ADVANCED FINANCIAL LITERACY FOR DIRECTORS: APPLYING RATIO ANALYSIS - - PowerPoint PPT Presentation

ADVANCED FINANCIAL LITERACY FOR DIRECTORS:

APPLYING RATIO ANALYSIS TO MANAGE THE BALANCE SHEET & MAXIMIZE INCOME

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Presented by:

• Dr. Randy Thompson

rthompson@tctrisk.com

BOARD OF DIRECTORS RESPONSIBILITIES

 The board of directors is responsible for the general

direction and control of the affairs of each federal credit

• union. While a federal credit union board of directors may

delegate the execution of operational functions to federal credit union personnel, the ultimate responsibility of each federal credit union's board of directors for that federal credit union's direction and control is non-delegable.

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BOARD OF DIRECTORS RESPONSIBILITIES

Credit Union National Association (CUNA) Generally speaking, the board's job is to set direction for and control the credit union, making sure it is operated in a sound and prudent manner and that all decisions are guided by the best interests of the members.

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BOARD OF DIRECTORS RESPONSIBILITIES

Necessary Knowledge and Skills

• 1. An understanding of credit union philosophy
• 2. A desire to better the financial lives of

members

• 3. Ability to understand basic financial

statements

• 4. Ability to think and plan strategically

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BOARD OF DIRECTORS RESPONSIBILITIES

Foundational to all other duties is the responsibility to assure that the credit union is pursuing a direction that will assure business success.

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DEFINITIONS AND TERMS

Balance Sheet Income Statement Key Ratios

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DEFINITIONS AND TERMS

 Balance Sheet – Statement of:

 Assets – cash, investments, loans, other assets

(building, equipment, REO, etc.)

 Liabilities – money owed, deposits, other

liabilities (taxes, accruals, etc.)

 Equity/Capital – retained earnings, reserves,

adjustments to investment value

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BALANCE SHEET

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Assets Liabilities Loans to Members $ 16,390,528 Total Liabilities $ 352,488 Total Visa Loans & Advances $ 649,962 Participation Loans $ 132,794 1st Mortgage Loan-CUSO $ - Shares CUBG MBL LN Part $ 445,077 Regular & Xmas Shares $ 25,487,300 Bus Partner MBL Ln Part $ 2,834,860 Share Draft $ 5,616,549 GE Auto Loan Paticipation $ 1,946,824 Money Markets $ - Total Loans $ 22,400,045 Regular Certificates $ 1,648,988 Allowance for Loan Loss $ (90,562) IRA Shares $ - Net Loans $ 22,309,483 Total Member Shares $ 32,752,837 Cash $ 902,351 Investments $ 13,351,217 Fixed Assets $ 216,035 Other Assets $ 64,872 Equity $ 3,738,633 Total Assets $ 36,843,958 Total Liabilities and Equity $ 36,843,958

DEFINITIONS AND TERMS

 Income Statement

 Revenues – interest on loans, interest on

investments, non-interest income (fees)

 Expenses – operating expenses, dividends  Net Margin – bottom line earnings

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INCOME STATEMENT COMPONENTS 10

Interest from Loans $ 91,989 Income From Investments $ 6,509 Fees and Charges $ 22,296

• Misc. Operating Income

$ 2,042 Total Interest Income $ 122,836

INCOME STATEMENT COMPONENTS 11

Salary $ 32,480 Employee Benefits $ 10,007 Travel and Conference $ 2,505 Association Dues $ 1,434 Office Occupancy $ 23,088 Office Operations $ 27,968 Total Advertising and Promotion $ 1,071 Loan Servicing $ 2,792 Professional & Outside Service $ 13,672 Provision for Loan Loss $ - Cash Over & Short $ 100 ATM Cash Over/Short $ 151 Misc Operating Exp $ 348 Total Operating Expense $ 115,616

INCOME STATEMENT COMPONENTS 12

Regular & Xmas Shares $ 951 Share Draft $ - Money Markets $ - Regular Certificates $ 330 Total Dividend Expense $ 1,281

INCOME STATEMENT COMPONENTS 13

Summary Total Interest Income $ 122,836 Total Operating Expense $ 115,616 Total Dividend Expense $ 1,281 Net aFter Dividends $ 5,939

KEY RATIOS – FOCUS OF MEASUREMENT

 Financial Performance  Application of and return on financial resources  Growth  Increases in key resources  Asset Quality  Risk associated with assets

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ANALYSIS OF IMPACT OF KEY RATIOS

What types of analysis can be used to measure and control credit union direction?

 Financial Trends  Benchmarks  Internal Metrics/Goals

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ANALYSIS OF IMPACT OF KEY RATIOS

Financial Trends

 A look at the movement related to the ratio output  May be:



Consecutive months in a period of time

 Comparison of consecutive points in time over several years

 Because they are internal they are easily computed

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ANALYSIS OF IMPACT OF KEY RATIOS

Benchmarks

 Sometimes used in reference to best practices  Developed by examining peer performance  Commonly involves averaging peer scores  Limitations

 What are peers?  What care should be used to select peers?  Is being “average” your goal

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ANALYSIS OF IMPACT OF KEY RATIOS

Internal Metrics/Goals

 Developed internally based on your expectations  Directly related to budget and strategic plan  May be the most important measure  These measures are internally developed, as well

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FINANCIAL PERFORMANCE

 Loan Yield  Investment Yield  Other Income  Operating Expenses  Cost of Funds  ROA  Equity Ratio

