Financial Literacy for Supervisory Committee Members. Presented by: Daniel J. Mahalak, CPA, CGMA

Transcription

1 Financial Literacy for Supervisory Committee Members Presented by: Daniel J. Mahalak, CPA, CGMA

2 Daniel J. Mahalak, CPA, CGMA Dan is the President & Managing Partner of Cindrich, Mahalak & Co., P.C., a CPA firm specializing in working with credit unions and their subsidiaries. He joined the firm in 1980 upon graduating from Eastern Michigan University and became a partner in He is a certified public accountant (CPA), a chartered global management accountant (CGMA), and a member of both the American Institute of Certified Public Accountants (AICPA) and the Michigan Association of Certified Public Accountants (MICPA). Dan has spent his entire professional career with this firm. Throughout his career Dan has worked in all phases of the practice. He is involved in all audit activities and works closely with the staff in training and development. He is involved in audit planning and personally reviews all audit files and reports as part of the firm s quality control process. His extensive experience allows him to provide clients with unique insights into any problems, issues, or challenges they are facing. Throughout his tenure, Dan has been responsible for hundreds of credit union audits, and worked in fraud/embezzlement investigations, including filing bond claims, working with authorities, and testifying in criminal proceedings. He also works with credit unions in budgeting and forecasting, asset-liability management consulting, strategic planning, mergers and acquisitions, human resources consulting, regulatory consulting, and a variety of other consulting projects. He is a frequent speaker on topics related to the credit union industry on both a local and national level, and has written articles for several credit union publications. Cindrich, Mahalak & Co., P.C. is one of the largest credit union auditing firms in the country. They currently audit credit unions ranging from less than $10 million to well over $2 billion in assets. They have concentrated their practice in credit unions and their subsidiaries since their inception in JUNE

3 Session Overview The Supervisory Committee is responsible for oversight of the credit union s operation. As such, it is important committee members understand the financial statements generated by management on a monthly basis. It is equally important they understand the impact of the decisions made by management and the board of directors. Certainly the financial impact of these decisions is critical to their success or failure. The committee should be comfortable enough to ask questions pertinent to their understanding of financial results. JUNE

4 Agenda Financial statements What do they contain Why are they important Financial trends How to interpret them What do they mean Financial strength Why it is important How decisions impact financial results JUNE

5 Regarding Financial Statements What does this line item mean? Why is it important? What do changes in it mean? Is the change positive or negative for the CU? JUNE

6 What Else You Should Know Understand specific activities the CU is involved in How is revenue generated What are the risks Have an understanding of internal controls JUNE

7 Supervisory Committee Responsibilities Ensure that management s financial reporting objectives have been met Ensure that management s practices and procedures safeguard members assets JUNE

8 Determine that Management has Established and maintained effective internal controls to achieve the CU s financial reporting objectives Promptly prepared accounting records and financial reports that accurately reflect operations and results Properly administered the relevant plans, policies, and control procedures established by the board Established policies and control procedures that safeguard against error, carelessness, conflict of interest, self-dealing, and fraud JUNE

9 Types of Financial Statements Balance Sheet (Statement of Financial Condition) Income Statement Statement of Cash Flows Other Reports Loan Delinquency Investments Budget Asset-Liability Management JUNE

10 Balance Sheet Equation JUNE

11 Assets Economic resources Capable of being owned or controlled to produce value What you own What you have claim to Carried at monetary value JUNE

12 Types of CU Assets Cash and Cash Equivalents Cash on hand (change fund) Cash on Deposit Cash Equivalents Investments with original maturities of 3 months or less JUNE

13 Types of CU Assets Investment Securities Trading Securities Available-for-Sale Securities Held-to-Maturity Securities Non-Negotiable Certificates of Deposit Membership Capital at Corporate CUs Other Corporate CU Investments Credit Union Service Organizations (CUSO) JUNE

14 Types of CU Assets Investment Security Types U.S. Government Obligations Federal Agency Securities Mutual Funds Certificates of Deposit Municipal Bonds Corporate Securities JUNE

15 Types of CU Assets Loans & Leases Credit Card Other Unsecured Student New Vehicle Used Vehicle First Mortgage Home Equity Leases Commercial/Business Participation JUNE

16 Types of CU Assets Loans & Leases - Adjustments Unamortized Premium/Discount Unamortized Points/Fees/Costs Allowance for Loan and Lease Losses JUNE

