EARNINGS - Utah's Credit Unions



Eleven Key Ratios Every

Credit Union Professional

Should Know

Presented by:

Deborah L. Rightmire

Vice President

Asset/Liability Management

Texas Credit Union League

Dallas, Texas

1.800.442.5762 ext. 6496

469.385.6496 direct

drightmire@tcul.coop

Goals of

Asset/Liability Management

[pic]

Capital Adequacy

The credit union must have an adequate level of net worth to insure that solvency is not threatened by significant and prolonged changes in either the level of interest rates or the slope of the yield curve. Net worth is total reserves and undivided earnings.

Earnings Stability

The credit union’s gross spread must be sufficient and stable enough to cover net operating expenses, reserve transfers, loan net charge offs, investment losses, and other non-operating losses over all phases of the interest cycle. Factors affecting earnings stability include rate risk management, loan pricing, dividend policy, investment decisions, containment of operating expenses, pricing policies pertaining to non-interest income, and credit risk administration in the loan and investment portfolios.

Liquidity Management

The credit union must maintain adequate liquidity to meet normal and seasonal patterns in loan/share flows. A contingency plan should be developed to address credit lines and funding sources during periods of strained liquidity. The three M’s of liquidity are Monitor, Manage, and Maximize.

Interest Rate Risk

The credit union must control interest rate risk (IRR) to avoid a significant decline in earnings and net worth due to changing interest rates. The chosen measurement of interest rate risk must be adequate to address the complexity of the balance sheet and current level of net worth.

[pic] Credit Union Uses of Cash

1)

2)

3)

4)

5)

6)

[pic] Credit Union Sources of Cash

1)

2)

3)

4)

5)

6)

[pic]CAMEL Rating System

C Capital

➢ Net Worth

A Asset Quality

➢ Delinquency

➢ Net Charge Offs/Average Loans

M Management

E Earnings

➢ Asset Yield

➢ Cost of Funds

➢ Spread

➢ Net Operating Expense Ratio

➢ Operating ROA (Return on Assets)

➢ Net Charge Offs/Average Total Assets

➢ Net ROA (Return on Assets)

➢ Loan Mix

L Asset/Liability Management

➢ Liquidity Management

➢ Interest Rate Risk Assessment

Earnings – Asset Yield

Definition:

The annualized yield on assets, both earning assets (loans and investments) and non-earning assets (fixed assets, accounts receivable, and cash).

Formula:

Annualized Loan & Investment Income

( Average Total Assets

Industry Standard:

Determined by market conditions. Refer to current Peer Group Statistics and/or current market rates.

Impact Factors:

[pic] Loan Mix (

[pic] Loan Yield

[pic] Loan Portfolio Content (

[pic] Investment Mix

[pic] Investment Yield

[pic] Investment Portfolio Content

[pic] Cash Management Procedures

[pic] Fixed Asset Mix (

Earnings – Cost of Funds

Definition:

The annualized amount of dividends paid on deposits and interest paid on borrowed funds. The combined cost of money purchased from the member, borrowed from a liquidity source, and the credit union’s net worth dollars which have zero direct cost.

Formula:

Annualized Dividend & Interest Amount

( Average Total Assets

Industry Standard:

Determined by market conditions. Refer to current Peer Group Statistics and/or current market rates.

Impact Factors:

[pic] Dividend Rates

[pic] Account Mixes (

[pic] Account Rate Structures

[pic] Net Worth Ratio

[pic] Liquidity Position (

Earnings – Gross Spread

Definition:

The percentage difference between the income generated on all assets and the cost incurred for all liabilities. This ratio is sometimes referred to as Net Interest Margin by the regulators.

Formula:

Annualized Net Interest Income

( Average Total Assets

or

Asset Yield

- Cost of Funds

Industry Standard: 4.5% - 5% or higher

Impact Factors:

[pic] Loan Mix (

[pic] Loan Yield

[pic] Loan Portfolio Content (

[pic] Investment Mix

[pic] Investment Yield

[pic] Investment Portfolio Content

[pic] Account Mixes (

[pic] Account Rate Structures

[pic] Dividend Rates

[pic] Cash Management Procedures

[pic] Net Worth Ratio

[pic] Liquidity Position (

[pic] Fixed Asset Mix (

Earnings – Net Operating Expense Ratio (NOER)

Definition:

The annualized operating expenses (excluding provision for loan loss, dividends, and interest on borrowed money) less fee and other miscellaneous operating income. This ratio reduces expense by the amount of income collected to offset the cost of offering services.

