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1 Insight. Oversight. Foresight. SMMichigan Texas Florida
Financial Literacy: Understanding Financial Statements & Key Ratios
Presented by:Joseph A. Zito, CPA, MBA
NACUSAC 2016 Annual Conference
Philadelphia, PA
June 16, 201610:30am – 12:10pm and 1:20pm – 3:00pm
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Financial Institutions GroupLearning Objectives
• Meet the NCUA financial literacy requirements for credit union officials
• Improve your understanding of the credit union’s performance in comparison to expected benchmarks
• Obtain resources available to help you develop expectations and to assist in the monitoring of the credit union’s performance to those expectations
• Understanding why financial trends occur (positive and negative) in order to assist in asking the appropriate questions of management
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Financial Institutions GroupNCUA Financial Literacy Requirements
• NCUA Letter to Federal Credit Unions 11-FCU-02, February 2011• Clarifies Final Rule 701.4, General Authorities and Duties of
Federal Credit Union Directors• Focuses on financial skills requirement• New directors must acquire training within six months of
election or appointment
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Financial Institutions GroupSix Key Provisions
• Director responsibilities include:• Responsible for credit union’s general direction• Carry out duties with good faith and due care• Administer affairs fairly and impartially• Ability to read and understand financial statements and ask
appropriate questions• Follow laws and sound business practices• May rely on work of competent staff and consultants
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Financial Institutions Group
Board/Management Responsibilities for Financial Reporting
NCUA Regulation, Part 741.6• Ensure financial statements are prepared in accordance with
generally accepted accounting principles (GAAP).
• Ensure accounting records/financial reports are prepared timely and accurately.
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Financial Institutions Group
Director Duties Regarding FinancialsNCUA Regulation, Part 701.4
• At a minimum, a director should be able to examine the balance sheet and income statement, and be able to answer the following questions:? What does this line item mean?
? Why is it important to the credit union
? Is the value of the line item changing over time? If so, what does that change (either positive or negative) mean?
? Is the change important to the credit union?
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Financial Institutions Group
Supervisory/Audit Committee Responsibilities for Financial Reporting
NCUA Regulation, Part 715: Basic ResponsibilitiesBoard of Directors or Management:• Meet required financial reporting objectives
• Establish practices and procedures sufficient to safeguard members’ assets.
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Financial Institutions Group
Supervisory/Audit Committee Responsibilities for Financial Reporting
NCUA Regulation, Part 715: Specific ResponsibilitiesTo carry out the basic responsibilities, the Committee must determine whether:
• Internal controls are established and effectively maintained
• Accounting records and financial reports are promptly and accurately prepared
• Policies and control procedures established by the Board are: • Properly administered.• Sufficient to safeguard against error, conflict, self-dealing, and fraud.
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Financial Institutions Group
Supervisory/Audit Committee Responsibilities for Financial Reporting
NCUA Regulation, Part 715: MandatesTo carry out the basic and specific responsibilities, the Committee must:
• Ensure filing requirements for Call Reports are met
• Perform / Obtain an audit (as defined by regulation)
• Perform / Obtain a verification of members’ accounts
• Act to avoid sanctions for failure to comply with these requirements
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Financial Institutions GroupWhat’s Required
• Officials should know:• What each financial statement line item means
• Its importance to the credit union
• Effect of changes in line items
• Are changes important to the credit union
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Financial Institutions GroupAccounting Rules
• Generally Accepted Accounting Principles (GAAP) are the framework of guidelines used for financial accounting
• Financial Accounting Standards Board (FASB) develops GAAP in the United States
• International Financial Reporting Standards (IFRS) work to standardize global accounting standards
• American Institute of Certified Public Accountants (AICPA)
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Financial Institutions GroupBasic Financial Statements
• Statement of Financial Condition: Balance sheet• Statement of Income: Income statement or Profit &
Loss (P&L) statement• Statement of Cash Flows• Statement of Changes in Members’ Equity
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Financial Institutions GroupStatement of Financial Condition
• Assets, resources controlled by the entity as a result of past events or transactions and from which future economic benefits are expected to flow to the entity
• Liabilities, obligations of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future.
