The Safety Paradox: Why the Industry is Safe, Sound, and Slowly Shrinking

On the surface, the credit union industry appears stronger than ever.

As of the third quarter of 2025, the aggregate CU HealthScore stands at 5.81, placing the industry firmly in the Low Risk (Tier 1) category. Capital levels are at historic highs. Earnings have stabilized. The risk of mass institutional failure is near zero.

However, beneath this veneer of safety lies a critical structural vulnerability.

Our analysis of the Q3 2025 data reveals a bifurcation. While financial soundness metrics (Capital & Liquidity) are excellent, relevance metrics (Membership & Loan Growth) have collapsed.

The industry has inadvertently entered a state of managed run-off. We are maximizing the profitability and safety of a static member base while failing to attract the next generation. The strategic mandate for 2026 is no longer about survival; it is about deployment.

The Diagnostic: The Great Bifurcation

To understand the paradox, we must look through the lens of the CU HealthScore. Unlike regulatory exams that focus on safety (CAMELS), the HealthScore measures Safety and Vitality in equal measure on a 1–10 scale relative to historical industry averages.

• 5.0 = Historical Industry Average
• > 5.0 = Above Average Performance
• < 5.0 = Below Average Performance

When we apply this lens to the Q3 2025 data, a stark contrast emerges:

• Dominant Strength: Net Worth (Score 8.98). The industry is effectively "over-insured" against failure.
• Critical Weakness: Membership Growth (Score 2.30). This is the lowest-scoring component in the entire model.

The Risk Landscape

The industry has largely migrated out of the immediate "Danger Zone."

• Tier 1 (Low Risk): 78.0%. Nearly 8 out of 10 credit unions are performing above the historical average.
• Tier 2 (Medium Risk): 16.4%. Stable but inefficient.
• Tier 3 (High Risk): 5.6%. A small minority facing immediate capital or performance crises.

The data is clear: The risk of credit union failure is low. The risk of credit union irrelevance is rising.

The Core Diagnosis: "The Fortress Trap"

For the last two decades, credit unions have operated under the assumption that "Safety = Success." This has led to the formation of what we call The Fortress Trap.

As Net Worth scores climbed year over year (reaching near-perfect levels in 2025), Growth scores have inversely declined. Institutions have prioritized building fortress-like balance sheets at the expense of market expansion.

The symptom is visible in many boardrooms: High ROA and High Capital, but zero or negative member growth.

The reality is uncomfortable: These institutions are effectively liquidating the business in slow motion. They are extracting value from an aging membership base without replacing the pipeline.

If this trend continues, our models predict the aggregate HealthScore will drift downward to 5.71 by late 2026. Capital will continue to pile up (projected Net Worth Score > 9.1), while Loan Growth continues to fall.

The Four Faces of the Industry

The "Average Credit Union" is a myth. Our granular analysis of 4,419 distinct institutions reveals four specific profiles that define the current landscape.

1. The Drifters (The Silent Majority)

• Prevalence: ~32% of the Industry
• Profile: Tier 1 (Score 5.0 – 5.9).
• The Diagnosis: These institutions are "Comfortably Average." They are technically healthy, but they excel at nothing. They have high capital (8.9) but mediocre efficiency and low growth. They are cruising on inertia.
• The Risk: Complacency. Being "average" in a consolidating market is a slow path to irrelevance.

2. The Fortress Trap (The Rich & Stagnant)

• Prevalence: ~30% of the Industry
• Profile: Tier 1, High Score (>6.0), but Growth Scores in the Red (<3.0).
• The Diagnosis: These are the financial powerhouses. They have massive retained earnings and elite ROA, but they are shrinking. They have the resources to dominate their markets but are choosing to save for a rainy day that already here.
• The Risk: Obsolescence. They are the "rich" institutions that will eventually run out of members.

3. The Balanced Builders (The Gold Standard)

• Prevalence: ~15% of the Industry
• Profile: Tier 1, High Score (>6.0), High Growth (>3.0).
• The Diagnosis: The elite. These institutions prove the trade-off between safety and growth is false. They use their capital to fund expansion, maintaining high scores across the board.
• The Strategy: These are the acquirers of tomorrow.

4. The Sleepers & Strugglers (The Vulnerable)

• Prevalence: ~23% of the Industry.
• The Diagnosis:
  • The Sleepers (Tier 2): Held back by poor Efficiency. They are bloated and must cut OpEx to fund growth.
  • The Critical List (Tier 3): Often triggered by the Net Worth Safety Override (<5.0). These institutions are one recession away from a "forced" merger.

The Strategic Mandate for 2026

The era of Accumulation must end. The era of Deployment must begin.

For "Fortress" and "Drifter" Institutions (Tier 1)

Mandate: Weaponize Your Net Worth. You are sitting on a war chest. Holding a Net Worth ratio significantly above regulatory requirements in a low-growth environment is a strategic error.

• Action: Intentionally lower your Net Worth score to raise your Growth score.
• How: Invest in technology, aggressive marketing, or M&A. Buy market share. Buy younger members. You can afford the "J-Curve" dip in earnings; you cannot afford the flatline in membership.

For "Sleepers" (Tier 2)

Mandate: Fund Focus via Efficiency. You do not have the capital surplus to buy your way out. You must cut your way to growth.

• Action: Relentless focus on OpEx.
• How: Every dollar saved in back-office inefficiency must be redeployed to member-facing value (rates or tech).

For "Strugglers" (Tier 3)

Mandate: Seek Shelter. If your Net Worth score is below 5.0, you are in the statistical "Kill Zone."

• Action: Immediate preservation or partnership.
• How: Stop asset growth (to preserve ratios) and/or actively seek a Tier 1 merger partner while you still have member value to negotiate.

If this topic resonates with your credit union's challenges, schedule a private consultation to discuss how our strategic frameworks can help.