HealthScore Background

The HealthScore is a composite financial performance score reflecting the financial health of credit unions. 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 performance trends.

The HealthScore was an outcome of a Glatt Consulting client merger project. In 2007 we were asked by a client greatly impacted by the recession to help them quickly identify and rank the overall “health” of potential merger candidates. Their desire was to find a partner healthy enough to take on the challenges of the credit union’s increasingly risky balance sheet, and that could continue to provide good service to the credit union’s members. We created a rudimentary scoring system that allowed us to determine the relative health of potential partners, and to rank their “fit” given the credit union’s objectives.

Since that time we have fine-tuned the scoring model and system, and made frequent use of our score reports in support of a variety of client and media projects. For example, our HealthScore have been used to support the development of credit union merger strategy, as a reference tool for client strategy planning and assessment, for CEO performance evaluation criteria, as a means for credit unions to track and evaluate competitors, and for general national, state and local market assessments.

Score Calculation

To arrive at scores for individual credit unions, we score/grade their performance for each of the 17 ratios included in our score model. Scoring is based on a ten-point scale with ten indicating the highest possible performance. For industry scores, we “roll up” the individual credit union scores into an aggregate score – a methodology that allows us to identify industry movements generally masked by other methodologies used to analyze industry performance.

Score Components

The 17 ratios included in the HealthScore were selected for their strong relationship to sound credit union performance, which we determined following a statistically sound correlation study. These ratios include:

  1. Net Worth: This ratio measures net worth in relation to total assets. Net worth cushions fluctuations in earnings, supports growth, and provides protection against insolvency. A low Net Worth (NW) score may indicate insufficient net worth and an inability to adequately protect against risk. A high score, though generally positive, may indicate limited commitment to cooperative principles.
  2. Solvency Evaluation: This ratio measures the value of assets after liabilities in relation to shares. A low Solvency Evaluation (SE) score may indicate risk of insolvency (the credit union can can no longer meet its financial obligations) and/or a high likelihood of regulator administrative action. A high score, though generally positive, may indicate limited commitment to cooperative principles.
  3. Return on Average Assets: This ratio measures net income in relation to average assets. A low Return on Average Assets (RA) score may indicate that earnings do not properly cover the credit union’s operating expenses and cost of funds. A high score, though generally positive, may indicate limited commitment to cooperative principles.
  4. Operating Expenses to Average Assets: This ratio measures effectiveness in controlling the costs of operations. A low Operating Expenses to Average Assets (OE) score may indicate a need to reduce or better control operating expenses. A high score, though generally positive, may indicate lack of necessary investment in operations.
  5. Efficiency: This ratio measures the relationship between income and expense. A low Efficiency (EF) score may indicate a need to improve earnings and/or better control expenses. A high score, though generally positive, may indicate a lack of necessary investment in operations and/or limited commitment to cooperative principles.
  6. Delinquent Loans to Total Loans: This ratio measures the effectiveness of delinquency control and the quality of loans held in portfolio. A low Delinquent Loans to Total Loans (DL) score may indicate a high degree of portfolio risk and/or a need for increased provision for loan losses. A high score, though generally positive, may indicate overly restrictive underwriting policy.
  7. Net Charge-Offs to Average Loans: This ratio is an indicator of the effectiveness of lending and collection practices. A low Net Charge-Offs to Average Loans (CO) score may indicate a high level of uncollectable loans and/or a need for improvement in collection strategy and effort.
  8. Texas: This 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.
  9. Cash and Short-Term Investments to Assets: This ratio is an indicator of the level of cash and liquid assets available to meet share withdrawals or additional loan demand. A low Cash and Short-Term Investments to Assets (CS) score may indicate the credit union will be unable to meet current obligations. A high score, though generally positive, may indicate stress on income due to lack of yield. Note: Post-recession, many credit unions have kept this ratio intentionally low due to interest rate issues and consequently have low scores – though most have offset low CS scores via improved Return on Average Assets (RA) scores.
  10. Regular Shares to Total Shares and Borrowings: This ratio measures liquidity, specifically the portion of funding sources derived from regular (core) shares. A low Regular Shares to Total Shares and Borrowings (RS) score may indicate liquidity stress and/or that the credit union is overly reliant on price-sensitive funds. A high score, though generally positive, may indicate excessive liquidity.
  11. Loans to Assets: This ratio measures liquidity and also the effectiveness of member loan relationship development. A low Loans to Assets (LA) score may indicate earnings stress and/or lack of lending relationships. A high score, though generally positive, may indicate liquidity stress.
  12. Loans Per Member: This ratio measures average per-member loan relationships. A low Loans Per Member (LM) score may indicate lack of focus on loan relationship development and/or a need for membership diversification. A high score, though generally positive, may indicate excessive member debt loads, overly accommodative underwriting policy, or a high concentration of large-dollar loans (e.g., real estate).
  13. Deposits Per Member: This ratio measures average per-member deposit relationships. A low Deposits Per Member (DM) score may indicate lack of focus on deposit relationship development and/or a need for membership diversification. A high score may indicate sound and stable deposit relationships, but also can be a sign of a non- borrowing membership base.
  14. Borrowers Per Members: This ratio measures the number of borrowers relative to overall membership. A low Borrowers Per Members (BM) score may indicate a need for improved loan sales and marketing strategy and/or membership diversification. A high score may indicate a need for market/field of membership expansion.
  15. Asset Growth: This ratio measures growth in total assets. A low Asset Growth (AG) score may indicate lack of focus on member relationship development and/or a need for membership diversification/field of membership expansion. A high score, though generally positive, may indicate unsustainable growth.
  16. Loan Growth: This ratio measures growth in total loans. A low Loan Growth (LG) score may indicate lack of focus on member relationship development and/or a need for membership diversification/field of membership expansion. A high score, though generally positive, may indicate unsustainable growth and/or overly accommodative underwriting policy.
  17. Membership Growth: This ratio measures growth in total membership. A low Membership Growth (MG) score may indicate lack of focus on developing relationships within the field of membership and/or a need for field of membership expansion. A high score, though generally positive, may indicate a a need to purge dormant or inactive member accounts.

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