View
25
Download
0
Category
Tags:
Preview:
DESCRIPTION
Financial Literacy Requirements for Directors. By Tim Harrington, CPA President, T.E.A.M. Resources 7049 E. Tanque Verde Rd. PMB 136 Tucson, Arizona 85715 (800) 788-9542 tharrington@forTeamResources.com. Financially Literacy Regulation. NCUA Rules and Regulations 701.4(b)(3) - PowerPoint PPT Presentation
Citation preview
By Tim Harrington, CPAPresident, T.E.A.M. Resources
7049 E. Tanque Verde Rd. PMB 136Tucson, Arizona 85715
(800) 788-9542tharrington@forTeamResources.com
Financial Literacy Requirements for
Directors
NCUA Rules and Regulations 701.4(b)(3)(3) At the time of election or appointment, or within a
reasonable time thereafter, not to exceed six months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the Federal credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors
Financially Literacy Regulation
Should identify:
• Risks within our credit union
• Level of financial literacy Directors need
• Individual analysis and plan for each Director in order to achieve financial literacy– Can consider past education or experience
• CPA, Financial background, etc.
– Should include supplemental education where deficiencies are identified
Financially Literacy Policy
Balance Sheet Income Statement ASSETS LIABILITIES & CAPITAL
REVENUEEARNING ASSETS MISCELLANEOUS LIABILITIES
Loan Interest IncomeLoans
Less Allowance for Loan and
Lease Losses
Investment Interest Income
Fees and Other Non-Interest SHARES Income
EXPENSES
Investments Held -to-Maturity Occupancy Available-for-Sale Personnel Trading Provision for Loan Losses
NON-EARNING ASSETS COST OF FUNDS
Building, Equipment, etc. Dividends PaidNCUSIF Deposit CAPITAL
Regular Reserves
Other Assets Undivided Earnings NET INCOME or LOSS
4
Balance Sheet Income Statement ASSETS LIABILITIES & CAPITAL
REVENUEEARNING ASSETS MISCELLANEOUS LIABILITIES
Loan Interest IncomeLoans
Less Allowance for Loan and
Lease Losses
Investment Interest Income
Fees and Other Non-Interest SHARES Income
EXPENSES
Investments Held -to-Maturity Occupancy Available-for-Sale Personnel Trading Provision for Loan Losses
NON-EARNING ASSETS COST OF FUNDS
Building, Equipment, etc. Dividends PaidNCUSIF Deposit CAPITAL
Regular Reserves
Other Assets Undivided Earnings NET INCOME or LOSS5
What You
Have
What You Owe
What Your
Members Own
What Comes
In
What Goes
Out
Balance Sheet Income StatementASSETS LIABILITIES & CAPITAL
REVENUE
EARNING ASSETS MISCELLANEOUS LIABS
Cash 160,000$ Miscellaneous Liabs 151,000$ INTEREST INCOME
LOANS SHARES Loans 563,400$ Unsecured 1,350,000 Vehicle 3,500,000 Share savings 1,680,000 Investments 200,400 Real estate 300,000 Share drafts 3,500,000 Total Int Inc 763,800 Total loans 5,150,000 Money market 3,624,000 Non Interest Inc 78,200
IRAs 41,000 Less allowance (101,875) Other 4,000 TOTAL 842,000 Net Loans 5,048,125
Total Shares 8,849,000 EXPENSES
OccupancyINVESTMENTS Personnel 332,000 Held to maturity 3,500,000 Provission for Avail for sale 441,875 Loan Losses 44,000 TOTAL 3,941,875 TOTAL 376,000
NON-EARNING ASSETS CAPITAL COST OF FUNDS
Property and equip 150,000 Regular reserve 80,000 NCUSIF 200,000 Undivided earn 920,000 Dividends Paid 364,000 Other N. E. assets Reserve for
Investment losses
Other assets 500,000 Total Capital 1,000,000 NET INCOME
TOTAL ASSETS 10,000,000$ TOTAL LIABS & CAP 10,000,000$ NET INCOME 102,000$
6
What are the most important items to watch?
