WE’RE GOING TO BUILD A
“DASHBOARD OF FINANCIAL HEALTH”
AS WE REVIEW THE FOUR RATIOS.
A DASHBOARD IS A TOOL TO HELP
FOCUS BOARD MEETING DISCUSSIONS
ON THE MOST IMPORTANT ISSUES.
OUR FIRST KEY RATIO IN THE
DASHBOARD IS THE CAPITAL OR NET
WORTH RATIO.
THIS RATIO IS A MEASURE OF THE
CREDIT UNION’S ABILITY TO COVER
LOSSES AND INVEST IN MEMBER
SERVICES.
THE FINANCIAL STATEMENT LINE
ITEMS ARE TOTAL EQUITY,
ALSO KNOWN AS CAPITAL OR NET
WORTH,
DIVIDED BY TOTAL ASSETS.
A FEW REMINDERS ABOUT EQUITY:
IT’S THE ACCUMULATION OF NET
EARNINGS SINCE THE CREDIT
UNION’S INCEPTION.
IT’S THE CREDIT UNION’S CUSHION
AGAINST PLANNED AND UNPLANNED
LOSSES.
CHANGES TO EITHER SIDE OF THE
RATIO CALCULATION WILL AFFECT
THE RATIO.
LET’S REVIEW TWO COMMON
SCENARIOS LEADING TO A NET WORTH
RATIO DECLINE.
THESE ARE EQUITY SHRINKING AND
ASSETS GROWING.
NET LOSSES SHRINK EQUITY (CENTER
THIS STATEMENT ON SCREEN WITH A
“SHRINKAGE” VISUAL OF SOME SORT)
WHEN A CREDIT UNION HAS A NET
LOSS THE EQUITY SHRINKS BY THAT
LOSS AMOUNT.
LET’S REVIEW THE THREE-YEAR
TREND AT THIS $5 MILLION CREDIT
UNION.
IN 2007 THIS $5-MILLION DOLLAR
CREDIT UNION IS [1]EARNING .05%
PROFIT EACH YEAR.
IN 2008 RECESSION LEADS TO A
$5,000 LOSS.
IN 2009 RECESSION LEADS TO
ANOTHER $5,000-DOLLAR LOSS.
NET WORTH DECLINES FROM 10.00%
DOWN TO 9.8%.
THE CREDIT UNION HAS MAINTAINED
$5 MILLION IN TOTAL ASSETS FOR
MANY YEARS.
IT GENERATES ABOUT .05% ON
ASSETS EACH YEAR,
A PROFIT OF $2,500.
2007 ENDS WITH $500,000 IN
EQUITY AND $5MILLION IN TOTAL
ASSETS, A 10% NET WORTH RATIO.
IN 2008 THE RECESSION HITS AND
RATHER THAN SHOWING A
$2,500 PROFIT, THE LOAN LOSSES
LED TO A $5,000 DOLLAR NET LOSS.
IN 2009 THE SAME THING, ANOTHER
$5,000-THOUSAND DOLLAR LOSS.
THE ASSETS HAVE STAYED STEADY AT
$5-MILLION DOLLARS.
BUT THE NET WORTH RATIO IS
SLOWLY FALLING FROM 10% DOWN TO
9.80%.
THAT WAS A LOOK AT THE NET WORTH
RATIO FALLING BECAUSE OF A
CHANGE IN THE NUMERATOR, TOTAL
EQUITY.
NOW LET’S LOOK AT CHANGE IN THE
DENOMINATOR, TOTAL ASSETS.
IF THE DENOMINATOR IN THE
EQUATION,
TOTAL ASSETS, GROWS AT A FASTER
PACE THAN THE NUMERATOR,
TOTAL EQUITY, THEN THE NET WORTH
RATIO WILL FALL.
SEE THE TRENDS IN THIS SCENARIO.
IN 2009 THE $5-MILLION DOLLAR
CREDIT UNION IS EARNING .05%
PROFIT EACH YEAR.
