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Sept. 26, 2005
Carrying a high "Undivided Earnings" at a credit union is a key question that all Credit Union members should be asking. Have we forgotten why credit union's were started? I continue to attend training in the credit union world that the instructor is talking about making a "Profit". When asked about the instructors background you seldom hear that they belong to or have worked in a credit union environment. Have we forgotten about the "Not for Profit" phrase we used to rally around? It is easier to access of funds in the Undivided Earnings account, you do not need permission from the state or federal regulators, just the Board of Directors to move funds. While the Regular Reserves you must get permission to withdraw funds under the regulations from state and federal regulators. If only the Regular Reserves were used to determine Net Worth, most credit unions remain above 10.0% requirement. Most are in the 20% levels. This account should be used for major losses. Thus, I agree that the Undivided earnings should be capable of supporting the expenses and dividends at a credit union over a period of time ( I look for 5 years when I look at the amounts. ). Anything over this amount should be returned to the members in dividends or lower interest rates. But, I also feel the interest rates offered at all the credit union today are reasonable and just for the risk to the members. Then we have to ask, why state and federal regulators look only at the Net Income on a statement for credit unions with a 19-20% Net Worth Ratio see it going negative and blow a gasket. Should these people be better trained on what the purpose of a credit union is and look more at the full operations?
My guess is that a number if industry specific variables are at work here. Capital ratios are increasing because of slow asset growth and regulatory influence. (CAMEL ratings on earnings require a 1.00 ROA.) Credit union management and boards are typically more risk averse in planning and decision making than bank competitors. Is slow asset growth a result of risk averse behavior? Is risk averse behavior driven inherently by the non-profit (less incentive driven) nature of the industry? For many credit unions, the answer is YES. Simply put, lower asset growth rates combined with all earnings retained to capital will continue to cause the ratio to grow. It is up to management to deploy the excess capital strategically relative to future expected growth rates. If that doesn't happen eventually, then the board should direct management to come up with a plan to do so.
Another argument against such a high net worth ratios is that it makes a credit union a juicy target for conversion to a mutual savings bank and later a stock-issuing company. Those law firms that prey on such CUs aren't attracted to 6% capital, but 10% or 11% can mean a windfall for them and for greedy board members.
Thanks for the "thumbnail" approach to the issue. As a credit union board member, I need to know as much as I can, and as quickly as I can.
Enough capital is that which can withstand a severe adverse impact and still let the cu operate without governmental supervisory oversight while it rebuilds it's capital base. In the Carter era we saw an inflation caused rate increase of 13 basis points in a mere 13 months, and much of the financial industry was in dire straits, capital wise. Those of us who experienced that era don't want us or our cu's to go through it ever again!
2014 Credit Union Performance In 7 Chart...
Industry Performance (3Q 2015)
Merger Activity through the 3rd Quarter ...