Depends• But there are some Basics
– ROA– Capital to Assets Ratio– Loan to Share Ratio– Delinquency and Charge-off Ratios– But if you have Areas of High Risk, you’ll need more
• Concentration • Real estate • Indirect lending• Commercial (member business) lending
What is ROA?
ROA stands for Return on Assets (or Return on Average Assets)
• It is a standard measure of profitability in financial institutions
• It can tell you how profitable your credit union is• It allows you to compare your profitability to
other credit unions of any size (as it is based on Asset size)
• It tells you how effectively the credit union is using its Assets and Liabilities
8
Balance Sheet Income StatementASSETS LIABILITIES & CAPITAL
REVENUE
EARNING ASSETS MISCELLANEOUS LIABS
Cash 160,000$ Miscellaneous Liabs 151,000$ INTEREST INCOME
LOANS SHARES Loans 563,400$ Unsecured 1,350,000 Vehicle 3,500,000 Share savings 1,680,000 Investments 200,400 Real estate 300,000 Share drafts 3,500,000 Total Int Inc 763,800 Total loans 5,150,000 Money market 3,624,000 Non Interest Inc 78,200
IRAs 41,000 Less allowance (101,875) Other 4,000 TOTAL 842,000 Net Loans 5,048,125
Total Shares 8,849,000 EXPENSES
OccupancyINVESTMENTS Personnel 332,000 Held to maturity 3,500,000 Provission for Avail for sale 441,875 Loan Losses 44,000 TOTAL 3,941,875 TOTAL 376,000
NON-EARNING ASSETS CAPITAL COST OF FUNDS
Property and equip 150,000 Regular reserve 80,000 NCUSIF 200,000 Undivided earn 920,000 Dividends Paid 364,000 Other N. E. assets Reserve for
Investment losses
Other assets 500,000 Total Capital 1,000,000 NET INCOME
TOTAL ASSETS 10,000,000$ TOTAL LIABS & CAP 10,000,000$ NET INCOME 102,000$
9
Which CU is Doing Better?Why we use Comparable ratios
At a $10,000,000 CU 10 Bil CU 10 Mil CUInterest income $ 496,000,000 763,000Cost of funds (175,000,000) (364,000)
Net Interest Margin 321,000,000 399,000Operating costs (329,000,000) (332,000)Provision for loan losses (111,000,000) (44,000) Net loss before other income (120,000,000) 23,000NII – Non-interest income
(Fee income, Other) 136,000,000 78,000 Net Profit or Loss $ 16,000,000 102,000
Total Capital $ 50,000,000 $1,000,000
10
As a % of Average Assets 10 Bil CU 10 Mil CUYield: Interest income 4.96 7.63Less: Cost of funds (1.75) (3.64) Net Interest Margin (NIM-Spread) 3.21 3.99Less: Operating costs (3.29) (3.32)Less: Provision for loan losses (1.11) (0.44)
Net loss before other income (1.20) 0.23Plus: NII-Non-interest income
(Fee income, Other) 1.36 0.78 Equals: Return on Assets (ROA) 0.16 1.02
Capital to Assets Ratio 5.00% 10.00%
Which CU is Doing Better?Why we use Comparable ratios
11
Spread AnalysisNational Averages
12
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
The ‘Banking’ Business
Credit unions make money 2 ways:• Interest Income• Non-Interest Income
Credit unions spend money 3 ways:• Cost of Deposits (Cost of Funds)• Operating Expenses (cost of people, buildings,
etc)• Provision for Loan Losses (cost of bad loans)
13
Loan Interest Income
Investment Interest Income
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
Yield on Average AssetsTotal Interest Income from Loans and Investments / Average Assets
National Average = 4.10%
Our Example:
763,000/10,000,000 x 100 = 7.63%
14
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
15
Dividends Paid
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
Cost of FundsTotal Dividends and Interest paid / Average Assets
Cost of borrowing money from members to loan out at a higher price to other members
National Average = 0.94%
Our Example:
364,000/10,000,000 X 100 = 3.64%
16
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
17
What is Net Interest Margin?
