and Expense and Income Ratios Brian Smith-Vandergriff CUNA CFO Council Conference May 19, 2014

Transcription

1 Managing Non-Interest Operating Income Expenses and Expense and Income Ratios Brian Smith-Vandergriff CUNA CFO Council Conference May 19, 2014

2 Objectives Review Current Environment Discuss Delinquencies and Charge-offs Explore ALLL Methodology Changes Outline Real World Management Strategies

3 Philosophical Arguments Negative ROAs are Not Evil, nor are they a Sustainable Business Strategy Non-Controllable Expenses are Real Fees are Not Inherently Bad, but they Should not be a Profit Center

4 Current Environment Corporate Credit Unions Ongoing Assessments Recapitalization??? NCUSIF Losses at Troubled Credit Unions Fees and Other Income Supplement NIM Delinquencies and Charge-offs elevated Audit & Examination Burdens are Excessive

5 Current Environment Credit CARD Act of 2009 Overdraft Fees Require Opt-In Pay to Pay Fees Abolished Late Fees Capped ($25-$35) Inactivity Fees Eliminated Troubled Debt Restructuring (TDR) Introduced in FAS 15 (1977) Recent Guidance - Market Rate Comparison Application Requires Interpretation

6 Current Environment Dodd-Frank Act Consumer Financial Protection Bureau Durbin Amendment & Interchange MBL Cap Attracting Attention Tax Expenditures Under Review* $500 MM in 2012 $500 MM in 2013 $1 billion in 2017 *Based on February 2013 Report of the Joint Committee on Taxation

7 Asset Yields vs. Liability Costs 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Yield On Assets Liability Expense

8 Operating Surplus Contribution 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Net Interest Margin Non-Interest Income Operating Surplus (NIM + Fees)

9 Net Operating Spread 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Net Spread Operating Surplus (NIM + Fees) Operating Expenses

10 Loan Losses Impact Net Income 2.00% 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Net Income Loan Loss Provision Net Spread

11 Lending Leads to Losses Losses are Anticipated in Lending Credit Union Losses are Moderating Still Relatively Manageable Should Naturally Decline Policies and RBL Tiers Need Review More Credit Unions will Likely Fail Ample Capital is Available

12 Easy Expense Reductions Conference and Travel Staff and Board Training Marketing Salary Adjustments Mergers (Economies of Scale) Layoffs POTENTIALLY ERODING THE LONG TERM VALUE OF THE CREDIT UNION FOR SHORT TERM GAINS

13 Other Despicable Habits Peer Comparisons Driving Decisions Cutting Member Services Adopting Delay and Pray Accounting Death by a Thousand Fees

14 Broad Real World Responses CEO Solicited Input from All Stakeholders Metrics and Timeframes Defined Success Capital Plans Were Adjusted Mortgages Were Originated and Sold Realistic Budgets Projected Losses 1% ROA Target Removed from CAMEL

15 Specific Real World Responses Credit Union A Started Providing Fee Services to CUs (2009) Data Processing Cost Tied to Assets (2011) Credit Union B Closed 2 Branches (2008) Transferred 2 Branches to Another CU (2008) Consolidated Headquarters (2009) Revised Board Dashboard (2009,2013) Renegotiated Major Contracts (2011)

16 Allowance Project In Early 2009, Regulators and Auditors Became Fixated on Credit Losses Battles Ensued 3-year vs. 1-year Rolling Historical Averages Projecting Losses for Underwater Collateral Designed New Model and Metrics Capital at Risk (# of Average Loans) Time to Capital Depletion Multiplier to Shock Estimates

