KBRA Affirms Ratings for GreenState Credit Union and Revises Outlook to Negative

KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for North Liberty, Iowa-based GreenState Credit Union (“GreenState” or “GCU”) (“the credit union”). The Outlook for all long-term ratings has been revised to Negative from Stable.

Key Credit Considerations

The change to a Negative Outlook is primarily driven by the diminishing earnings profile, largely impacted by rising funding costs as GCU is primarily funded by longer term share certificates (i.e., CDs), which resulted in NIM falling below 2% during 3Q23, combined with recent elevated charge-off trends throughout 9M23. However, the credit union’s recent leadership transition, with Todd Fanning becoming Interim CEO, includes implementing strategies that should help position the credit union to be able to address the funding model over the intermediate term with moderate growth, while also optimizing the expense and network base. GreenState’s ratings are supported by its well-executed credit union model that benefits from its extensive membership base. However, GCU has experienced rapid asset growth of ~20% CAGR for the last 3 years and has nearly doubled in size since 2017, increasing reliance on wholesale funding as core deposits accounted for 73% of total funding as of 3Q23. GCU sustains a higher than peer reliance on interest-bearing and wholesale funding sources through FHLB and brokered deposits. As a result, the credit union’s cost of total funding was nearly 2.98% for 3Q23 (~2.00% in 2019). The credit union has a fairly diversified revenue stream complemented by solid fee revenue with a 3-year average of noninterest income to total revenue of almost 25%, bolstered by servicing income and supported by interchange fees and financial service income. Going forward, noninterest income is expected to decline to less than 20% of total revenue in 2023 and beyond as GCU’s realizes the negative impact from the Durbin Amendment. The credit union also maintains a granular/diversified risk nature of the consumer-oriented balance sheet and solid credit loss history, which further bolster GCU’s credit profile. Overall, net charge-off activity has been steadily increasing due to fintech originated unsecured products that have been discontinued in the current environment. Classified and criticized loans are forming into more predictable NPAs and NCOs ratios given the granularity within the loan portfolio. GCU has a stable regulatory capital profile, in line with many similarly rated peer, reflected in its net worth ratio near 10% and the total risk based capital ratio of 11.2%. Going forward, the expectation is that GCU will maintain higher capital levels corresponding with a newer strategic focus on improving earnings capacity and anticipated modest growth trajectory.

Rating Sensitivities

A return to Stable Outlook could occur from reduced reliance on wholesale funding, improved asset quality performance, the addition of stable fee income, and further strengthening of core capital measures. Declining capital metrics falling below peer positioning (net worth ratio of 9.5% or less) or unexpected material deterioration in credit causing elevated loss rates that could potentially have an continued negative impact on profitability may result in negative rating pressure.

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Methodologies