17 Types of CU Assets Fixed Assets Land Land Improvements Buildings Building Improvements Leasehold Improvements Furniture & Equipment Accumulated Depreciation JUNE

18 Types of CU Assets Other Assets Share Insurance Deposits Foreclosures & Repossessions Accrued Income Prepaid & Deferred Expenses Accounts Receivable Intangible Assets Identifiable Intangibles Goodwill Other Assets JUNE

19 Liabilities Economic Obligations What you owe JUNE

20 Types of Liabilities Borrowed Funds Accounts Payable Taxes Payable Accrued Dividends/Interest Accrued Expenses Deferred Income JUNE

21 Types of Liabilities Shares & Deposits Regular Shares Share Drafts (Checking) Money Market Accounts Share Certificates IRA Accounts Christmas/Vacation Club Non-Member Deposits JUNE

22 Equity Accumulated unused earnings since inception Equity vs Capital vs Net Worth Equity is all equity accounts Capital is all equity plus Allowance for Loan Losses Net Worth is all equity representative of accumulated earnings Regulatory measurement JUNE

23 Equity Accounts Undivided Earnings Regular Reserve Investment Valuation Reserve Other Reserves Accumulated Other Comprehensive Income Investment Securities Defined Benefit Plans Equity Acquired in Merger Net Income JUNE

24 Statement of Income & Expense Interest Interest Income Loans Investments Less: Interest Expense Dividends on Shares Interest on Deposits Interest on Borrowings Equals: Net Interest Income JUNE

25 Statement of Income & Expense Provision for Loan Losses Less: Provision for Loan & Lease Losses Equals: Net Interest Income after PLLL JUNE

26 Statement of Income & Expense Non-Interest Income Fees Other Operating Income Gain(Loss) on Investment Sales Investment Impairment Gain(Loss) on Disposition of Assets Other Non-Operating Income(Expense) JUNE

27 Statement of Income & Expense Non-Interest Expenses Compensation & Benefits Travel & Conference Office Occupancy Office Operations Educational & Promotional Loan Servicing Professional & Outside Services Member Insurance Operating Fees Miscellaneous JUNE

28 Statement of Income & Expense Summary Net Interest Income Less: Provision for Loan Losses Plus: Non-Interest Income Less: Non-Interest Expenses Equals: Net Income(Loss) JUNE

29 Ratios and Trends What do they tell you What is important to monitor What are acceptable ranges What is a peer group Financial Performance Reports(FPR) JUNE

30 Why Ratios are Important Measure performance Document trends Comparison with peers Annualizing ratios Some are measured at a point in time Some are measured over a period of time JUNE

31 FPR Ratios Capital Adequacy Asset Quality Earnings Asset/Liability Management Productivity Other Ratios JUNE

32 Capital Adequacy Net Worth/Total Assets a measure of financial strength Total Delinquent Loans/Net Worth measure of risk of loan losses against total financial strength Solvency Evaluation value of $100 in shares Classified Assets/Net Worth measure of all losses in balance sheet against total financial strength JUNE

33 Asset Quality Delinquent Loans/Total Loans indicator of potential loan losses, related to performance Net Charge-Offs/Average Loans measure of actual loan losses Accum Unreal G/L on AFS/Cost of AFS measure of unrealized investment losses against investment cost Delinquent Loans/Assets an alternative measure of problem loans JUNE

34 Earnings Return on Average Assets measure of profitability Gross Income/Average Assets asset yield; a measure of how much you are earning on assets Yield on Average Loans A measure of what you are earning on the loan portfolio Yield on Average Investments a measure of what you are earning on the investment portfolio Fee & Other Op Income/Average Assets a measure of how much fees are contributing to the revenue stream JUNE

35 Earnings (continued) Cost of Funds/Average Assets A measure of dividend and interest costs against assets Net Margin/Average Assets a measure of total revenue less cost of funds Operating Expenses/Average Assets a measure of what it costs to operate credit union Provision for Loan Losses/Average Assets measures the impact of loan losses on profitability Net Interest Margin/Average Assets net interest income, loan and investment income less dividend and interest costs JUNE

36 Asset/Liability Management Cash + Short-Term Investments/Assets measure of liquidity Total Shares, Deposits, & Borrowings/ Earning Assets measure of productivity Regular Shares + Share Drafts/Total Shares & Borrowings another measure of strength of share base JUNE

