Credit unions celebrating first quarter financials that suggest an end to the industry’s recession woes should refrain from popping champagne corks, said consultant Tom Glatt Jr.
Wilmington, N.C.-based Glatt Consulting’s Credit Union HealthScore shows that not only did the first quarter 2013 score drop compared to one year prior, the data also reveals some long-term viability issues that could continue to drag on industry success.
The HealthScore combines 11 financial measurements that include net worth, return on average assets, expense management, credit quality, member relationships, loan-to-share ratios and membership and asset growth.
The score increased 4.56% in the first quarter 2013 over the previous quarter; however, Glatt said because of seasonal trends like fourth quarter inactive account purging, which drives down membership growth numbers, scores typically improve during the first three months of every year.
With the exception of first quarter 2009, Glatt’s HealthScore has shown improvement when comparing the first quarter to the previous quarter every year since 2003.
However, when the first quarter 2013 is compared to the first quarter of 2012, the score decreased by -0.71%.
“In short, so far we aren’t quite as healthy today as we were over the same time period in 2012,” Glatt said.
The decline is being driven by small credit unions, Glatt said, who score lower than large credit unions.
For the first quarter, the overall industry HealthScore was 2.446. However, credit unions with fewer than $2 million in assets averaged a score of 1.722. The next largest peer group with assets between $2 million and $10 million also scored below average at 2.095. Credit unions between $10 million and $50 million were about average: 2.430.
However, credit unions with more than $50 million in assets performed above average, and the more assets, the better the score. Peer group three with assets from $50 million to less than $100 million scored 2.727, whiie credit unions with assets from $100 million to less than $500 million, and those with assets of $500 million or more, scored 2.958 and 3.404, respectively.
Small credit unions tend to have good deposit relationships with members but poor lending relationships, he said, which increases cost of funds while limiting revenue. Additionally, small credit unions struggle with efficiency ratios that measure how much money they have to spend to earn a dollar of revenue.
“If you run Navy Federal, you have hundreds of thousands of members and you can spread your expenses among them,” Glatt said. “But if you’re a credit union with 1,000 members, you have fewer people to share fixed costs like technology.”
While the overall industry efficiency score is 85% - meaning, on average credit unions spend 85 cents to earn $1 – large credit unions have much lower scores than small ones. Small credit unions tend to score 90% or higher. Glatt said one small credit union has an efficiency score of 126%.
Small credit unions that have a high net worth may be feeling a false sense of security about their lack of revenue, Glatt said, and may mistakenly think they don’t need to change their strategy or operations.
“If you’re a single sponsor and you’re located in the plant or at the school district headquarters, and your field of membership is right there, I can buy into believing you don’t need a robust home banking system,” Glatt said.
“But we have also seen an erosion of subsidies by sponsor groups for credit union operations. So even though you’re not investing in technology or other expenses, your pricing advantage is still deteriorating. Even though you’re still in the plant, the world is changing around you,” he said.
Technological services like mobile banking allow competitors to reach consumers within a credit union’s field of membership more easily than ever, he said.
So how can small credit unions compete? By positioning themselves differently from the competition, serving the needs of a niche market, he said.
“For example, you could build a valuable process around a product your members want,” Glatt said, “whereas, a large credit union or bank might not be willing to do something unique for just one SEG.”
Glatt said he thinks sustainability issues will continue to drive the merger trend and shrinking number of credit unions; however, he added that eventually the industry will run out of strong credit unions able to absorb struggling ones.