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Financial Institutions Group
Statement of Financial Condition (continued)
• Shares, member deposits, including regular shares, checking shares, money market accounts, share certificates, and individual retirement accounts
• Net Worth, accumulated retained earnings since inception. This includes appropriated reserves.
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Financial Institutions Group
Statement of Financial ConditionKey Ratios & Percentages
• Asset growth• Loan growth• Delinquency• Loan loss• Share growth• Loan to share• Net worth
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Financial Institutions GroupStatement of Income
• Interest income from loans and investments• Interest expense, dividends and interest on borrowed
funds• Provision for loan losses• Non-interest income, fees, charges, etc.• Non-interest expense, operating costs• Net income (loss)
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Financial Institutions Group
Statement of Income:Key Ratios & Percentages
• Yield on loans• Yield on investments• Net interest margin / assets• Operating expense / assets• Non-interest income / assets• Return on assets
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Financial Institutions GroupStatement of Cash Flows
• Cash flows from • Operating activities• Investing activities• Financing activities
• Net change in cash and cash equivalents• Supplemental disclosures
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Financial Institutions GroupStatement of Members’ Equity
• Regular reserve• Undivided earnings• Accumulated other comprehensive income
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Understanding The Financial Statements
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Financial Institutions Group
Understanding the Statement of Financial Condition (Balance Sheet)
Prepared for a specific day, not a period of time and is usually prepared monthly (e.g., June 30, 2016, etc.)
Accounting equation: Assets – Liabilities = Equity
• Assets: Things that are owned• Liabilities: Things owed to third parties• Members’ Equity: Mathematical difference between
assets and liabilities
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Financial Institutions Group
Understanding the Statement of Financial Condition (Balance Sheet)
• Assets• Cash on hand, cash in banks, investments, loans to
members, accrued interest receivable, property and equipment, prepaid assets, NCUSIF deposit
• Liabilities• Members’ deposits, borrowed funds, interest payable,
accounts payable, accrued liabilities• Members’ Equity
• Undivided earnings, regular reserve, appropriated undivided earnings, accumulated other comprehensive income (loss), equity acquired through merger/acquisition
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Financial Institutions Group
Understanding the Statement of Income
Prepared for a period of time, not for a specific day, and is usually prepared monthly (e.g., month ended June 30, 2016; quarter ended June 30, 2016, etc.)
• Revenues: Income earned from assets and services• Expenses: Costs incurred on liabilities and services
provided for and by the credit union• Net Income (Loss): Mathematical difference between
revenues and expenses
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Financial Institutions Group
Understanding the Statement of Financial Condition (Balance Sheet)
• Net Income (Loss)• At the end of each accounting period, the net income or loss
is added or subtracted from the undivided earnings balance• Inadequate net income over a prolonged period, or a material
net loss in any period, could erode the net worth and result in serious regulatory intervention, including conservatorship
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Financial Institutions GroupStatements of Financial Condition
Assets:As of
June 30, 2016As of
June 30, 2015 $ Change % Change
Cash $ 2,625,000 $ 1,650,000 $ 975,000 59.09%
Investments 78,000,000 72,000,000 6,000,000 8.33%
Loans to members, net (see note 1) 215,375,000 200,350,000 15,025,000 7.50%
Prepaid and other assets 1,000,000 1,500,000 (500,000) ‐33.33%
Other real estate owned (OREO) 3,000,000 500,000 2,500,000 500.00%
Total assets $ 300,000,000 $ 276,000,000 $ 24,000,000 8.70%
Liabilities:
Members' share & savings accounts $ 276,000,000 $ 252,500,000 23,500,000 9.31%
Accounts payable and accrued liabilities 2,350,000 2,500,000 (150,000) ‐6.00%
Borrowed funds 1,000,000 1,000,000 ‐ 0.00%
Total liabilities 279,350,000 256,000,000 23,350,000 9.12%
Members' Equity:
Regular reserve 2,500,000 2,500,000 ‐ 0.00%