Net Interest Margin:• NIM• Spread• You don’t control your Interest Income, the
Market does• You don’t control you Interest Expense, the
Market does
You try to control the spread between the two:
NIM or Spread 18
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Yield COF
Spread or Net Interest Margin
3.993.79
3.713.77
3.553.59
3.413.32
3.163.24
3.123.20
3.21
Long term decline in SpreadThe Spread or Net Interest Margin is the difference between Yield on Assets and Cost of Funds. A credit union historically could pay its operating costs from the Spread and still have enough left over for a Profit. What has happened?
SpreadYield on Assets
Cost of Funds
19
3.253.16
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
20
All Credit Unions
3.00%
3.10%
3.20%
3.30%
3.40%
3.50%
3.60%
3.70%
3.80%
3.90%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Interest Margin Operating Expenses
Net Interest Margin & Operating Expense Ratio
Net Interest Margin
Operating Expenses
You can see in this graph that several years ago, there was enough Spread to more than cover Operating Expenses. Recently, Operating Expenses have exceeded the NIM. This means that a credit union needs to do more than take Deposits and make Loans to earn a profit. If not, credit union profitability can be hard to find.
21
EXPENSES
OccupancyPersonnelOperations
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
Operating Expenses to Average AssetsTotal operating expenses / Average Assets National Average = 3.03%
Our Example:
332,000/10,000,000 X 100 = 3.32%
22
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
23
Provision for Loan Losses
Provision for Loan Losses to Average Assets
National Average = 0.50%
Our Example:
44,000/10,000,000 X 100 = 0.44%
Total Provision for Loan Losses Expense / Average Assets
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets24
Not for Profit,Not for Charity,But for Service
25
Is Non-Interest Income (NII) Important?
Vital:• Where a majority of CU profit is derived• Has been growing in importance for decades• Is more flexible than other forms of income• Causes less financial risk to the credit union
when expanded
26
Sources of Non-Interest IncomeNot Just Fees!!!
• Fee Income – NSF and late loan fee
• Service Revenues – Overdraft Protection
• Commission Income – sales of something
• Interchange Income – Debit and Credit cards
• Other Non-Interest Sources – CUSO selling some product or service
2727
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
28
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Credit Union profit in ROA
Credit Union profit without Fee Income
One more look at it. This graph shows credit union profitability over time. And what that profit would be if all Non-Interest Income were removed. This should give you a very clear picture of the importance of Non-Interest Income.
29
Non-Interest Income
Non-Interest Income (Fee and Service Revenues) to Average Assets
National Average = 1.30%
Our Example:
78,000/10,000,000 X 100 = 0.78%
Measure’s the contribution of non-interest income to profitability
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets30
As a % of Average Assets 9/30/11 Our CUYield: Interest income 4.10 7.63Less: Cost of funds (0.94) (3.64) Net Interest Margin 3.16 3.99Less: Operating costs (3.03) (3.32)Less: Provision for loan losses (0.50) (0.44)
Net loss before other income (0.38) 0.23Plus: Non-interest income 1.30 0.78
Minus: Corporate Stabilization (0.26) Equals: Net Profit or Loss (ROA) 0.66 1.02
Spread AnalysisNational Averages
31
NET INCOME or LOSS
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
Return on Average Assets (ROAA or ROA)Net income / Average assets**Average assets = Total assets last period + Total assets this period / 2
National Average = 0.66%
Our CU:
102,000/10,000,000 X 100 = 1.02%
Measures a credit union’s profitability
32
Why is
Capital
Important?
What is Capital?Capital is not cash
• It is the accumulated earnings and losses since you started the credit union.
