Video Update

In this Q3 2023 HealthScore Insights brief, Glatt Consulting's Tom Glatt explores the credit union industry HealthScore for the third quarter of 2023.

Transcript

This is Tom Glatt with Glatt Consulting Group, and in this Insights brief we’re exploring the credit union industry HealthScore for the third quarter of 2023.

If you are unaware, Glatt Consulting is a boutique consulting firm serving credit union leaders. Boutique means we engage with a small collection of clients – specifically in the areas of credit union strategy, organizational structure, leadership, and governance.  We were established in 2006 and possess a hard-earned awareness of the unique challenges and opportunities facing the credit union movement - including what it takes to be a healthy, high performing financial institution.

Our Credit Union Industry HealthScore is a model we created and use to evaluate the health and performance of individual US-based credit unions, and of the credit union industry overall. We calculate scores for 17 different key ratios for every US-based credit union to determine their overall HealthScore, then use the individual credit union results to determine scores for the industry. 

Our scoring is based on a ten-point scale, with ten generally indicating high performance and health and zero generally indicating low performance or health - and five generally indicating performance that is average by industry historical standards. Note that I said generally - because in the banking industry you sometimes do not want high scores in certain areas, depending on your balance sheet strategy and environmental influences. 

So what is the latest HealthScore for the industry?

It is 6.141 - which if you recall what I just said about the score range means the industry as a whole is operating above average. That is certainly a good thing, however this latest score represents the second straight quarter of year over year decline. While the industry is above average in health and performance, it is slightly less healthy and less high performing than it was in late-2022. Why? Three primary reasons: credit quality, liquidity, and growth. 

By the way, if you are not a current HealthScore subscriber you can get you own copy of this report on our website at glattconsulting.com/healthscore - and if you are a credit union leader, which includes staff, board members, committee members and the like - you can subscribe to get a custom report that includes the scores for your credit union in addition to the summary data I’m sharing here.

The first collection of data points I’ll share from our most recent report is truly my favorite page - our year-over-year %change report. This shows us in number and color format what the underlying trends are for each of our 17 score components and the HealthScore itself. 

With regard to the colors, red indicates a negative % change in scores while a green represents a positive %change. Note that The latest figures are at the top of the page - and at the top there is a whole lot more red than at the bottom of the page which includes scores for 2018. Consider Q3 of 2018. There were only three scores with red boxes. For Q3 2023 there are eleven including our overall HealthScore. Overall the industry is healthier today than in 2018, but many more scores are trending in a negative direction. 

While the colors are important, so too are the numbers in the boxes and how they relate to the numbers that came before them. Take the DL column (delinquent loans to total loans) for example. We saw the first of the most recent red boxes pop up in June of 2022 with a year over year score decline of 2.81. The number after that, for September 2022 was a negative 3.10, then negative 4.41, then -3.69, then -3.99 — following with a -6.13 in the most recent quarter. This shows an accelerating pace of decline in the score - which for this particular score component means deteriorating credit quality.

On the other hand, the CS column, which is our cash and short-term investments ratio, went from -21.98 in the first quarter of this year to a negative 13.23 in the second, and finally to a negative 7.13 in the third quarter. While still negative, this indicates a slowing pace of decline, meaning that credit unions may be seeing some light at the end of the tunnel when it comes to the challenge of  maintaining liquidity

Like I said earlier, the primary drivers for the year over year score declines are credit quality, liquidity, and growth. Credit quality columns include DL, CO, and TX (the Texas ratio, which can also serve as something of a loss coverage  ratio). With the exception of TX, DL and CO show accelerated declines. 

Our liquidity columns include CS, RS, and LA. CS and RS both show declines, though you’ll note that the pace of decline for CS slowed relative to prior quarters. This is likely due in part to credit unions investing longer term. You’ll also note that LA is an outlier in that while CS and RS are red, LA is green - meaning score improvement year over year - though if you look closely you’ll see that that pace of score improvement has slipped some -  a trend I attribute to the growth columns.

Each of our growth columns experienced year over year score declines. The two scores that influence LA include AG and LG. Credit unions have worked in recent months to tighten up lending standards both to address liquidity challenges and to head off escalating risk. 

Finally, membership growth scores year over year turned red - after four months of score improvement. Competition has heated up so I;m not surprised. 

As I stated, this page shows year over year % changes in our scores. Where do the scores themselves sit? 

This page shows us - but before I get into the numbers, recall that I said five indicates historical average. The color coding on this page uses green to identify scores 5 or above. Yellow indicates scores below five, and red indicates scores that are well below five.  

I’m immediately drawn to the aberrations - which in this case are the CS column and our growth columns: AG, LG, MG. Candidly I’m not as concerned about the CS column if we’re otherwise stable and healthy, and if we’re not blowing the doors off with loan growth. On that note, and as I mentioned, credit unions have tightened up to a degree so the lower scores for CS are more than likely ok.  

What concerns me more is the continued challenge with solid membership growth. Part of the underlying driver for membership growth challenges is just the heightened state of competition - coming from all types of institutions including banks, other credit unions, FinTechs, buy now pay later, and the like. The other driver, and one I find more of a problem than heightened competition, is how many credit unions struggle with defining, understanding, and therefore properly relating to the marketplace that they want to grow. This is a business model problem, and some credit unions are just not up to the task of constructing a future-relevant business model. Consequently membership growth is likely to remain an industry issue.

The final thing I’ll point out, and it is a trend I made note of last quarter, is the scores for credit quality. Let’e stay with our charge off, or CO column. Remember that the year over year %change in the third quarter was -12.40 - but the actual score is still above average at 6.71. This means that while charge offs are increasing as evidenced by the year over year score decline, we’re still doing ok relative to historical experience. That said, scores generally moderate to the average over time, and this is likely where charge offs are headed meaning back to around 5 - so I expect to see continued declines in our charge off score, and our delinquency scores as well.

Ok … I can spend all day diving into the weeds of this data, but as I said at the start this is an insights brief, not an epic saga - so let’s move on to our final bit of HealthScore material - a look at the leaders list. 

The credit unions you see here are, at least as to the third quarter, at the top of their game. Let me point out a few that I find interesting. …

First is Rome Kraft Employees. They have the highest HS of all CUs. This $22M CU has been stellar since  CEO Diane McCoy was named CEO back in 2015. Prior to then the CU had successive years of zero scores for loan and membership growth - and by successive I mean, with very few quarter exceptions - they were predominantly zero from 2003 until 2015. Since 2015, with the exception of the two quarters deep in the Covid pandemic, their membership and loan growth scores have been well above industry averages.

Second CU I want to point out is Western Division in Williamsville KY. Starting in 2020 they really turned membership growth around. 

Finally there is Eastman out of Tennessee. At 7.8B they are the largest on the leaders list. What is amazing about them is that  since 2003 they have only had one quarter where their membership growth score was 0. 

Of course those are only three of the many interesting credit unions on our leaders list. It is fascinating to dive in and explore how they present themselves to the marketplace.

Don’t forget, you can get your own copy of this report on our website at glattconsulting.com/healthscore - and in that report can see the full top 20 which includes quite the array of diverse credit unions. 

That’s it for this Insights brief. If you have questions about credit union health and performance let us know. We can be reached at hello@glattcnsulting.com or by completing the contact us form on the Glatt consulting website. 

Once again, I’m Tom Glatt with Glatt Consulting. Thanks for watching.