Net Worth at 6.84%: Three Requests, One Board Vote
Riverton Federal Credit Union holds $148 million in assets, 21,400 members, a main office, and two in-store branches. Its net worth ratio has fallen from 8.10% to 6.84% over three years, driven by a push into indirect auto lending and a 2023 renovation that ran $1.9 million over budget. Return on assets is 0.31% and the loan-to-share ratio is 89%. At the March board meeting, three items sit on the same agenda: add three adjacent underserved census tracts to the field of membership, open a fourth branch in a leased storefront, and launch a 24-month certificate paying 4.50% to counter a bank promotion across the street. Outstanding member business loans equal 11.9% of assets. The chair asks for your written assessment before the vote, noting that Riverton has never been examined by NCUA with a net worth ratio below 7%.
1. What does a 6.84% net worth ratio mean under NCUA prompt corrective action, and how should it shape the board's handling of the three agenda items?
Read the worked answer
6.84% places Riverton in the adequately capitalized category. The thresholds are 7.00% for well capitalized, 6.00% for adequately capitalized, and 4.00% for undercapitalized, so Riverton sits 16 basis points under the well-capitalized line and has no buffer against a bad quarter. It does not yet need a net worth restoration plan, but adequately capitalized credit unions need prior NCUA approval for certain activities, including accepting non-member deposits and issuing secondary capital unless low-income designated. The decisive issue is arithmetic, not labels. At 0.31% ROA on $148 million, retained earnings add about $460,000 a year, roughly 4.5% growth in the $10.1 million of net worth. Eight percent asset growth ($11.8 million) requires net worth to grow 8% (about $810,000) just to hold 6.84%, leaving a $350,000 hole before any branch startup losses. Each item pulls a different lever: FOM expansion is almost capital-free but deposit inflow enlarges the denominator; a new branch loses money for 24 to 36 months; a 4.50% certificate raises cost of funds on an already 89% loaned book.
2. The CEO points to the 11.9% member business loan figure and says there is room to grow. What do you advise?
Read the worked answer
Start with the statute: member business loans are capped at 12.25% of total assets. On $148 million, 11.9% is about $17.6 million, leaving roughly $520,000 of nominal headroom, under half a percent of assets. Two cautions follow. First, the numerator is not simply the commercial loan total on the core report. Several categories are excluded from the cap, for example loans fully secured by a first lien on a 1-4 family residence and certain agricultural and entity loans, so rebuild the aggregate from the loan tape and have the calculation reviewed rather than assumed. Second, the denominator moves. A certificate campaign that raises $5 million shifts the ratio down without a single new commercial loan, while deposit runoff pushes it up and can put the credit union over the cap through no lending decision at all. Practically, the board should hear that headroom equal to two or three commercial renewals is not a growth plan, that concentration limits and commercial underwriting expertise matter more than the ceiling, and that growth in this line needs a capital plan, not just available capacity.
3. List the specific metrics and projections you would put in front of the board so the vote is informed rather than optimistic.
Read the worked answer
The packet should show net worth ratio against three scenarios, not one: base, no-growth, and growth with each item approved. For each, project assets, retained earnings at 0.31% ROA, and the resulting ratio for eight quarters, because the failure mode here is a ratio that slides under 6.00% quietly. Add: (1) net worth growth rate versus asset growth rate, the single cleanest early warning; (2) delinquency and charge-offs by product, with indirect auto broken out, since that portfolio drove the decline; (3) cost of funds and deposit beta, to show what the 4.50% certificate does to margin if the bank promotion fades in six months; (4) a branch pro forma with break-even month, occupancy cost, and deposits needed to cover it; (5) liquidity and borrowing capacity, given 89% loan-to-share; (6) commercial concentration as a percentage of net worth. Label the assumptions explicitly, especially the loan growth rate, so directors can challenge them. If the numbers show the ratio crossing below 7% for four or more quarters under the growth scenario, recommend sequencing: FOM first, branch after a capital plan, certificate only if margin supports it.