Formula:

Annualized Operating Expenses

- Annualized Non-Interest Income

( Net Operating Expense

( Average Total Assets

Industry Standard:

2.5% - 3% range is typical, but depends on asset size. Refer to current Peer Group Statistics.

Impact Factors:

[pic] Expense Amounts (Budgets) (

[pic] Fee Income Structure (

[pic] Asset Size (

Earnings – Operating Return on Assets (Operating ROA)

Definition:

The percentage of net operating income after dividends, but before reserve transfers including provision for loan loss; actual net charge offs; non-operating gains or losses; or interest refunds.

Formula:

Annualized Net Operating Income

( Average Total Assets

or

Gross Spread

- NOER

Industry Standard: 1.30% - 1.50% or higher

Impact Factors:

[pic] Loan Mix (

[pic] Loan Yield

[pic] Loan Portfolio Content (

[pic] Investment Mix

[pic] Investment Yield

[pic] Investment Portfolio Content

[pic] Account Mixes (

[pic] Account Rate Structure

[pic] Dividend Rates

[pic] Asset Size (

[pic] Expense Amounts (

[pic] Fee Income Structure (

[pic] Cash Management Procedures

[pic] Net Worth Ratio

[pic] Liquidity Position (

[pic] Fixed Asset Mix (

Earnings – Net Charge Offs (NCOs)

Definition:

The percentage of assets being lost because of annualized net charge offs.

Formula:

Annualized Charge Offs

- Annualized Recoveries

( Annualized Net Charge Offs

( Average Total Assets

Industry Standard: .30% or less

Impact Factors:

[pic] Loan Rates

[pic] Loan Policies

[pic] Loan Portfolio Content (

[pic] Collection Policies and Procedures

[pic] Economic Conditions

[pic] Asset Increases & Decreases (

Earnings – Net Return on Assets

(Net ROA)

Definition:

The percentage of net operating income after dividends, non-operating amounts, interest refunds, and net charge offs. Amount that results in increases or decreases to Regular Reserves and Undivided Earnings.

Formula: Annualized Net Operating Income

( Average Total Assets (or)

Operating ROA

- Net Charge Offs/Average Total Assets

Industry Standard: 1% or higher

Impact Factors:

[pic] Loan Mix

[pic] Loan Yield

[pic] Loan Portfolio Content (

[pic] Investment Mix

[pic] Investment Yield

[pic] Investment Portfolio Content

[pic] Account Mixes (

[pic] Account Rate Structure

[pic] Dividend Rates

[pic] Net Worth Ratio

[pic] Liquidity Position (

[pic] Asset Size (

[pic] Fixed Asset Mix (

[pic] Expense Amounts (

[pic] Fee Income Structure (

[pic] Cash Management Procedures

[pic] Loan Policies

• Loan Mix (

• Collection Policies & Procedures

Earnings – Loan Mix

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.

Formula:

Gross Loans

( Total Assets

Industry Standard: 65% or higher. Refer to current Peer Group Statistics.

Impact Factors:

[pic] Loan Rates

[pic] Loan Types (

[pic] Deposit Rates

[pic] Deposit Types (

[pic] Marketing Efforts (

[pic] Economic Conditions

[pic] Asset Increases and Decreases

Asset Quality - Delinquency

Definition:

The percentage of loan portfolio delinquent two months or more.

Formula:

Delinquent Amounts > 2 Months

( Gross Loans

Industry Standard: 2% or less.

Impact Factors:

[pic] Loan Rates

[pic] Loan Policies

[pic] Loan Portfolio Content

[pic] Collection Policies & Procedures

[pic] Economic Conditions

[pic] Gross Loan Increases & Decreases (

Asset Quality – Net Charge Offs

Definition:

The percentage of loans being lost because of annualized net charge offs.

Formula:

Annualized Loan Losses

- Annualized Recoveries

( Annualized Net Charge Offs

( Average Gross Loans

Industry Standard: .40% or less

Impact Factors:

[pic] Loan Rates

[pic] Loan Policies

[pic] Loan Portfolio Content (

[pic] Collection Policies & Procedures

[pic] Economic Conditions

[pic] Gross Loan Increases & Decreases (

Capital – Net Worth

Definition:

The percentage of earnings from current and previous periods set aside to absorb operational losses. Higher levels of net worth allow the credit union to survive difficult periods.

Formula:

Regular Reserves & Undivided Earnings

( Total Assets

Industry Standard:

Prompt Correction Action (PCA) requires 7% or higher

TCUL suggests 9% of higher

Impact Factors:

[pic] Profitability (Operating ROA & Net ROA) (

[pic] Provision for Loan Losses

[pic] Asset Growth (

[pic]

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