11 Ratios Every Credit Union Professional Should Know

Transcription

1 Want your credit union to soar above the rest? 11 Ratios Every Credit Union Professional Should Know Presented by: Deborah L. Rightmire, CCUE Vice President Asset/Liability Management Texas Credit Union League

2 Goals of Asset/Liability Management n Capital Adequacy Adequate level of net worth to insure the credit union s solvency. Net worth combines Regular Reserves and Undivided Earnings.

3 Goals of Asset/Liability Management n Earnings Stability Income must be sufficient to cover: interest expense operating expense loan losses capital contribution

4 Goals of Asset/Liability Management n Liquidity Management Adequate liquidity to meet normal and seasonal loan/share flows and a contingency plan when liquidity approaches inadequate levels.

5 Goals of Asset/Liability Management n Interest Rate Risk Control interest rate risk to avoid a significant decline in earnings and net worth due to changing interest rates.

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7 CAMEL C Capital A Asset Quality M Management E Earnings L Asset/Liability Management - Liquidity Interest Rate Risk Source: NCUA Letter 03-CU-04 (Rescinded December 2007)

8 Earnings Asset Yield n Definition The annualized yield on assets - both earning assets (loans & investments) and non-earning assets (fixed assets, accounts receivable, and cash).

9 Earnings Asset Yield n Formula Annualized Loan & Investment Income Average Total Assets n Industry Standard Determined by market conditions. Refer to current Peer Group Statistics and current market rates.

10 Earnings Asset Yield Impact Factors: n Loan Mix n Loan Yield n Loan Portfolio Content n Investment Mix n Investment Yield n Investment Portfolio Content n Cash Management Procedures n Fixed Asset Mix

11 Total Assets $48,

12 Earnings Cost of Funds n Definition The annualized cost of the liabilities - dividends paid on deposits and interest paid on borrowed funds combined with the zero direct cost of the credit union s net worth dollars.

13 Earnings Cost of Funds n Formula Annualized Dividend & Interest Expense Average Total Assets n Industry Standard Determined by market conditions. Refer to current Peer Group Statistics and current market rates.

14 Earnings Cost of Funds Impact Factors: n Dividend Rates n Account Mixes n Account Rate Structures n Net Worth Ratio n Liquidity Position

15 Total Liabilities $48,

16 Earnings Gross Spread n Definition The percentage difference between the income generated on all assets and the cost incurred for all liabilities.

17 Earnings Gross Spread n Formula Annualized Net Interest Income Average Total Assets OR Asset Yield minus Cost of Funds n Industry Standard 4.5% - 5% or higher

18 Earnings Gross Spread Impact Factors: n Loan Mix n Loan Yield n Loan Portfolio Content n Investment Mix n Investment Yield n Investment Portfolio Content

19 Earnings Gross Spread Impact Factors: n Account Rate Structures n Account Mixes n Dividend Rates n Cash Management Procedures n Net Worth Ratio n Liquidity Position n Fixed Asset Mix

20 Earnings Net Operating Expense Ratio (NOER) n Definition Annualized operating expenses (excluding provision for loan loss, dividends, and interest on borrowed money) less fee and other operating income. This ratio adjusts expense ratio by the amount of income collected to offset the cost of offering services.

21 Earnings Net Operating Expense Ratio (NOER) n Formula (Annualized Operating Expense minus Annualized Non-Interest Income) Average Total Assets n Industry Standard 2.5% - 3% or lower

22 Earnings Net Operating Expense Ratio (NOER) Impact Factors: n Expense Amounts (Budgets) n Fee Income Structure n Asset Size

23 Earnings Operating Return on Assets (Operating ROA) n Definition The percentage of net operating income after dividends, but before reserve transfers including provision for loan loss; actual net charge offs; nonoperating gains or losses; or interest refunds. (Profit after daily operational processes)

24 Earnings Operating Return on Assets (Operating ROA) n Formula Annualized Net Operating Income Average Total Assets OR Gross Spread minus NOER n Industry Standard 1.30% or higher

25 Earnings Operating Return on Assets (Operating ROA) Impact Factors: n Loan Mix n Loan Yield n Loan Portfolio Content n Investment Mix n Investment Yield n Investment Portfolio Content n Account Mixes n Account Rate Structure

26 Earnings Operating Return on Assets (Operating ROA) Impact Factors: n Dividend Rates n Asset Size n Expense Amounts n Fee Income Structure n Cash Management Procedures n Net Worth Ratio n Liquidity Position n Fixed Asset Mix

27 Earnings Net Charge Offs (NCOs) n Definition The percentage of assets being lost because of annualized net charge offs.

