This week’s HealthScore Chart of the Week focuses on credit union cost of funds, specifically looking at the comparison of individual credit union HealthScores to the Cost of Funds to Average Assets ratio.
The Cost of Funds to Average Assets ratio simply compares cost of funds, or the interest paid on member deposits and other borrowed funds, to credit union assets. By itself, cost of funds should not have a negative impact on the health of a financial institution. However, some financial institutions are too slow to adjust deposit rates down in a down-rate environment (such as what we have experienced over the last few years) resulting in an abundance of high-cost deposits that reduce earnings and pressure net worth.
The chart above compares individual credit union Cost of Funds to Average Assets ratios to their HealthScores. Again, when properly managed, credit union cost of funds should not detract from health, but it is interesting to see the number of credit unions with high ratios and low health scores. One could argue that for these credit unions, an adjustment of rates to average levels might enable them to invest in other areas that might actually improve their health.
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Data is as of 3/31/2013