10 Liquidity Questions for CUs in Aftermath of Silicon Valley Bank

Amid economic uncertainty and heightened awareness of liquidity issues in the U.S. banking system, California and Nevada credit unions should weigh their balance sheets against 10 important questions as they continue standing out as a unique option in the financial services ecosystem.

That was the message to credit union CEOs yesterday on a virtual meeting with the California and Nevada Credit Union Leagues and Michael Sacher — principal of Sacher Consulting, retired certified public accountant, and former chief financial officer of Xceed Financial FCU.

Sacher’s insightful presentation reiterated how credit unions are in a healthy financial position. However, there are relevant implications for every credit union regarding liquidity risk and deposit growth strategies in the aftermath of Silicon Valley Bank’s failure.

10 Questions for CU Leaders After SVB’s Collapse
His presentation — Key Takeaways for Credit Unions from Silicon Valley Bank’s Collapse — asked the following 10 questions of credit union leaders when it comes to deposit strategies, liquidity, and risk:

• Deposit Strategy: Does your credit union have competitive rates on deposits at various maturity stages?
• Large-Depositor Focus: Has your credit union identified members with relatively large deposit balances (perhaps more than $100,000) and ensured those members have competitively priced products to alleviate the need for withdrawal to another institution?
• Proactive Outreach: Does your credit union actively reach out to members with upcoming certificate-of-deposit (CD) maturities for the purpose of promoting competitively priced products, and perhaps for offering an early withdrawal without penalty (if the proceeds are immediately rolled into a new CD)?
• Member Service Representatives: Do your member service representatives have the authority to match deposit rates of other institutions to avoid a potential withdrawal?
• Loan Pricing: Are appropriate steps being taken to ensure loan pricing is appropriate and not too low based on current market conditions?
• Credit Line Testing: Has your credit union confirmed line-of-credit borrowing limits and “tested” execution of borrowing transactions?
• AFS, HTM, and NWR: Does your credit union’s management and board of directors monitor your net-worth ratio (NWR) and outstanding net worth — both with and without available-for-sale (AFS)/hold-to-maturity (HTM) investment losses?
• ‘Intent’ and ‘Ability’ Investment Classifications: Is both “intent” and “ability” factored into the classification of AFS and HTM investment securities? Are HTM losses properly disclosed within internal financial reporting?
• Liquidity Borrowings and AFS Calculation: Is your credit union’s borrowings to avoid realized AFS losses calculated in conjunction with performance comparisons of the net present value (NPV) of holdings versus selling those AFS securities?
• Worst-Case Deposit Scenarios: Does your credit union’s liquidity stress-testing include “worst case” deposit withdrawal assumptions which take into consideration uninsured deposit concentrations?

A Look at Your CU’s ‘Modified’ Net-Worth Ratio
Sacher also touched on key takeaways from Silicon Valley Bank’s collapse, including red flags, mounting investment losses, financial accounting standards, increasing debt, negative deposit trends, and uninsured deposits. He also discussed accounting issues at the bank related to “intent and ability” to hold investment securities to maturity versus securities that were available for sale. Potential governance and risk findings may become public soon as post-mortem Silicon Valley Bank reviews are eventually released.

Additionally, Sacher provided a bird’s eye view on where California credit unions stand, including available-for-sale securities versus hold-to-maturity investment losses, increased liquidity borrowings, declining deposit growth, and decreasing money market deposit account balances versus increasing certificate-of-deposit balances.

Sacher said that something important to remember is California credit unions’ “modified” net-worth ratio — essentially what it looks like when subtracting unrealized losses on available-for-sale investment securities in a rising interest rate environment. Currently, 37 credit unions in California (out of 267) have a low “modified” net-worth ratio, which indicates the increasing impact of rising rates on available-for-sale investment securities.

“You should be looking at net worth absent available-for-sale investment losses, as well as net worth with AFS losses,” Sacher said. “If you look at what the resulting net worth ratio would be, there are some numbers with significant meaning.”

Overall, many credit unions could be “missing the boat on the certificate-of-deposit side of the product cycle,” Sacher said. Credit unions, in general, have been slower than others in financial services to offer higher, more competitive rates on various deposit products — which means there is opportunity here.

‘Our Structure is Inherently Different’
Sacher said more importantly, today’s mini-crisis in U.S. banking is shining a light on who is local, who has a high percentage of federally insured deposits, and who has the wherewithal to serve consumers during volatile periods. In fact, who advocates for the best financial interests of individuals is under the societal microscope.

Fortunately, California credit unions’ $241 billion in member deposits are 90 percent federally insured by the National Credit Union Share Insurance Fund (NCUSIF), where members have never lost a penny throughout history. In addition, credit unions in the state have a robust $51.4 billion in liquidity to safely manage daily operations and financial settlements.

From a “net worth” perspective, credit unions across the Golden State are also utilizing a healthy $29.9 billion in equity reserves to weather economic storms and remain a safe harbor. California credit unions’ net-worth-to-assets ratio is 10.5 percent — well above the 7 percent “well capitalized” federal regulatory threshold.

“At the end of the day, it’s about getting the message out regarding the safety and soundness of the credit union industry,” Sacher said. “It’s about showing the world how our structure is inherently different.”