IN 2010 A CD PROMO ATTRACTS
$500,000 IN DEPOSITS.
IN 2011 THE PROMO ATTRACTS
ANOTHER $500,000.
THE NET WORTH RATIO DECLINES
FROM 10% DOWN TO 8%.
LET’S TAKE THE SAME $5-MILLION
DOLLAR CREDIT UNION.
IT CLOSES 2009 WITH
$500-THOUSAND DOLLARS IN EQUITY
AND $5-MILLION IN TOTAL ASSETS,
A 10% NET WORTH RATIO.
BUT THERE’S A BIG CAMPAIGN TO
“MOVE YOUR MONEY” COMING.
IN 2010 THE CREDIT UNION HAS ITS
USUAL $2,500-DOLLAR PROFIT,
SO EQUITY GROWS TO BY THE SAME
AMOUNT,
ENDING WITH $502,500-DOLLARS.
BUT IN THAT SAME YEAR THE “MOVE
YOUR MONEY” CAMPAIGN LED TO AN
INFLUX OF $500-THOUSAND IN
DEPOSITS.
MEMBERS TOOK THEIR MONEY OUT OF
THE BIG BANKS AND DEPOSITED IT
IN THE CREDIT UNION.
THE LARGE INCREASE IN CASH
ASSETS ON THE BALANCE SHEET LED
TO A NET WORTH RATIO DROP FROM
10% TO 9%.
IN 2011, THE CAMPAIGN BRINGS IN
ANOTHER HALF MILLION,
BUT THE CREDIT UNION HAD ITS
USUAL $2,500-THOUSAND DOLLAR
PROFIT.
SO WHILE EQUITY HAS GROWN BY
$5,000 OVER TWO YEARS,
THE PACE OF THE ASSET GROWTH IS
MUCH QUICKER.
THE CREDIT UNION CLOSES 2011
WITH AN 8% NET WORTH RATIO.
THESE TWO SCENARIOS ILLUSTRATE
THE IMPORTANCE OF MONITORING THE
NUMERATOR AND DENOMINATOR IN ANY
RATIO.
SUCCESS IS POSSIBLE WHEN THE
CHANGES MOVE IN A POSITIVE
DIRECTION AND AT THE SAME PACE.
WE STARTED WITH NET WORTH RATIO
BECAUSE ITS DECLINE CAN HAVE
DIRE CONSEQUENCES.
A NET WORTH RATIO DECLINE CAN
LEAD TO A CREDIT UNION’S MERGER
OR LIQUIDATION.
PROMPT CORRECTION ACTION, OR
PCA,
IS NCUA’S REGULATION REQUIRING
CREDIT UNIONS TO REMAIN WELL
CAPITALIZED.
SEE EACH PCA CLASSIFICATION AND
THEIR CORRESPONDING NET WORTH
RATIO LEVELS.
A NET WORTH RATIO DROP BELOW 7%
TRIGGERS PROMPT CORRECTIVE
ACTION.
AT THE UNDERCAPITALIZED LEVEL,
HIGHLIGHTED IN RED,
THE CREDIT UNION MUST PREPARE A
NET WORTH RESTORATION PLAN.
THE NET WORTH RESTORATION PLAN
IS A SET OF PROJECTIONS AND AN
ACTION PLAN OF HOW THE CREDIT
UNION WILL RESTORE ITS NET WORTH
TO 7%.
AS THE RATIO DECLINES FURTHER,
NCUA CAN IMPOSE INCREASING
RESTRICTIONS ON THE CREDIT
UNION’S LENDING ACTIVITY.
AT A DROP BELOW 2%, NCUA CAN
MERGE,
CONSERVE OR LIQUIDATE THE CREDIT
UNION TO PROTECT THE SHARE
INSURANCE FUND.
FOR MORE ON PCA AND NET WORTH
RESTORATION PLANS SEE OSCUI’S
WEBINAR, NET WORTH RESTORATION
PLANS: A PATH TO RECOVERY.