37 Productivity Members/Potential Members measure of penetration into FOM Borrowers/Members measures what percentage of members are borrowers Members/Full-Time Employees measure of productivity Average Shares per Member measure extent to which members participate in deposit programs Average Loan Balance measure extent to which borrowers use CU funds Salary & Benefits/Full-Time Employees measures average cost of employees JUNE

38 Other Ratios Growth Net Worth Growth annual contributions to net worth balances Share Growth annual growth in total deposit balances Loan Growth annual growth in outstanding loan balances Asset Growth annual growth in size of balance sheet Investment Growth annual growth in investment portfolio balances Membership Growth annual growth in member base JUNE

39 Important Ratios Net Worth Ratio Return on Assets Loan/Share Ratio Loan/Asset Ratio Loan Delinquency Ratio Net Loan Loss Ratio Growth Ratios JUNE

40 Financial Strength Why is financial strength important? Protects against risks in balance sheet Protects against economic downturns Allows for new products/services Serves as cost-free capital How much is enough? What do you think? How much risk are you willing to take? What is in your strategic plan? JUNE

41 How Decisions Impact Results JUNE

42 Base Example Financial Statements Cash & Equivalents 3,000,000 Interest on Loans 6,208,000 Loans 120,000,000 Income from Invest 646,000 ALLL (800,000) Total Interest Income 6,854,000 Investments 56,000,000 Interest Expense 780,000 Fixed Assets 6,000,000 Net Interest Income 6,074,000 Other Assets 6,113,000 PLLL 450,000 Total Assets 190,313,000 Net After PLLL 5,624,000 Liabilities 3,378,000 Non-Interest Income 3,200,000 Shares & Deposits 165,000,000 Non-Interest Expenses 7,200,000 Net Worth 22,000,000 Net Income 1,624,000 AOCI (65,000) Total Liab/Equity 190,313,000 JUNE

43 Base Example Key Statistics Loan-to-Share Ratio 72.73% Loan Portfolio Yield 5.25% Loan-to-Asset Ratio 63.05% Investment Yield 1.15% Net Worth Ratio 11.56% Total Interest Income 3.65% Loan Delinquency 1.00% Cost of Funds 0.48% Loan Loss Ratio 0.51% Net Interest Income 3.23% PLLL-to-Avge Assets 0.24% Non-Int Income 1.70% Non-Int Expenses 3.83% Return on Assets 0.86% JUNE

44 Scenario #1 Build new building for a cost of $5,000,000 Funded through both share growth and investment maturities Loan portfolio growth 3% Share account growth 3% Cost of new building impacts non-interest expenses JUNE

45 Scenario #1 Financial Statements Cash & Equivalents 3,000,000 Interest on Loans 6,397,076 Loans 123,600,000 Income from Invest 632,468 ALLL (828,120) Total Interest Income 7,029,544 Investments 53,653,908 Interest Expense 803,756 Fixed Assets 11,000,000 Net Interest Income 6,225,788 Other Assets 6,113,000 PLLL 450,000 Total Assets 196,538,788 Net After PLLL 5,775,788 Liabilities 3,378,000 Non-Interest Income 3,200,000 Shares & Deposits 169,950,000 Non-Interest Expenses 7,700,000 Net Worth 23,275,788 Net Income 1,275,788 AOCI (65,000) Total Liab/Equity 196,538,788 JUNE

46 Scenario #1 Key Statistics Loan-to-Share Ratio 72.73% Loan Portfolio Yield 5.25% Loan-to-Asset Ratio 62.89% Investment Yield 1.15% Net Worth Ratio 11.84% Total Interest Income 3.63% Loan Delinquency 1.00% Cost of Funds 0.48% Loan Loss Ratio 0.49% Net Interest Income 3.22% PLLL-to-Avge Assets 0.23% Non-Int Income 1.65% Non-Int Expenses 3.98% Return on Assets 0.66% JUNE

47 Scenario #2 Increase in loan losses of 1 percentage point due to change in risk appetite Additional funding of ALLL Loan portfolio growth 3% Share account growth 3% JUNE

