An Understanding of a Credit Union Net Worth Restoration Plan

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Due to recent declines in the equity markets, some credit unions may experience an increased flow of funds coming into their organization at a time of weak loan demand and low investment returns. This “flight-to-safety” for some credit unions could result in the need to submit a “Net Worth Restoration Plan”.

The Net Worth Restoration Plan commonly referred to as NWRP serves as a blueprint for the board and management to restore and maintain for four consecutive quarters the credit union’s net worth ratio to 6% or greater and to establish a financial framework for the 1/10th percent (0.1%) quarterly earnings waivers transfers.

Understanding the implications of the credit union having an inadequate level of net worth is important.  Your primary goal should be safeguarding the member’s deposits through sound policies and practices, and by creating and sustaining a sufficient amount of net worth and reserves to absorb possible losses without endangering the stability of the credit union.

Your plan needs to meet the criteria set forth in NCUA Rules and Regulations 702.206-NWRP including: More

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Credit Union Mergers

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Back in the late 1970s there were approximately 20,000 federally insured credit unions in the US.  Fast forward to today and the number is down to less than 7,700 credit unions.

Our industry faces many challenges moving forward in the form of rising competition, new imposed regulations, as well as the long-term corporate stabilization and special NCUSIF premiums, a decrease in loan origination, increase deposit growth, low yielding investments prospects, and tighter margins. Collectively, these challenges have tempered growth opportunities for many credit unions.  Many are looking to the prospect of mergers as a means of building asset size, adding members, increasing net worth and/or expanding market share.  Mergers enable credit unions to increase their geographical footprint, enhance their technological capabilities, build their branch infrastructure or solve human resource challenges such as management succession issues.

Whether your the acquiring (acquirer) credit union or the one being acquired (acquiree) having a well-respected and knowledgeable credit union advocate and leader to assist in evaluating and acting upon one of the most important transactions that a credit union may consider-a merger with another credit union- is in the best interests of the credit union membership.  A merger has a life of its own; it contains a cycle from inception through “closing the deal” and the actual merging of the credit unions.

A merger can also be a tremendously emotional experience for volunteers, employees and members of a credit union.

Clearly, if considering a merger one may need to balance a number of competing interests as you begin the journey and undertake in determining whether to proceed with a merger opportunity.

I can assist the existing management and board in the determining the future of the credit union. If a decision to merge is made retaining outside assistance is highly recommended as this person can further provide guidance during the steps in the “life cycle” that the organization may encounter through the merger process and to raise pertinent legal, regulatory, accounting, and business issues that you may wish to consider in your credit union’s journey through the merger process.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

Key Ratios

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Key ratios are relatively unimportant in isolation. Board members should monitor trends (e.g., ratio this month compared to same month last year) & compare your ratios to peer averages or another type of benchmark (i.e., ratio compared to other credit unions with similar characteristics).
The following 8 key ratios will give you a very good picture of your credit union’s performance.

Net Economic Value

Capital/Assets Ratio

Return on Assets (ROA)

Loan to Share Ratio

Net Expense to Assets Ratio

Delinquency Ratio

Loan Charge-off Ratio

Checking Accounts to Members Ratio

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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Asset-Liability Management

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ALM is a subject that has constantly evolved over the years.  It is expected that the knowledge level of the credit union personnel responsible for ALM evolve as well. ALM is a process and involves more than simply reporting on ALM result or just having an ALLL Policy

Here are some key points to remember relative to ALM:

  • ALM is the process of coordinating actions to control the credit union’s risk and reach it financial goals;
  • Every action taken by the credit union sooner or later affects the ALM position;
  • Good ALM measurement and management processes are a must;
  • The ALM Policy sets the guidelines for the ALM process including key measurements; and
  • The “red zone” shows whether the credit union is in compliance with these measures.  If not, take action.

ALCO and the board should be aware of ratios or trends that may signal an existing or potential problem by analyzing the past, present, and future direction of the credit union.

ALCO should be alert for the appearance of “red flags”, investigate their sources, and if necessary, develop action plans to address the issues.

Asset-Liability Red Flags: More

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