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Monitor return on assets and eight other ratios
Once upon a time, credit union mergers were performed only out of necessity. In today’s vibrant marketplace, however, strategy tends to be a driving force for many CU combinations. According to Glenn Christensen, president of CEO Advisory Group, Kent, Wash., nine financial ratios should be used to monitor credit unions’ positions in the face of a potential merger and to evaluate the best next steps.
Here, we cover one ratio, return on assets. Get the other eight by reading Christensen’s full Center for Credit Union Board Excellence, “9 Ratios for Evaluating Whether Your CU Should Consider a Merger.”
Long-term growth is limited by return on assets. Because CUs can only build capital through earnings, the earnings rate must be equal to, or in excess of, the asset growth rate. If this ratio is not met, net worth ratio will decline.
One of your board’s responsibilities is to truthfully answer whether you can sustain a sufficient ROA in the long run to maintain a healthy, competitive growth rate. Pay particular attention to negative earnings. NCUA reports, “54 percent of merging credit unions had negative return on average assets for three consecutive years prior to failure.”
If your credit union wishes to maintain or grow its net worth ratio while maintaining market share in an area where deposits are growing at an annualized rate of 10 percent, you’ll need a very strong ROA, likely in the area of 0.8 percent to 1.2 percent, depending on your level of capital. C Myers Corp., Phoenix, offers a net worth calculator that could help guide you toward your optimal ROA range.
Ask yourself: Does your credit union have the earnings potential to keep up with market growth, or will your CU continue to fall further behind?