Undivided earnings 19,400,000 18,500,000 900,000 4.86%
Accumulated other comprehensive loss (1,250,000) (1,000,000) (250,000) 25.00%
Total members' equity 20,650,000 20,000,000 650,000 3.25%
Total liabilities & members' equity $ 300,000,000 $ 276,000,000 $ 24,000,000 8.70%
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Financial Institutions GroupNote 1: Loans to Members
Loans outstanding June 30, 2016 June 30, 2015Real estate $ 175,000,000 $ 163,500,000 Vehicle 25,500,000 23,000,000 Unsecured 15,500,000 14,500,000Gross loans to members 216,000,000 201,000,000 Less: allowance for loan losses (625,000) (650,000)Loans to members, net $ 215,375,000 $ 200,350,000
Summary of allowance activityBalance, beginning of year $ 650,000 $ 400,000 Provision for loan losses 750,000 1,250,000 Recoveries 100,000 150,000 Loans charged off (875,000) (1,150,000)Balance, end of year $ 625,000 $ 650,000
Reportable Delinquencies from Call Report:2 ‐ 6 months $ 2,000,000 $ 1,360,000 6 ‐ 12 months 2,900,000 517,000 over 12 months 1,067,500 240,000
$ 5,967,500 $ 2,117,000 Reportable Delinquency to Gross Loans 2.76% 1.05%
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Financial Institutions GroupStatements of Income
For the years ended ROA June 30, 2016 June 30, 2015 2016 ROA 2015 ROA Impact
Interest income $ 11,000,000 $ 11,000,000 3.82 4.14 (0.32)Interest expense ( 1,750,000) ( 1,500,000) (0.61) (0.56) (0.05)Net Interest margin 9,250,000 9,500,000 3.21 3.58 (0.37)Provision for loan losses (PLL) (750,000) (1,250,000) (0.26) (0.47) 0.21 Net interest income after PLL 8,500,000 8,250,000 2.95 3.11 (0.16)Non‐interest income 7,000,000 7,250,000 2.43 2.73 (0.30)Non‐interest expense (13,600,000) (14,250,000) (4.72) (5.37) 0.65 Net income $ 1,900,000 $ 1,250,000 0.66 0.47 0.19
28 Insight. Oversight. Foresight. SM
Key Balance Sheet Ratios
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Financial Institutions GroupKey Balance Sheet Ratios
Loan to Share: Gross outstanding loans divided by outstanding deposits
$216,000,000 / $276,000,000 = 78.3%
Loan to Assets: Gross outstanding loans divided by total assets$216,000,000 / $300,000,000 = 72.0%
• What these ratios mean• Portion of members’ deposits for total assets that have been invested in
loans to members• A low ratio may indicate strict lending policies, low risk tolerance, or
unattractive loan products• A high ratio may indicate attractive loan products, higher risk tolerance, or
strong marketing programs
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Financial Institutions GroupKey Balance Sheet Ratios
• What you should know• What are the key characteristics and challenges of each type of loan
portfolio segments? (real estate loans = lower yield)• Are there any concentration risks?• Is the credit union effectively managing its loan portfolio mix?
Loan Portfolio MixJune 30, 2016
Real estate $175,000,000 / $216,000,000 = 81.0%Vehicle $25,500,000 / $216,000,000 = 11.8%Unsecured $15,500,000 / $216,000,000 = 7.2%
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Financial Institutions GroupKey Balance Sheet Ratios
Delinquent Loan: Delinquent loans > 2 months divided by total loans
$5,967,500 / $216,000,000 = 2.76% as of June 30, 2016$2,117,000 / $201,000,000 = 1.05% as of June 30, 2015
• What this ratio means• Indicates the current credit risk associated within the loan portfolio• A low ratio may indicate underwriting practices are very conservative or
that uncollectible loans are charged off timely• A high ratio may indicate uncollectible loans are not charged off timely,
the collections department is understaffed, or poor credit decision were made 12 – 18 months earlier
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Financial Institutions GroupKey Balance Sheet Ratios
• What you should know• What is the credit union’s charge off policy? Are loans being charged off
timely?• What percentage of delinquency over 6 – 12 months result in losses? Is
this factored into the Allowance for Loan Losses (ALL) reserve?• How is the underlying collateral being evaluated?
Delinquent Loan MixCategory June 30, 2016 June 30, 20152 – 6 months 33% 64%6 – 12 months 49% 25%Over 12 months 18% 11%
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Financial Institutions GroupKey Balance Sheet Ratios
Net Charge Off: Charge-offs minus recoveries divided by average loans outstanding
$775,000 / ($216,000,000 + $201,000,000) / 2 = 1.05%
• What this ratio means• Indicates the annualized percentage of net charge-offs recognized in
relation to the average balance of outstanding loans during the same period.
