q4 2012 cycle.
Scores for ROA did improve year-over-year by 3.08% in Q4 2019, but with loan growth being what it is, and likely to remain at least through mid-2020, we’re thinking year-over-year ROA growth could slow by Q3, if not sooner. Net worth score improvements have already slowed year-over-year, and if the ROA ‘prediction’ holds, net worth scores could start trending downward.
Doom and Gloom?
Do the numbers portend significant challenges for 2020? Maybe, but one thing we came to appreciate in working with credit unions during the Great Recession was that those with high-performing teams, sound governance, and clearly-articulated strategic priorities stayed above the scrum. This is a very good time, then, to validate your strengths in each of these three areas, and to make use of those strengths in rigorous short-term scenario planning covering the coming months.
Our mission is to provide distinctive strategy consulting that leads to achievement, growth, and financial health for our credit union clients. If you need help validating or strengthening your leadership, governance, or strategic foundation in preparation for the year ahead – we’re here for you. Schedule a complimentary consultation using our online scheduler so we can dive into what specific support is most helpful to your credit union. You’ll find the scheduler here:
HealthScore Trend Update
One more thing… we’re happy to video or audio conference into one of your board or management team meetings for a focused HealthScore trend update at a very reasonable cost. In such an update we explore industry trends, and also the trends for your state and local market, and of course answer questions and share strategic insight gleaned from work with credit unions nationwide. Call the office directly to talk about this option since board and management team meeting schedules are unique to individual credit unions. We’re at (888) 217-5988.