Credit Union HealthScore Decline First Since 2013

The current credit union industry HealthScore, updated to include 1st quarter 2020 credit union performance data, is 5.939. The latest score represents a 1.7% year-over-year decline, the first such decline since the fourth quarter of 2013. Driving the score decline were major drops in loan growth, membership growth, return on assets, and efficiency scores – four of the seventeen component scores making up the overall HealthScore. The quarter’s results end a historic streak of 24 straight quarters of year-over-year HealthScore improvement.

Component Score Details

Credit unions saw year-over-year declines in 9 of the 17 HealthScore components, most notably in loan growth which declined 32.57% year-over-year. The loan growth score itself now sits at 1.65, the fourth lowest in 18 years of HealthScore reporting. It is also the largest year-over-year decline since the third quarter of 2010.

It should be noted that generally a score of “5” is considered average or baseline for each of our 17 metrics. This is due to the fact that we based our score distribution on “average” credit union performance over 20 years for each of our HealthScore components.

The nine scores with year-over-year declines are as follows:

Score ComponentScoreYear-Over-Year %Change
Return on Assets4.48-15.93
Operating Expenses5.05-1.47
Delinquent Loans6.39-1.68
Regular Shares to Total Shares and Borrowings5.81-1.42
Loans to Assets5.87-1.28
Loan Growth1.65-32.57
Membership Growth2.39-17.37

While there were eight scores with positive year-over-year improvement, the level of improvement was generally small – with two exceptions: cash and short term investments, and asset growth. Year-over-year score changes for these two metrics were 8.97% and 5.79% respectively. Both trends make sense when factoring in the low loan growth rates noted earlier, and consumers hedging personal risk by migrating funds to insured credit union accounts.

The eight scores with year-over-year improvement are as follows:

Score ComponentScoreYear-Over-Year %Change
Net Worth8.750.48
Charge Offs6.440.51
Cash and Short Term Investments5.848.97
Deposits per Member6.333.8
Loans per Member6.432.09
Borrowers per Membership5.910.51
Asset Growth6.695.79

It might seem confusing that the loans per member score would be positive given the stark declines in loan growth scores, however, when considering credit unions’ more determined effort to become leaders in mortgage loan origination it makes sense. In the first quarter mortgage loan applications jumped as did the volume of approved loans (which, incidentally led some credit unions to throttle applications). This would account for an increase in loan balances per member even while overall loan growth declined.

Other Observations and Concerns

Here are a few other thoughts to share regarding this latest round of scores…

  • Delinquency and Charge Offs: Forbearance and paycheck protection strategies did not come to life until the second quarter. It is possible that as the year goes on, what currently is “above average” performance in these two score components will change dramatically if/when the time runs out on these legislative efforts.
  • Income and Expenses: Income has outpaced expenses for some time which has allowed for strong scores for ROAA and consequently efficiency, but the tide is turning. The challenge in the near future is with expenses. For credit unions that are slow to act to trim expenses to better align them with income realities the future will be especially troublesome.

The Road Ahead

Regardless of how the COVID recession resolves itself over the coming months, it clearly looks like challenging times for credit unions. Consider that the percentage of credit unions scoring below five, our benchmark average, increased by 2.06% (an additional 89 credit unions) from the first quarter in 2019 – a comparison we illustrate in the chart below. Generally a score below “5” is considered below average.

In addition, the total number of credit unions scoring below 3.5, typically a threshold that, depending on the motivating score factors, results in increased regulatory scrutiny, increased from 38 to 52. While a score below 3.5 does not mean the credit union in question is at immediate risk, it does indicate an increased likelihood of a future merger, or direct regulatory guidance on strategic decisions due to share insurance fund risk.

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    1. Hello Larry! Our apologies! We did not receive a comment notification and missed your message. We’ve now corrected that issue. Sorry about that. Now on to your question.

      The Texas ratio measures the total value of at-risk loans in relation to the total value of funds on hand to cover such loans (allowance for loan losses and capital). A low Texas (TX) score may indicate an inability to absorb losses and/or a high likelihood of institutional failure. When we see a score decline for the Texas ratio it means that the underlying ratio is headed in the wrong direction. Either at-risk loans increased on credit union balance sheets, or the value remained stable but the combination of net worth and allowance for loan loss accounts decreased.

      In the case of Q1, the score for delinquencies declined somewhat resulting in that slight negative change in the Texas score. The picture adjusted just a bit in Q2. We’ll be releasing that data next week!

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