Q4 2023 HealthScore Update

The Q4 2023 industry HealthScore is 6.048, a decrease of 2.580% as compared to Q4 2022. This is the lowest score since the Covid pandemic.

Video Update

In this HealthScore Insights brief, Glatt Consulting's Tom Glatt explores the credit union industry HealthScore for the fourth quarter of 2023. Notable score issues include asset growth, operating expenses, credit quality, and liquidity - to name a few. 

Video Transcript

Hello to all our viewers, I’m Tom Glatt with Glatt Consulting Group and thank you for tuning in to our latest Insights episode. This episode is all about dissecting crucial trends from the most recent Credit Union HealthScore report. In this brief update I’ll shed light on what the latest score patterns portend for the future of credit unions - so prepare to dive into the health of asset growth, operational expenses, loan quality, and more—vital indicators that reflect the pulse of the credit union industry.

First, what is the Credit Union HeathScore?

The HealthScore is essentially a health and performance report card for individual credit unions and for the industry as a whole. It helps us, industry leaders, and generally people interested in credit unions to more easily see and contextualize industry and individual credit union trends and issues. 

How do we determine HealthScores?

We first assess individual credit union performance by assigning a score for each of 17 different ratios that include:

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. 

By the way… the 17 ratios, which we call HealthScore components, were selected for their strong relationship to sound credit union performance, which we determined following a statistically-proper correlation study. 

Back to our scoring. As I said we calculate scores for each of the 17 ratios. These "component" scores are then averaged to determine a given credit union's overall HealthScore. Scores for the industry are then calculated by averaging all of the individual credit union scores. 

Before I get to our latest update … if you are not a current HealthScore subscriber you can download your own copy of our latest industry 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.

Ok - what is the industry score for Q4 2023?

It is 6.048. The good news is that this score is above that benchmark 5 score, however, the score is also a 2.58% decrease year over year. This is also the lowest score since Covid pandemic restrictions slowed loan growth and income, and the third straight quarter showing a year-over-year decline. There’s a lot to unpack in terms of score influences so let’s get into it… 

And we’ll start with asset growth. Weakness in the Asset Growth (AG) score continued in Q4. In fact, Q4 was the 11th straight quarter of decline. Worse than that - the AG score is 1.89 — by far the lowest score we’ve ever seen for the component. What is hampering asset growth? Tightening underwriting standards,  inflation, interest rates and rate competition - to name a few. 

And speaking of asset growth trends and inflation, both conspired to negatively impact the Operating Expense (OE) score, which continued its own declining year-over-year trend. While the OE score is still above 5.00, sitting at 5.66 at quarter’s end, it was as high as 6.46 in 2022 - a 12% decline in a little over one year. An asset growth turnaround doesn;t seem likely, nor does cooling expenses so I expect this score to at least moderate to closer to 5 if not below.  

Also following declining trends are Delinquent Loans (DL) and Charge Offs (CO). The DL score saw its seventh quarter of Y-O-Y decline and CO its sixth. More importantly than the trend itself is the pace of decline in these two component scores — it’s accelerating for both with the DL score dropping 7.64% YOY and CO 12.97% after dropping 6.13% and 12.40% respectively in Q3. 

That said, scores are 6.41 for DL and 6.43 CO so credit quality is still positive overall - but I think we’ll continue to see credit quality deterioration over the coming quarters - at least enough to get the scores closer to a benchmark 5 average.

Seeing a similar accelerating pace of decline is the score for Regular Shares to Total Shares and Borrowings (RS). Q4 saw a decline of 9.80% for an RS score of 5.43. While above 5.00 like OE and CO scores, this is the lowest score for the RS component since 2011. This begs the question … Is the regular share account losing its place as a critical, and sticky indicator of the member relationship? I think so, at least for a number of credit unions - but that doesn’t mean credit unions should let regular share balances and the people that own them decamp to the competition.  

Now how about loan growth? It was pretty hot coming out of Covid. Well, Loan Growth (LG) is also underperforming, with a Q4 Y-O-Y decline of 31.76% to a score of 4.62. The drop in the component score is likely due to two influences: intentional tightening of underwriting standards to temper loan demand for liquidity purposes and interest rates slowing demand.

With regard to underwriting stands, the most recent Fed Senior Loan Officer survey had this to say:

And for credit card, auto, and other consumer loans?

You guessed it: Tighter standards and weaker demand on balance.

Despite the pressures on LG, scores for Return on Assets (RA) and Efficiency (EF) continue positive, upward momentum. The RA score is 5.66, a 10.08% Y-O-Y gain, and efficiency is at 6.01, a 13.40% gain. The RA score was aided by asset growth trends in a fashion similar to the OE score, so the EF score adds helpful context here. Credit unions are making more per dollar spent.

Now, many headlines are reporting that a sizable number of credit unions lost money in Q4. So what’s the story? ROA strength, or weakness? Well, 87% of credit unions had a positive ROA and only 621 had a loss. What causes consternation, and drives a lot of the hand wringing? In the mix of the 621 are some rather large credit unions so when you look at the size of the losses in the credit union community in total relative to past experience it is a startlingly large number. 

The important thing to remember, however, is that the industry isn’t one monolithic enterprise. There are 4702 credit unions and 4081 do not have a net loss.

My final observation of note is the ever-increasing Loans per Member (LM) score. 2023 saw the highest-ever scores for the component, with Q4 the highest of the high at 7.54. On one hand this makes sense given the rising cost of household assets over the years in general combined with credit union growth in mortgage and commercial/business lending — both high-dollar loan categories. However, when considered in the context of Membership Growth (MG), which is rather poor, we perhaps see a pending problem. Slow membership growth could mean limited upside loan growth opportunities for many credit unions. In other words, as the current well of loan opportunity exhausts itself there may be no one left to drive or sustain new growth. The solution: pay attention to the next generation!

Ok… let’s move on to our final bit of HealthScore material - my favorite - a look at the leaders list. 

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

First we have PORT WASHINGTON - taking the top spot with a score of 8.941. Port Washington is in PORT WASHINGTON, NY They have $67.8M in assets and serve over 3000 members. I checked them out online. They are little old school in their marketing and messaging, but what they are doing works. 

We also have LYNN FIREMENS. The credit union is second in score at 8.618. They are out of LYNN MA and are a tidy $18,8M in assets with 1,519. Lynn is old school in a different way in that they are primary focused on a few loal-area fire departments. I understand firefighters make good members.

In fact we have a couple of small firefighter-focused credit unions in the top two. In addition to Lynn we have KNOXVILLE FIREFIGHTERS out of Tennessee, and RESPONDERS EMERGENCY SERVICES CU which serves firefighters among other first responders. By the way, the name is a little long, but the acronym is a creative one. It is RESCU. Get it… Rescue! 

The last one I’ll make note of is SIKORSKY FINANCIAL out of stratford connecticut. They are the highest scoring CU with more than $1B in assets - they are at 1.2B and serve over 66,000 members - and their  score is 8.412.

Of course those are only a few 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 - which you can do if you get your own copy of our Industry report on our website at glattconsulting.com/healthscore - 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.