• Tells you what portion of your assets belong to your members (collectively) and what part is dedicated to your depositors and other creditors
• Your ‘rainy day’ fund• Your ‘hibernation’ fat
Balance Sheet Income Statement ASSETS LIABILITIES & CAPITAL
REVENUEEARNING ASSETS MISCELLANEOUS LIABILITIES
Loan Interest IncomeLoans
Investment Interest Income
FeesSHARES
EXPENSES
InvestmentsOccupancyPersonnelProvision for Loan Losses
NON-EARNING ASSETS COST OF FUNDS
Building, Equipment, etc. Dividends PaidNCUSIF Deposit CAPITAL
Regular Reserves
Other Assets Undivided Earnings NET INCOME or LOSS35
Balance Sheet Income StatementASSETS LIABILITIES & CAPITAL
REVENUE
EARNING ASSETS MISCELLANEOUS LIABS
Cash 160,000$ Miscellaneous Liabs 151,000$ INTEREST INCOME
LOANS SHARES Loans 563,400$ Unsecured 1,350,000 Vehicle 3,500,000 Share savings 1,680,000 Investments 200,400 Real estate 300,000 Share drafts 3,500,000 Total Int Inc 763,800 Total loans 5,150,000 Money market 3,624,000 Non Interest Inc 78,200
IRAs 41,000 Less allowance (101,875) Other 4,000 TOTAL 842,000 Net Loans 5,048,125
Total Shares 8,849,000 EXPENSES
OccupancyINVESTMENTS Personnel 332,000 Held to maturity 3,500,000 Provission for Avail for sale 441,875 Loan Losses 44,000 TOTAL 3,941,875 TOTAL 376,000
NON-EARNING ASSETS CAPITAL COST OF FUNDS
Property and equip 150,000 Regular reserve 80,000 NCUSIF 200,000 Undivided earn 920,000 Dividends Paid 364,000 Other N. E. assets Reserve for
Investment losses
Other assets 500,000 Total Capital 1,000,000 NET INCOME
TOTAL ASSETS 10,000,000$ TOTAL LIABS & CAP 10,000,000$ NET INCOME 102,000$
36
CAPITAL
Regular Reserves
Undivided Earnings NET INCOME or LOSS
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
Capital (Net Worth) To Assets Ratio
Total Capital/Total Assets
National Average = 10.15%
Our CU:
1,000,000/10,000,000 = 10.00%
Measures stability of the credit union
TotalAssets
CAPITAL
Regular Reserves
Undivided Earnings NET INCOME or LOSS
Capital (Net Worth) To Assets Ratio
Total Capital/Total Assets
Woops! Now
$1,000,000/12,000,000 = 8.33%
If Assets grow, and Capital doesn’t grow proportionately, the Ratio will decline Total
Assets
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
Investments
NON-EARNING ASSETS
Building, Equipment, etc.NCUSIF Deposit
Other Assets
History of Capital to Assets Ratio National Average
11.1411.42
10.71 10.7210.96
11.3011.61 11.41
10.03 10.1510.83
9.91
10.93
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
How much Capital is enough?
No consensus
Prompt Corrective Action RulesNational or Peer AveragesDepends on how much risk your assets
and liabilities representDepends on level of growthDepends on profitability of CUDepends on future plans
How much Capital is enough?
