In 2007 my firm was asked by a client credit union to assist them in finding a suitable merger partner. They faced multiple challenges due to the recession, and because they were seeing their net worth decline at an ever-accelerating pace, they knew they needed to find a partner in short order. The problem, however, was finding a partner that was healthy enough to support not only their present situation but their likely future one as well.
To aid in the search, we created a system that allowed us to grade the performance of any given credit union, identify whether that credit union’s “grades” were rising or falling, and to determine a short list of potential merger partners for our client credit union to meet with. Ultimately the credit union made a wise choice, one that preserved services and value for thousands of credit union members.
The conclusion of that project, however, meant that we had one less client to serve … but it also led to the realization that we had a dynamic new tool to use to assess credit union health. Over the next year we began to fine tune the tool, establishing a formal grading scale (0 is poor, five is great), settling on the metrics that would be graded, and migrating the scoring system from a spreadsheet platform to a database. As the tool matured we even gave the output a name: The Credit Union Industry HealthScore.
I tell this story as a prelude to sharing some very exciting news about the health of the credit union community, as well as some basic concerns. First, let’s celebrate the good news.
The credit union community is healthy and is getting healthier every day. The latest HealthScore, an average of the individual HealthScores of all credit unions, now at sits at 2.512 – an improvement of 4% over year-end scores from 2013. This represents the fourth highest year-over-year improvement in score going back to 2004. We’re seeing building strength in the credit union community, a trend that is very exciting indeed.
But that isn’t the best part. That overarching HealthScore is an average of the scores of the 11 different metrics making up our scoring system. What is really impressive is that each of the 11 metrics saw positive year-over-year improvement. Why so impressive? We’ve never seen it before. For every quarter dating back to 2004 there is almost always a dip in three to five out of the 11 scores. This time, every score improved over the prior year.
To provide some basis of comparison, at the height of the recession the industry’s overall HealthScore was 2.224, and eight out of the 11 metrics showed year-over-year declines. To say that the industry has turned itself around since then would be an understatement.
Now to the challenges… namely, industry consolidation and problems with membership growth. Let’s start with industry consolidation. The year-over-year decline in the total number of credit unions (Q4 2013 to Q4 2014) was 4.26%. This number represents the largest year-over-year negative percent change in the total number of credit unions in more than a decade. While the accelerated consolidation has likely trimmed unhealthy credit unions from the ranks, thereby improving industry health, the pace of decline is a concern. Broad diversity of credit unions, in terms of market speciality, service philosophy, even size, is good for consumers. Rampant consolidation oftentimes results in minimal differentiation amongst competitors, and little in the way of distinct choice for consumers. It would be better to work for the survival of credit union diversity than for accelerated consolidation, though I acknowledge that many of the forces driving consolidation are beyond the direct control of the broader industry (lack of proper strategic and succession planning at smaller credit unions, regulatory/compliance burdens, changing consumer behaviors to name a few).
As for membership growth, while the industry is rightfully touting large gains in total members served, 54% of individual credit unions experienced negative membership growth in 2014. Without membership growth, a credit union will either tap out loan growth opportunities to existing members, or be forced to substantially loosen underwriting standards to keep the loans flowing. The net result of either strategy can be a less-healthy credit union as income declines and/or delinquencies, charge offs, and associated servicing expenses rise.
All credit union leaders should work to ensure industry preservation and stability, and the best way to do that is to lead a healthy, growing credit union. For inspiration, we suggest you take a look at the credit unions listed below. They represent the top 5 healthiest credit unions according to our Q4 HealthScore calculation results.
The highest score was shared by $2.5B Redwood CU out of California and $902M Kemba Financial CU of Ohio. Each scored 4.636 – and each were also in the Top 5 in the 3rd quarter.
Three credit unions shared the second-highest overall score of 4.545. Sandia Area CU, a $516M credit union out of New Mexico (also in our Q3 top 5), $2.1B Community First CU out of Wisconsin (they were 12th in Q3, but pushed their way into the top 5 with their stellar Q4 performance), and Consumers Cooperative CU out of Nebraska. Unlike their fellow list leaders, Consumers Cooperative is not in Peer Group 6. Rather, they are $24M in assets making them by far the smallest credit union in our Top 5.
These credit unions, all scoring well over 4, are doing something right, and are destined to be among the survivors in an ever-shrinking credit union community. Incidentally, only 225 credit unions have scores over 4. That’s a mere 3.5% of the industry. The credit unions above could be considered the best of the best – at least for the moment.
While our industry is healthy and getting healthier day by day we should be aiming higher still. Our challenge to the more than 6,000 credit unions scoring below the top 5, or even below the 225 that have reached a score of 4, is simply this: find a path that leads to sustainable growth. Such paths exist, and as proven by the highly successful Consumers Cooperative Credit Union, they exist for even for the smallest of credit unions.