28 Earnings Net Charge Offs (NCOs) n Formula (Annualized Charge Offs minus Annualized Recoveries) Average Total Assets n Industry Standard -.30% or less

29 Earnings Net Charge Offs (NCOs) Impact Factors: n Loan Rates n Loan Policies n Loan Portfolio Content n Collection Policies n Economic Conditions n Asset Increases & Decreases

30 Earnings Net Return on Assets (Net ROA) n Definition The percentage of net operating income after dividends, nonoperating amounts, interest refunds, and net charge offs/provision expense. (Amount that increases or decreases Regular Reserves and/or Undivided Earnings).

31 Earnings Net Return on Assets (Net ROA) n Formula Annualized Net Income Average Total Assets OR Operating ROA minus Net Charge Offs/Average Total Assets n Industry Standard 1% or higher

32 Earnings Net Return on Assets (Net ROA) n CAMEL Codes 1% or higher - code 1.80% to.99% - code 2.35% to.79% - code 3 Source: NCUA Letter 03-CU-04 (Rescinded December 2007)

33 Earnings Net Return on Assets (Net ROA) Impact Factors n Loan Mix n Loan Yield n Loan Portfolio Content n Investment Mix n Investment Yield n Investment Portfolio Content

34 Earnings Net Return on Assets Impact Factors: n Account Mixes n Account Rate Structure n Dividend Rates n Net Worth Ratio n Liquidity Position n Asset Size (Net ROA)

35 Earnings Net Return on Assets (Net ROA) Impact Factors: n Fixed Asset Mix n Expense Amounts n Fee Income Structure n Cash Management Procedures n Loan Policies n Collection Policies

36 Earnings Asset Yield - Cost of Funds = Gross Spread - Net Op Exp Ratio = Operating ROA - NCOs/ATA = Net ROA

37 Earnings Loan Mix n Definition The percentage of asset dollars in the loan portfolio. Because loan yield is historically greater than investment yield, earnings are directly affected by an increase or decrease in loan mix.

38 Earnings Loan Mix n Formula Gross Loans Total Assets n Industry Standard 65% or higher. Refer to current Peer Group Statistics.

39 Earnings Loan Mix Impact Factors: n Loan Rates n Loan Types n Deposit Rates n Deposit Types n Marketing Efforts n Economic Conditions n Asset Increases and Decreases

40 Asset Quality - Delinquency n Definition The percentage of the loan portfolio with payments delinquent two months or longer.

41 Asset Quality - Delinquency n Formula Delinquent amounts greater than 2 months Gross Loans n Industry Standard 2% or less

42 Asset Quality - Delinquency Impact Factors: n Loan Rates n Loan Policies n Loan Portfolio Content n Collection Policies n Economic Conditions n Gross Loan Increases & Decreases

43 Asset Quality Net Charge Offs (NCOs) n Definition The percentage of loans being lost because of annualized net charge offs.

44 Asset Quality Net Charge Offs (NCOs) n Formula (Annualized Charge Offs minus Annualized Recoveries) Average Gross Loans n Industry Standard -.40% or less

45 Asset Quality Net Charge Offs (NCOs) Impact Factors: n Loan Rates n Loan Policies n Loan Portfolio Content n Collection Policies n Economic Conditions n Gross Loan Increases & Decreases

46 Capital Net Worth n Definition Earnings from current and previous periods (as a percent of total assets) set aside to absorb operational losses. Higher levels of Net Worth sustain the credit union during difficult periods.

47 Capital Net Worth n Formula Regular Reserves & Undivided Earnings Total Assets n Industry Standard 7% or higher (PCA) 9% or higher (TCUL)

48 Capital Net Worth Impact Factors: n Profitability (ROA) n Provision for Loan Losses n Asset Growth

49 11 Ratios Every Credit Union Professional Should Know Operating ROA Delinquency Asset Yield NCOs/ATA NOER NCOs/Avg Lns Cost of Funds Gross Spread Net ROA Loan mix Net Worth

50 Texas Credit Union League ALM Resources

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52 Uses of Cash n Loans n Share Withdrawals n Expenses n Share Draft Clearings n Credit Card Clearings n Fixed Asset Acquisition n Investments

53 Sources of Cash n Member Deposits n Non-Member Deposits n Borrowed Money (Notes Payable) n Early Withdrawal of Investments n Income from Loans, Investments & Fees n Sale of Assets Loans, Investments, Fixed