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FINANCIAL PERFORMANCE

 Loan Yield

 Average interest rate earned on loans  Calculation

Annualized interest income/total loans

 Result

Return on each dollar of loans

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FINANCIAL PERFORMANCE

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Annualized x12 Interest Income Loans $ 91,989 $ 1,103,868 Loans $ 22,400,045 Loan Yield 4.93%

FINANCIAL PERFORMANCE

 Investment Yield  Average interest rate earned on investments  Calculation

Annualized interest income/total investments

 Result

Return on each dollar of investments

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FINANCIAL PERFORMANCE

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Annualized x12 Interest Income Investments $ 6,509 $ 78,108 Investments $ 12,759,726 0.61%

FINANCIAL PERFORMANCE

Cost of Funds Dollar cost on total deposits Calculation

Annualized interest expense/deposits

Result

Interest cost for each dollar of deposits

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FINANCIAL PERFORMANCE

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Annualized x12 Dividend Expense $ 1,281 $ 15,372 Deposits $ 32,752,837 0.05%

FINANCIAL PERFORMANCE

 Non-Interest Income (fees, charges)

 Dollar income from non-interest sources  Calculation

Annualized non-interest/assets

 Result

Non-interest income on each dollar of assets

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FINANCIAL PERFORMANCE

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Annualized x12 Non-Interest Income $ 24,338 $ 292,056 Assets $ 36,843,958 0.79%

FINANCIAL PERFORMANCE

 Operating Expense

 Dollar cost for non-interest expenses  Calculation

Annualized non-interest expense/assets

 Result

Non-interest cost on each dollar of assets

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FINANCIAL PERFORMANCE

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Annualized x12 Operating Expenses $ 115,616 $ 1,387,392 Assets $ 36,843,958 3.77%

FINANCIAL PERFORMANCE

 ROA (Return on Assets)  Dollar return for each dollar of assets  Calculation  Interest Income  -Interest Expense  =Net Interest Margin  +Other Income  -Operating Expense  =Net Income/Assets = ROA

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FINANCIAL PERFORMANCE

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ROA $ ROA % Loan Interest $ 1,103,868 3.10% Investment Interest $ 78,108 0.22% Total Interest $ 1,181,976 3.32% Dividend Expense $ 71,268 0.20% Net Income $ 1,110,708 3.12% Other Income $ 292,056 0.82% Operating Expenses $ 1,387,392 3.89% Net Margin $ 15,372 0.04%

FINANCIAL PERFORMANCE

 Equity Ratio

 Dollars of reserves as a percent of total assets

(primary indication of financial strength)

 Calculation

 Total equity/total assets

 Result

 Dollars of reserves in relation to total assets

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FINANCIAL PERFORMANCE

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Annualized x12 Total Equity $ 3,738,633 $ 3,738,633 Assets $ 36,843,958 10.15%

GROWTH

 Assets

 % change from prior period

 Deposits

 % change from prior period

 Loans

 % change from prior period

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CALCULATION METHOD

 Identify most-recent period balance  Identify previous period balance  Subtract previous from current  Divide result by previous period  Result in the rate of change

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GROWTH

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2014 2015 Change $ Change % Deposits $ 31,618,264 32,752,837 $ 1,134,573 3.59% 2014 2015 Change $ Change % Loans $ 19,190,683 22,400,045 $ 3,209,362 16.72% 2014 2015 Change $ Change % Assets $ 35,624,295 35,871,385 $ 247,090 0.69%

ASSET QUALITY

 The Quality of Assets

 Measured by delinquency, loss or use of

assets

 Measures

 Delinquencies  Charge-Offs  Loan to Share

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ASSET QUALITY

 Delinquency  Meaning

 How many dollars are past due (30 or 60)  Dollars vs. numbers

 Measurement

 Divide dollars/numbers delinquent by total

dollars/number of loans

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ASSET QUALITY

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FINANCIAL PERFORMANCE

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Delinquency Ratio

Month January February March April May June July Trend 0.21% 0.33% 0.26% 0.23% 1.56% 1.05% 1.23% Benchmark 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% Internal Metric 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%

Conclusion:

0.00% 0.50% 1.00% 1.50% 2.00% January February March April May June July Trend Benchmark Internal Metric

ASSET QUALITY

 Charge-offs  Meaning

 How many dollars have been charged off

(lost)

 Dollars vs. numbers

 Measurement

 Divide dollars/numbers charge-offs by total

dollars/number of loans

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ASSET QUALITY

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FINANCIAL PERFORMANCE

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Charge Off Ratio

Month January February March April May June July Trend 0.00% 0.00% 0.00% 0.00% 0.00% 0.23% 0.28% Benchmark 0.33% 0.33% 0.33% 0.33% 0.33% 0.33% 0.33% Internal Metric 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

Conclusion:

0.00% 0.10% 0.20% 0.30% 0.40% January February March April May June July Trend Benchmark Internal Metric

FINANCIAL PERFORMANCE

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• 0.04%
• 0.57%

0.13% 0.72%

• 0.21%
• 0.60%
• 0.09%
• 0.80%
• 0.60%
• 0.40%
• 0.20%

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ROA - YE Goal 0.61%

Gap Actual Goal

THANKS FOR PARTICIPATING!

• Randy Thompson, Ph.D.
• Email: rthompson@tctconsult.com
• Phone: 208-939-8366
• Dennis Child
• Email: dennis.child62@gmail.com
• Phone: 435-770-0178
• Website: tctrisk.com

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