48 Scenario #2 Financial Statements Cash & Equivalents 3,000,000 Interest on Loans 6,397,076 Loans 123,600,000 Income from Invest 647,597 ALLL (1,236,000) Total Interest Income 7,044,673 Investments 52,276,917 Interest Expense 803,756 Fixed Assets 6,000,000 Net Interest Income 6,240,917 Other Assets 6,113,000 PLLL 2,126,000 Total Assets 193,753,917 Net After PLLL 4,114,917 Liabilities 3,378,000 Non-Interest Income 3,200,000 Shares & Deposits 169,950,000 Non-Interest Expenses 7,200,000 Net Worth 20,490,917 Net Income 114,917 AOCI (65,000) Total Liab/Equity 193,753,917 JUNE

49 Scenario #2 Key Statistics Loan-to-Share Ratio 72.73% Loan Portfolio Yield 5.25% Loan-to-Asset Ratio 63.79% Investment Yield 1.15% Net Worth Ratio 10.58% Total Interest Income 3.67% Loan Delinquency 1.21% Cost of Funds 0.48% Loan Loss Ratio 1.51% Net Interest Income 3.25% PLLL-to-Avge Assets 1.11% Non-Int Income 1.67% Non-Int Expenses 3.75% Return on Assets 0.06% JUNE

50 Scenario #3 10% growth in shares due to increased rates offered Cost of funds increase 25 basis points No loan growth JUNE

51 Scenario #3 Financial Statements Cash & Equivalents 3,000,000 Interest on Loans 6,302,538 Loans 120,000,000 Income from Invest 735,165 ALLL (800,000) Total Interest Income 7,037,703 Investments 73,805,040 Interest Expense 1,282,663 Fixed Assets 6,000,000 Net Interest Income 5,755,040 Other Assets 6,113,000 PLLL 450,000 Total Assets 208,118,040 Net After PLLL 5,305,040 Liabilities 3,378,000 Non-Interest Income 3,200,000 Shares & Deposits 181,500,000 Non-Interest Expenses 7,200,000 Net Worth 23,305,040 Net Income 1,305,040 AOCI (65,000) Total Liab/Equity 208,118,040 JUNE

52 Scenario #3 Key Statistics Loan-to-Share Ratio 66.12% Loan Portfolio Yield 5.25% Loan-to-Asset Ratio 57.66% Investment Yield 1.13% Net Worth Ratio 11.20% Total Interest Income 3.53% Loan Delinquency 1.00% Cost of Funds 0.74% Loan Loss Ratio 0.51% Net Interest Income 2.89% PLLL-to-Avge Assets 0.38% Non-Int Income 1.61% Non-Int Expenses 3.61% Return on Assets 0.66% JUNE

53 Scenario #4 15% loan portfolio growth due to loan special This reduces loan yield 50 basis points 3% share growth JUNE

54 Scenario #4 Financial Statements Cash & Equivalents 3,000,000 Interest on Loans 6,130,228 Loans 138,000,000 Income from Invest 570,017 ALLL (1,104,000) Total Interest Income 6,700,245 Investments 42,405,373 Interest Expense 803,756 Fixed Assets 6,000,000 Net Interest Income 5,896,489 Other Assets 6,113,000 PLLL 700,000 Total Assets 194,414,373 Net After PLLL 5,196,489 Liabilities 3,378,000 Non-Interest Income 3,200,000 Shares & Deposits 169,950,000 Non-Interest Expenses 7,200,000 Net Worth 21,151,373 Net Income 1,196,489 AOCI (65,000) Total Liab/Equity 194,414,373 JUNE

55 Scenario #4 Key Statistics Loan-to-Share Ratio 81.20% Loan Portfolio Yield 4.75% Loan-to-Asset Ratio 70.83% Investment Yield 1.15% Net Worth Ratio 11.07% Total Interest Income 3.48% Loan Delinquency 1.00% Cost of Funds 0.48% Loan Loss Ratio 0.51% Net Interest Income 3.06% PLLL-to-Avge Assets 0.36% Non-Int Income 1.66% Non-Int Expenses 3.74% Return on Assets 0.62% JUNE

56 Conclusion The financial statements tell the story of the credit union. They show the results of the planning and execution of that plan. The supervisory committee must understand the financial statements to fulfill their oversight responsibilities. JUNE

57 JUNE

58 My Contact Information.. Daniel J. Mahalak, CPA, CGMA President & Managing Partner ext CMCO Toll Free Jefferson Ave. St. Clair Shores, MI JUNE