ADVANCED FINANCIAL LITERACY FOR DIRECTORS: APPLYING RATIO ANALYSIS TO MANAGE THE BALANCE SHEET & MAXIMIZE INCOME Presented by: Dr. Randy Thompson rthompson@tctrisk.com 1
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 . 2
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. 3
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 4
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. 5
DEFINITIONS AND TERMS Balance Sheet Income Statement Key Ratios 6
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 7
BALANCE SHEET 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 8 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 9
INCOME STATEMENT COMPONENTS 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 10
INCOME STATEMENT COMPONENTS 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 11
INCOME STATEMENT COMPONENTS Regular & Xmas Shares $ 951 Share Draft $ - Money Markets $ - Regular Certificates $ 330 Total Dividend Expense $ 1,281 12
INCOME STATEMENT COMPONENTS Summary Total Interest Income $ 122,836 Total Operating Expense $ 115,616 Total Dividend Expense $ 1,281 Net aFter Dividends $ 5,939 13
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 14
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 15
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 16
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 17
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 18
FINANCIAL PERFORMANCE Loan Yield Investment Yield Other Income Operating Expenses Cost of Funds ROA Equity Ratio 19
FINANCIAL PERFORMANCE Loan Yield Average interest rate earned on loans Calculation Annualized interest income/total loans Result Return on each dollar of loans 20
FINANCIAL PERFORMANCE Annualized x12 Interest Income Loans $ 91,989 $ 1,103,868 Loans $ 22,400,045 Loan Yield 4.93% 21
FINANCIAL PERFORMANCE Investment Yield Average interest rate earned on investments Calculation Annualized interest income/total investments Result Return on each dollar of investments 22
FINANCIAL PERFORMANCE Annualized x12 Interest Income Investments $ 6,509 $ 78,108 Investments $ 12,759,726 0.61% 23
FINANCIAL PERFORMANCE Cost of Funds Dollar cost on total deposits Calculation Annualized interest expense/deposits Result Interest cost for each dollar of deposits 24
FINANCIAL PERFORMANCE Annualized x12 Dividend Expense $ 1,281 $ 15,372 Deposits $ 32,752,837 0.05% 25
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 26
FINANCIAL PERFORMANCE Annualized x12 Non-Interest Income $ 24,338 $ 292,056 Assets $ 36,843,958 0.79% 27
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 28
FINANCIAL PERFORMANCE Annualized x12 Operating Expenses $ 115,616 $ 1,387,392 Assets $ 36,843,958 3.77% 29
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 30
FINANCIAL PERFORMANCE 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% 31
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 32
FINANCIAL PERFORMANCE Annualized x12 Total Equity $ 3,738,633 $ 3,738,633 Assets $ 36,843,958 10.15% 33
GROWTH Assets % change from prior period Deposits % change from prior period Loans % change from prior period 34
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 35
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