17 The Model We Developed CU Industry as of 12/31/13 Most Recent Monthly ALLL 0.50% Loss Multiplier 1 Rolling ALLL Loan Balance Number of Loans Average Loan Balance Estimated Losses Total Equity Estimated Net Worth Total Assets 0.80% Target Net Worth Equity Dollars Losses Required # of Average Loans % of Loans 10% $ 101,032,807, $ 10,155,322, , % $ 645,222,781,460 9% $ 90,413,348, $ 20,774,781, ,609, % 8% $ 79,793,889, $ 31,394,240, ,432, % 50,000,000 7% $ 69,174,430, $ 42,013,699, ,255, % 6% $ 58,554,971, $ 52,633,158, ,078, % $ 12, % $ 47,935,512, $ 63,252,617, ,901, % 4% $ 37,316,053, $ 73,872,075, ,724, % $ 5,161,782,252 3% $ 26,696,594, $ 84,491,534, ,547, % 2% $ 16,077,135, $ 95,110,993, ,370, % $ 111,188,129,486 1% $ 5,457,676, $ 105,730,452, ,193, % 0% $ (5,161,782,251.68) $ 116,349,911, ,016, % 10.47% Net Worth at End of Year Adjusted Net Worth Ratio $ 1,061,945,893, % % % % % % % % % %

18 Shocked Losses Most Recent Monthly ALLL 0.50% Loss Multiplier 3 Rolling ALLL Loan Balance Number of Loans Average Loan Balance Estimated Losses Total Equity Estimated Net Worth Total Assets 0.80% Target Net Worth Equity Dollars Losses Required # of Average Loans % of Loans 10% $ 90,709,242, $ 20,478,886, ,586, % $ 645,222,781,460 9% $ 80,089,783, $ 31,098,345, ,409, % 8% $ 69,470,324, $ 41,717,804, ,232, % 50,000,000 7% $ 58,850,865, $ 52,337,263, ,055, % 6% $ 48,231,406, $ 62,956,722, ,878, % $ 12, % $ 37,611,947, $ 73,576,181, ,701, % 4% $ 26,992,489, $ 84,195,640, ,524, % $ 15,485,346,755 3% $ 16,373,030, $ 94,815,099, ,347, % 2% $ 5,753,571, $ 105,434,558, ,170, % $ 111,188,129,486 1% $ (4,865,887,815.14) $ 116,054,017, ,993, % 0% $ (15,485,346,755.04) $ 126,673,476, ,816, % 10.47% Net Worth at End of Year Adjusted Net Worth Ratio $ 1,061,945,893, % % % % % % % % % %

19 Strategic Planning Most Recent Monthly ALLL 0.50% Loss Multiplier 0.50 Rolling ALLL Loan Balance Number of Loans Average Loan Balance Estimated Losses Total Equity Estimated Net Worth Total Assets 0.80% Target Net Worth Equity Dollars Losses Required # of Average Loans % of Loans 10% $ 103,613,698, $ 7,574,431, , % $ 645,222,781,460 9% $ 92,994,239, $ 18,193,890, ,409, % 8% $ 82,374,780, $ 28,813,349, ,232, % 50,000,000 7% $ 71,755,321, $ 39,432,808, ,055, % 6% $ 61,135,862, $ 50,052,266, ,878, % $ 12, % $ 50,516,403, $ 60,671,725, ,701, % 4% $ 39,896,944, $ 71,291,184, ,524, % $ 2,580,891,126 3% $ 29,277,485, $ 81,910,643, ,347, % 2% $ 18,658,026, $ 92,530,102, ,170, % $ 111,188,129,486 1% $ 8,038,567, $ 103,149,561, ,993, % 0% $ (2,580,891,125.84) $ 113,769,020, ,816, % 10.47% Net Worth at End of Year Adjusted Net Worth Ratio $ 1,061,945,893, % % % % % % % % % %

20 Summary Past Decisions Led Us Here Bad Loans to Members and Businesses Inappropriate Investments by Corporate CUs Lax Regulatory Oversight Industry Risk Management Overhaul Concentration Risk RBNW Proposal

21 Summary Fees Should be Reviewed Focus on Non-Interest Expenses Revisit Strategy Number of Branches Staff Size Study Utilization of Member Services

22 For More Information Brian Smith-Vandergriff Senior Managing Director CNBS, LLC Toll free: Direct: