KBRA Downgrades Ratings for GreenState Credit Union

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

Key Credit Considerations

The rating downgrade is primarily related to the continued deterioration in credit quality including multiple periods of elevated credit losses at levels above those experienced during the GFC as well as high NPAs and delinquencies focused in the commercial loan portfolio, coupled with a materially weakened earnings profile reflected by its NIM at or below 2% for an extended period of time. The Stable Outlook post-downgrade is predicated on KBRA's view that the credit union has a sound turnaround plan with an emphasis on risk management; we also acknowledge that the FinTech originated, unsecured consumer loans that have caused elevated losses have successfully decreased in balance throughout 2H24, as well as the potential for a more favorable interest rate environment and its impact on GCU's funding profile and commercial loan performance. The credit union's sales culture driven by prior leadership (the CEO change is described below) contributed to rapid loan growth since 2020 of ~$3 billion, of which, $1.1 billion being inorganic growth with the acquisitions of the three community banks from 2020 to 2022. The growth has been centered in consumer loans, representing nearly a 50% growth rate with the remainder comprised of commercial loans, which represents one of the highest concentrations of commercial loans among credit unions nationally (29% of total loans at 3Q24). The diminished earnings profile, largely impacted by rising funding costs as GCU sustains a higher than peer reliance on interest-bearing and wholesale funding sources through FHLB and brokered deposits, which resulted in NIM falling below 2% during 2024, combined with recent elevated non-performing loan and charge-off trends (fintech originated unsecured products, autos, credit cards and commercial credits) throughout 2024. However, the credit union’s recent leadership transitions, with Vikram Israni becoming CEO in March of 2024, includes implementing risk and capital preservation strategies that should help position the credit union to be able to address the earnings power, funding model and credit challenges over the intermediate term with limited balance sheet growth, while optimizing the expense run rate and growing the member/core deposit base. Historically, the credit union has benefited from a fairly diversified revenue stream complemented by solid fee revenue with a 5-year average of noninterest income to total revenue of almost 26%, bolstered by servicing income, interchange fees, and financial service income, and noninterest income is projected to be maintained at these levels even with GCU realizing the negative impact from the Durbin Amendment which started as of 3Q23. GCU has a relatively stable regulatory capital profile, in line with many similarly rated peers, reflected in its net worth ratio near 10% and the total risk-based capital ratio of 11.4%. We will continue to monitor TCE as it reached its lowest level in 4Q23 (5.8%) as net losses decreased weakened tangible capital which was driven by lower NIM and higher provisioning expenses. Going forward, the expectation is that GCU will maintain higher capital levels corresponding with a strategic focus from the new management team and on improving the funding model which should translate into improved earnings capacity while working through the current credit challenges.

Rating Sensitivities

An upgrade is not anticipated over the medium term, though improved asset quality performance, reduced reliance on wholesale funding that translates into improved earnings power, and the strengthening of core capital measures could positively affect the ratings over the longer term. Conversely, further material declines in earnings, credit, and capital metrics could negatively affect the ratings going forward.

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Methodologies