The industry HealthScore is 6.208, which is above average in terms of our score construct, but this is the fourth straight quarter of year-over-year decline. In this time of heightened concern about bank safety (see Silicon Valley Bank), we’ve had more than a few inquiries about industry health – and declining trends do pique curiosity.
Overall, the industry is very healthy. In fact, our laggard list for Peer Group 6 credit unions, which includes credit unions $500M and greater, is populated with institutions that all have HealthScores greater than five. Five is basically benchmark average, meaning that even the “laggards” of our largest asset peer group are performing above average.
Despite the overarching industry good health, keep this in mind: a few credit unions do have legitimate problems. You’ll see those on the industry laggards list if you’re a subscriber. Some have decent capital positions, but many other aspects of their performance are substandard.
Looking deeper into this quarter’s data, there are a couple of notable, continuing industry score challenges that popped up over the last few quarters to point out. Let’s explore…
The first challenge relates to credit quality. The scores for delinquency have trended down year-over-year for the third straight quarter, and the charge-off scores are down for the second straight quarter.
Thinking ahead, higher prices, higher rates, and increasing debt loads should be of concern – and student loans may still turn into a critical challenge for those with substantial loan balances but who have been enjoying deferred payments.
By the way, some believe that the Fed has to pause in its quest to increase rates to tame inflation. That may offer a reprieve for debt-laden members, but if inflation sustains we’ll still be looking at fundamental challenges.
Cash and Short-Term Investments
The second score challenge relates to Cash and Short-Term Investments (CS in our Healthscore reporting). What’s that? Here’s a definition I like:
Cash and Short Term investments is the sum of two balance sheet line items: cash and equivalents and short term investments in marketable securities. Cash and short term investments are considered very liquid assets. For instance, if a company needs immediate liquidity, cash and short term investments can be be quickly used. Cash and short term investments are frequently used in liquidity ratios.YCharts
We’ve seen seven straight quarters of year-over-year decline for our CS score. Furthermore, the raw score has now been below five for two quarters. As of Q4 the score stands at 4.4. Remember that below five is below industry average.
The takeaway is that credit unions have a lower level of liquid assets relative to total assets – and while you won’t find this in the report, we’re at the lowest we’ve ever been.
A critical SVB problem apparently was that their deposit demand was so great that the bank had to liquidate longer-term securities at a loss. As word of their challenge grew, the chorus of voices sounding the alarm that depositors should get out while they could increased, which made the problem worse. As I’m sure you’ve by now heard, SVB was the victim of an old-fashioned bank run. They didn’t have enough liquid assets to meet their overwhelming withdrawal demand.
Given our CS score trends, one might ask whether credit unions could face the same problem. I’d never say never, but we don’t have any credit unions with quite the same customer and balance sheet dynamic at play as SVB – large corporate deposits with balances well above the deposit insurance cap with a lion’s share of customers all withdrawing most if not all of their balance at roughly the same time.
That said, it is worth a conversation in the board room and the C-Suite about how you might respond if members start asking questions about the security of their deposits. After all, ‘humans are humans,’ as former FDIC chair Sheila Bair said this week, and humans are bound to respond to rumor and innuendo (if not create it).
More to Come
We’re still digging into the full scope of data and trying to process it in the context of the events of the last week, so we may share additional thoughts over the next few weeks.
In the meantime, subscribe! We have nearly 400 credit unions that receive periodic HealthScore updates from us, including quarterly reports specific to their credit union and marketplace. It’s free, so subscribe today!
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