Enough to get you through the 3 Worst Imaginable Years
Arizona Federal CU
Capital can disappear fastCapital to Assets Ratio in a Recession
11.07 11.17
11.97
3.47
10.96
4.76
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2004 2005 2006 2007 2008 2009
Prompt Corrective ActionPCA
• 7% or higher Well capitalized
• 6%-6.99% Adequately capitalized
• 4%-5.99% Undercapitalized
• 2%-3.99% Significantly undercapitalized
• Less than 2% Critically undercapitalized
Balance Sheet Income StatementASSETS LIABILITIES & CAPITAL
REVENUE
EARNING ASSETS MISCELLANEOUS LIABS
Cash 160,000$ Miscellaneous Liabs 151,000$ INTEREST INCOME
LOANS SHARES Loans 563,400$ Unsecured 1,350,000 Vehicle 3,500,000 Share savings 1,680,000 Investments 200,400 Real estate 300,000 Share drafts 3,500,000 Total Int Inc 763,800 Total loans 5,150,000 Money market 3,624,000 Non Interest Inc 78,200
IRAs 41,000 Less allowance (101,875) Other 4,000 TOTAL 842,000 Net Loans 5,048,125
Total Shares 8,849,000 EXPENSES
OccupancyINVESTMENTS Personnel 332,000 Held to maturity 3,500,000 Provission for Avail for sale 441,875 Loan Losses 44,000 TOTAL 3,941,875 TOTAL 376,000
NON-EARNING ASSETS CAPITAL COST OF FUNDS
Property and equip 150,000 Regular reserve 80,000 NCUSIF 200,000 Undivided earn 920,000 Dividends Paid 364,000 Other N. E. assets Reserve for
Investment losses
Other assets 500,000 Total Capital 1,000,000 NET INCOME
TOTAL ASSETS 10,000,000$ TOTAL LIABS & CAP 10,000,000$ NET INCOME 102,000$
44
EARNING ASSETS MISCELLANEOUS LIABILITIES
Loans
SHARES
SHARES
EXPENSES
COST OF FUNDS
Loan to Share RatioTotal Loans / Total Shares and Deposits
National Average = 69.2%
Our CU:
= 58.2%$5,150,000/8,849,000
% of our Deposits currently loaned out to members?
45
46
History of Loan to Share Ratio National Average
76.179.5
70.8 71.274.5
79.482.4 83.6 83.1
71.869.2
76.173.8
0
10
20
30
40
50
60
70
80
90
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010
Delinquency and Charge-offs
• Delinquency ratio
Delinquent loans over 60 days old / Total loans
• Charge-off ratio
Charge-offs (less recoveries) / Average loans
• Recovery ratio
Recoveries / Charge-offs 47
Delinquency and Charge-offs
It is important to consider Delinquency and Charge-offs together!
Normal 9/30/11
Delinquency 0.75% 1.59%
Charge-offs 0.40% 0.91%
Combined 1.15% 2.60%48
49
Return on Average Assets (ROA)
0.00%0.20%0.40%0.60%0.80%
1.00%1.20%1.40%1.60%
Actual Results Planning Goal Preferred Range Preferred Range
Using an Dash Board
http://www.forteamresources.com/event_code.html?prod=7
Event Code: Harp
Return on Average Assets (ROA)
0.00%0.20%0.40%0.60%0.80%
1.00%1.20%1.40%1.60%
Actual Results Planning Goal Preferred Range Preferred Range
Loan to Share Ratio
68.00%
70.00%
72.00%
74.00%
76.00%
78.00%
80.00%
82.00%
Actual Results Planning Goal Preferred Range Preferred Range
Operating Expense to Average Assets
3.50%3.60%3.70%3.80%3.90%4.00%4.10%4.20%4.30%
Actual Results Planning Goal Preferred Range Preferred Range
Asset Growth
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Actual Results Planning Goal Preferred Range Preferred Range
Capital to Assets Ratio
17.00%
17.50%
18.00%
18.50%
19.00%
19.50%
20.00%
20.50%
Actual Results Planning Goal Preferred Range Preferred Range
Average Loan Balance
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Actual Results Planning Goal Preferred Range Preferred Range
GoalGoal Safe
Safe
RangeRange
51
By Tim Harrington, CPAPresident, T.E.A.M. Resources
7049 E. Tanque Verde Rd. PMB 136Tucson, Arizona 85715
(800) 788-9542tharrington@forTeamResources.com
Financial Literacy Requirements for
Directors
Recommended