2020 continues to prove itself as one of the strangest, most challenging years in our history. The HealthScore once again saw an inexplicable year-over-year increase, rising 2.8% over Q3 2019 to a record high of 6.134, but there were also continuing declines in certain component scores that could prove problematic for credit unions in 2021. Summary details are below.
On the positive side…
Credit unions remain a safe haven for members as evidenced by the 132.61% year-over-year improvement in the asset growth score. Yes, you read that right! The incredible gains in assets in Q3 also resulted in higher deposit relationship balances and also impacted the score for Operating Expenses, which measures expenses against total assets. The Operating Expense score improved 10.31% year-over-year, with the score itself ranking as the best ever achieved by the industry.
Credit union members remain current on loan payments. Scores for both delinquencies and charge offs each improved by more than 8% year-over-year (though some of that could be due to forbearance strategy), and the Texas ratio, already strong, improved as well.
On the negative side…
The score for membership growth declined by 15.7%. This is the 7th straight quarter of year-over-year weakness in membership growth. The score for loan growth is tracking similarly, though with amplified negativity. The score dropped 31.06% year-over-year, and also has seen its 7th straight quarter of double-digit decline.
As a consequence of both membership/loan declines and stark increases in asset growth, the score for Return on Average Assets dropped 21.8%. Relatedly, the Efficiency Score, which measures the relationship between spending and income, saw a 16.31% decline. Slowing loan growth and strained credit card spending in Q3 are the causes for the drop in efficiency.
Finally, the combination of income pressure and outsized asset growth conspired to drive net worth scores down for the second straight quarter. Though the underlying score remains exceptionally strong, two quarters of net worth score decline is worth paying attention to.
Somewhere In the middle…
Loans per member saw a slight improvement. How is that possible when loan growth scores are headed the wrong way? Mortgage lending has been strong year-to-date. The larger size of mortgage loans relative to all other loans allows for increasing balances, even if loan growth in general is down across all other categories. Case in point is the score for Borrowers to Member. The score dropped year-over-year by 4.05% – meaning fewer members getting loans – yet the Loans per Member score improved as we noted. Mortgage loans to the rescue (maybe).
What We Thought Last Quarter
Last quarter we stated that we thought delinquency scores would worsen as forbearance and stimulus payments wound down, asset growth scores would decline also on the end of stimulus payments and as consumers returned to spending, and loan growth scores would improve on mortgage lending and auto lending.
Our assumptions haven’t panned out quite like we thought yet, other than for mortgage lending. That said, the threats and opportunities we identified then remain today. And, if loan growth doesn’t resume, then some credit unions will find themselves in unfortunate positions in terms of operating expenses relative to income (efficiency).
That said, we talk with a lot of credit unions – and Q4 scores are likely to be similarly odd, at least by historical standards. One example comes from a recent client conversation with a CEO stating his credit union had just had one of the best Octobers they’ve ever had. Pandemic times. What can we say?!
Are you a credit union professional? Subscribe to receive a free quarterly HealthScore report for your credit union, and also access to a specialized database containing industry trend data and the most recent scores for every credit union in the US.
We’re Here to Help
Remember that we are not only score report publishers, but a consultancy. Need help with strategy development, merger outreach and engagement, succession planning/readiness, organizational structure? Let us know. We’d love to share what we can do for you.
Image by iXimus from Pixabay