Credit Union Net Worth Must Account for Both Risk and Opportunity
The panelists agreed the net worth goal depended on an individual credit union's risk. Updike suggested that credit unions first measure their risk, then determine how much capital they wish to place at risk.
A precise capital level is essential for credit unions because maintaining net worth is expensive, Updike said. To determine the amount of return on assets required to maintain a desired capital ratio, credit unions use the following equation: capital ratio multiplied by desired growth ratio equals ROA basis points necessary to support growth and net worth.
For a $100 million credit union, that could mean a three-year cost differential of nearly $500,000 to maintain a 10% capital ratio over 7% net worth, according to Updike's calculations.
"Just think of what a $100 million institution could do for its members with $470,000," he said.
Hanley reminded the audience capital has two purposes: to protect the credit union and to allow it to take advantage of growth opportunities.
"Capital goals shouldn't be your floor," Hanley said. "You have to allow for growth or saving for a rainy day."
Hanley said he and his board at SchoolsFirst decided years ago to maintain a net worth floor of 7%. However, net worth goals were set to 10%, purposely creating a 3% cushion that has since proven to be worthwhile.
Boards must realize that capital goals involve trade offs, Hanley said. High net worth goals may create "bulletproof" exteriors but make an institution immobile. Conversely, low net worth leaves a credit union lean but also vulnerable.
"In California, we've come as close as you can to a worst-case scenario," Hanley said. "So, if your capital held, stick with it. If it is still too high or dropped too low, you need to adjust it."
He also suggested credit unions account for systemic risk when determining appropriate capital levels. "As we've learned, when one of us suffers, we all suffer," he said.
Dykstra said she also put aside net worth above her credit union's floor. However, it wasn't quite enough because she reached her floor last month.
"We grew 22% the first part of this year, but because of capital, we can't take on any more," Dykstra said. "And let me tell you, it's killing me," she added, referring to having to turn away new business.
When Dykstra first took over SF Fire CU, she said net worth was too high at 12%, especially given the low-risk profile of firefighters. Capital was withdrawn and used to "grow and change" the credit union, which Dysktra said she doesn't regret.
The panel also discussed secondary capital, which Dykstra said could not only be a source of funds but could also provide market differentiation for credit unions. She shared that her husband shops at outdoor sporting equipment cooperative REI, even though he's not particularly outdoorsy. Rather, he shops there to receive his member dividend.
"We're at an inflection point, I think, and we need to come up with cooperative-based solutions," she said.
SF Fire CU has researched returning a portion of capital to members on a regular basis, with dividends earned according to member participation. Basically, a member's deposit dividends earned and loan interest paid would be combined to determine the member's level of participation and dividend payout.
Dykstra said she didn't think credit unions will gain access to secondary capital soon but said "we can't stop trying."