• A low ratio may indicate underwriting practices are very conservative or uncollectible loans are note being charged off timely.
• A high ratio may indicate uncollectible loans are excessive, underwriting standards are poor, or collection efforts are weak.
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Financial Institutions GroupKey Balance Sheet Ratios
Allowance to Delinquent Loans: ALL balance divided by delinquent loans > 2 months
$625,000 / $5,967,500 = 10.5% June 30, 2016$650,000 / $2,117,000 = 30.7% June 30, 2015
• What this ratio means• Indicates the relationship between current ALL reserves and non-
performing delinquent loans.
• What you should know• Why didn’t the ALL increase when delinquency significantly
increased?• What is the composition of delinquent loans (well-collateralized)?
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Financial Institutions GroupKey Balance Sheet Ratios
Net Worth: Regular reserve plus undivided earnings divided by total assets
$2,500,000 + $19,400,000 = $21,900,000 / $300,000,000 = 7.3%
• What this ratio means• Measures financial strength in terms of retained earnings to total
assets• A low ratio usually indicates net income has not been sufficient to
keep pace with the growth in total assets and/or management is ineffective.
• A high ratio usually indicates net income has been strong over the years and/or management is effective.
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Financial Institutions Group
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The Importance of Net Worth Ratios
Prompt Corrective Action (PCA)Well capitalized 7% or greaterAdequately capitalized 6% - 6.99%Under-capitalized 4% - 5.99%Significantly under-capitalized 2% - 3.99%Critically under-capitalized Less than 2%
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Net Worth Ratio
Total Assets Options • Quarter-end option• Average of the current and three preceding calendar quarter-
end balances• Average of the three month-end balances over the calendar
year• Average of daily assets over the calendar quarter
• What you should know• Which asset option does your credit union use?• Does it frequently change options to attain optimal ratios?• Is it using an alternative method to remain at a higher PCA
level?
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Financial Institutions Group
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Key Income Statement Ratios
Return on Assets: Net income/loss divided by average total assets
$1,900,000 / ($300,000,000 + $276,000,000) / 2 = 0.66%
• What this ratio means• Indicates how profitable a credit union is relative to its total average
assets• Indicates how well management is using assets to generate net income
For the years ended ROA June 30, 2016 June 30, 2015 2016 ROA 2015 ROA Impact
Interest income $ 11,000,000 $ 11,000,000 3.82 4.14 (0.32)Interest expense ( 1,750,000) (1,500,000) (0.61) (0.56) (0.05)Net Interest margin 9,250,000 9,500,000 3.21 3.58 (0.37)Provision for loan losses (PLL) ( 750,000) (1,250,000) (0.26) (0.47) 0.21 Net interest income after PLL 8,500,000 8,250,000 2.95 3.11 (0.16)Non‐interest income 7,000,000 7,250,000 2.43 2.73 (0.30)Non‐interest expense (13,600,000) (14,250,000) (4.72) (5.37) 0.65 Net income $ 1,900,000 $ 1,250,000 0.66 0.47 0.19
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Financial Institutions GroupKey Balance Sheet Ratios
Net Interest Margin: Interest income less interest expense divided by average total assets
$9,250,000 / ($300,000,000 + $276,000,00) / 2 = 3.21%
• What this ratio means• Indicates the relationship of interest income earned on loans and
investments versus interest paid on members’ deposits and borrowed funds. The NIM provides the primary resource to support the operating expenses and provision for loan losses expense.
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Financial Institutions GroupKey Balance Sheet Ratios
Net Interest Margin (Continued)
• What you should know• The Asset Liability Committee (ALCO) is responsible for managing
balance sheet risk, including setting interest rates on loans, as well as deciding what to pay on dividends.
• Which members of management and/or the Board participate on the ACLO?
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Financial Institutions GroupKey Balance Sheet Ratios
Provision for Loan Losses (PLL): PLL expense divided by average total assets
$750,000 / ($300,000,000 + $276,000,000) / 2 = 0.26%
• What this ratio means• Represents the amount charged to the income statement to fund
the ALL to cover incurred losses within the loan portfolio.• When loan charge-offs and delinquency are increasing, the PLL
expense and ratio will usually increase (directionally consistent).
