Ask Chuck: Small Credit Union Advice from the CUinsight Community #11
Chuck Cockburn travels across the United States coaching small and mid-size credit union CEOs on how to create a foundation for long-term success. Submit your confidential question to Chuck by emailing AskChuck@CUinsight.com.
Dear Chuck:
We just had our strategic planning meeting. My board wants to focus on two things that may not be compatible. I’m worried about the pressure this will put on the credit union, staff and myself as management. The objectives are:
- To grow
- Increase the net worth ratio
Is it possible to accomplish this right now? If it is not, how do I get my board to understand the challenge?
Signed,
Growth and Net Worth Compatibility Issues ($7 million in assets)
Dear Growth and Net Worth Compatibility Issues,
A credit union can have simultaneous goals of increasing the Net Worth Ratio and growing total assets. In order to achieve both goals, however, total equity must grow faster than total assets for the year. Total equity grows when the credit union has a positive net income. Let’s look at an example:
Assumptions:
- Current Total Assets: $10 million
- 10% asset growth during the year: $11 million
- Average assets of the year: $10,500,000
- Current Total Equity: $ 1 million
- Current Net Worth Ratio: 10.0%
- Net income needed to keep net worth ratio 10%: $100,000
- ROA needed to keep net worth ratio 10%: 95 basis points
In this example, the credit union can increase assets 10% and increase the net worth ratio, if net income is greater than $100,000. This would require a ROA of 95 basis points or higher. In today’s environment it is very difficult to achieve a ROA that high. Since most credit unions are trying to increase their net worth ratio and can only achieve a much lower ROA, they are forced to control asset growth. This is accomplished by lowering deposit rates.
In summary, if a credit union has a very high ROA, it can increase total assets and the net worth ratio. In today’s environment, it is more likely that asset growth is controlled by lowering dividend rates. This will enable the credit union to improve its net worth ratio in a low earnings environment.
Chuck is the President of Credit Union Strategic Planning, leading the Net Worth Restoration, Field of Membership Expansion, Board Governance and Small Credit Union CEO Mentorship Programs. Chuck’s 25-year CEO track record (and 40 in the business) has been to profitably grow credit unions while significantly improving service and morale. Chuck’s coaching resulted in eight prior direct reports becoming credit union CEOs.
