HealthScore Chart of the Week – Closed Credit Unions

HealthScore Chart of the Week

We are back with new content for our Credit Union Industry HealthScore Chart of the Week series. Our HealthScore system calculates overall credit union health by scoring/grading performance across eleven different key ratios. This week’s HealthScore chart focuses on credit unions that closed, merged, or changed charters during Q3 2013, specifically looking at the distribution of credit union scores as compared to industry averages.

The HealthScores of credit unions that closed, merged, or changed charter during Q3 2013 are charted below. The scoring scale ranges from 0 to 5, with 0 indicating poor health and 5 indicating exceptional health. Of this grouping of credit unions, 83% fell below the average HealthScore of the industry, which at the time was 2.456.

Score Distribution of Closed or Merged Credit Unions
Score Distribution of Closed or Merged Credit Unions

One of the compelling questions is why so may credit unions in this group chose not to act (or were not acted upon, in the case of conservatorships) until after their overall health declined to a “point of no return.” We think we have part of the answer. A position we have held at Glatt Consulting for some time is that for many credit unions, an “abundance” of capital is proof enough of a healthy institution that boards and management teams feel comfortable ignoring and/or justifying unhealthy performance in other areas.

Let’s explore…

For any given credit union, determining the appropriate or acceptable level of performance in many of the categories we incorporate into our HealthScore is more or less a subjective endeavor. For example, one credit union may determine that it is acceptable to maintain net membership growth at 0% while another credit union may determine that it is unacceptable to fall below 5%. This is true for every measure. The clear exception, however, is Net Worth. Legislators and regulators have determined a minimally acceptable level of Net Worth to be considered “healthy,” which under current rules is 7% (our HealthScore grading for Net Worth incorporates this expectation). What this means for far too many credit unions is that as long as Net Worth remains “in compliance,” performance in other areas can be easily justified by simply defining what would ordinarily be “poor health” as “adequate health.”

Consider this: 74% of the credit unions included in the chart above would have been considered well capitalized under current rules … yet they no longer exist. Our conclusion is that their choice to merge, change charter/strategic direction, or the determination to conserve or liquidate them was due to the cumulative negative impact of poor health in areas outside of Net Worth.

Take a look at the table below. It includes average HealthScores for this group of credit unions as of 9/30/13, average scores for the industry overall as of 9/30/13, and the +/- score differential between the two. On average, credit unions in this grouping fared worse than the industry in every category, but to even receive a score of 1 for Net Worth in our system, a credit union must be well capitalized. While the credit unions in this group had a lower score for Net Worth, relatively few were undercapitalized. It wasn’t necessarily Net Worth that did them in, but other factors … particularly earnings and membership growth.

Group Averages Industry Averages Score +/-
HealthScore 1.762 2.456 -0.694
Net Worth 2.500 3.328 -0.828
ROAA 0.797 1.810 -1.013
Operating Expense 1.905 2.824 -0.919
Efficiency 0.784 0.916 -0.132
Delinquency 2.554 2.847 -0.293
Charge-Off 2.581 3.202 -0.621
Deposits 3.041 3.668 -0.627
Loans 1.919 2.820 -0.901
Loan to Share 1.568 2.315 -0.747
Membership Growth 0.541 1.123 -0.582
Asset Growth 1.189 2.159 -0.970

Overall credit union health is certainly impacted by, and should be measured by, many factors beyond Net Worth. While this statement may seem obvious, we have had many conversations with boards and management team members about whether certain measurements in our score system (let alone any other measurement a credit union might use to track performance) are truly important. For example, during a planning session we facilitated a few years ago, a board member stated that membership growth was not important at all. True, you can be extremely healthy while experiencing recurring losses in total membership. You cannot, however, remain healthy in the long run. Furthermore, if you ignore poor performance for too long, whether in membership growth or in any other critical metric, it becomes exponentially more difficult to turn things around when necessary.

Our HealthScore system allows for credit unions to better understand how various areas of performance all contribute in some way to overall credit union health. Ignore one area for too long, other areas begin to fall  – a process which could ultimately lead to a sad, whimpering end similar to that experienced by so many of the credit unions charted above.

Interested in learning more about where your credit union stands in relation to Glatt Consulting’s Credit Union Industry HealthScore? Purchase a custom score report for your credit union. You may also want to learn more about our approach to credit union strategy consulting.

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