Credit unions strengthen, but is there cause for concern?
Glatt Consulting, a leading credit union consulting firm, publishes a proprietary Credit Union Industry HealthScore each quarter. The HealthScore, based on a 5-point scale (0 reflects poor health, 5 reflects exceptional health), calculates overall credit union health by grading them on 11 ratios, including net worth, ROAA, operating expense, efficiency, charge-offs, delinquency, deposits, loan-to-share, asset growth and membership growth.
According to Q3 2015 data released by Glatt Consulting, the overall strength of the credit union industry is up 2.92 percent over the same period last year. The increase, up to a score of 2.601 overall compared to 2.527 in 2014, represents the seventh straight quarter showing a year-over-year score increase. The Q3 2015 score, however, is a slight decrease from the Q2 2015 score of 2.631.
The data also shows that more than 28 percent of all credit unions were rated a 3 or better. In fact, the largest credit unions tend to comprise those higher ratings – the average assets of those rated a 4 or better is more than $1.5 billion, and those rated between 3 and 4 is more than $415 million. For credit unions rated between 1 and 2 (22.7 percent of credit unions), the average asset size is just under $17 million; for the 2 percent of credit unions rated under a 1, the average asset size is under $5 million.
The main cause for concern comes when reviewing quarter to quarter movement between scores. Comparing Q3 2015 to Q3 2014, credit unions moved up the rating scale – for instance, moving from a rating between 2 and 3 to a rating between 3 and 4 – to improve the overall score. However, when comparing Q3 2015 to Q2 2015, credit unions scoring a 2 or less grew 7 percent. The primary driver, according to Glatt Consulting, is a decrease in scores for delinquencies, asset growth and operating expenses. Glatt noted the trend is worth keeping an eye on, stating “the less healthy credit unions are the less competitive they become, and the less competitive they become the more likely they are to fail.”
As credit unions aim for continued growth in 2016, many are increasing their member business lending portfolios. As of September 2015, less than 40 percent of all credit unions offered business loans to their members – though almost 80 percent of credit unions with more than $100 million in assets did. Either way, this is one area credit unions have room to grow. For those interested in starting or expanding this area of lending, access the complimentary whitepaper: Mitigating Top Member Business Lending Risks.