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Financial Institutions Group
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CAMEL Rating System
• Primarily based on key ratios• Used by regulators to rate credit unions on overall
soundness• Rating system is 1 to 5, with 1 being the most sound
C Capital (also known as members’ equity, net worth)A Asset quality (includes delinquencies, charge-offs)M Management (subjective rating)E Earnings (Net income or ROA)L Asset/Liability Management
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Financial Institutions Group
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NCUA Sources for Credit Union Data
• Letter To Credit Unions – State of the CU Industry
• Quarterly Call Reports
• Financial Performance Report (FPR); a quarterly report that provides historical and peer information
• NCUA’s Peer Groups< $2 million$2 million to < $10 million$10 million to < $50 million$50 million to < $100 million$100 million to < $500 million$500 million and greater
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Financial Institutions Group
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FPR Ratio Analysis
Capital Adequacy
2010 2011 2012 2013 2014 2015 Peer Average
Net worth / Total assets 9.27% 8.39% 8.25% 8.86% 7.61% 7.30% 10.90%
Asset Quality
2010 2011 2012 2013 2014 2015 Peer Average
Delinquent loans / Totals loans 1.93% 1.56% 1.76% 1.25% 1.05% 2.76% 0.83%
Net charge-offs / Average loans 0.83% 2.18% 1.83% 1.67% 0.42% 0.37% 0.42%
Asset/Liability Management
2010 2011 2012 2013 2014 2015 Peer Average
Total loans / Total shares 74.74% 69.36% 83.96% 84.33% 79.60% 78.26% 69.85%
Total loans / Total assets 68.40% 63.12% 76.89% 77.12% 72.83% 72.00% 60.86%
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Financial Institutions Group
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FPR Ratio Analysis
Earnings
2010 2011 2012 2013 2014 2015Peer
AverageReturn on average assets (ROA) 0.19% -0.67% -0.41% 0.44% 0.47% 0.66% 0.57%
Interest income / Average assets 5.30% 4.90% 4.56% 4.35% 4.14% 3.82% 3.40%
Cost of funds / Average assets 1.80% 1.48% 0.97% 0.65% 0.56% 0.61% 0.38%
Provision for loan losses / Average assets 0.80% 1.61% 1.44% 0.70% 0.47% 0.26% 0.24%
Operating expenses / Average assets 5.22% 5.24% 5.30% 5.34% 5.37% 4.72% 3.64%
Non-interest income / Average assets 2.71% 2.76% 2.74% 2.78% 2.73% 2.43% 1.48%
46 Insight. Oversight. Foresight. SM
Credit Union Industry Financial Trends
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Financial Institutions Group
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Credit Union Industry – Be Informed!
www.ncua.gov (great resource for information)• Credit union analysis section
• Industry data• Industry Information• State and economic data• Financial trends• Credit union and bank interest rates
• Be able to form your own expectations!
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Financial Institutions Group
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Credit Union Failures 2011 – 2015
Reported by the NCUA
19
10
13
1110
2011 2012 2013 2014 2015
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Financial Institutions Group
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Credit Union Mergers 2011 – 2015
Approved by the NCUA
231
245
257262
234
2011 2012 2013 2014 2015
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Financial Institutions GroupUS Merger Trends 2011 - 2015
Year #Total $
(millions)2011 231 4,3142012 245 4,7192013 257 5,3402014 262 5,5632015 234 8,341Totals 1,229 28,277
Asset Size of Merged CUs # % of Units
$(millions) % of $
<$20 million 940 76.5% 5,028 17.8%$20-$99 million 245 19.9% 10,817 38.3%$100 -$499 million 39 3.2% 7,811 27.6%>$500 million 5 0.4% 4,621 16.3%
50Approved by the NCUA
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Financial Institutions Group
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Member Share Growth
Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 3.33 1.64 -0.92 4.11 3.90 4.21
50-100m 4.31 2.77 0.41 5.28 4.99 4.61
100-500m 5.72 3.71 2.02 5.83 4.70 4.73
500m-1b 7.67 5.90 4.16 6.96 6.03 4.82
1-10b 8.33 5.29 4.73 7.15 7.29 5.47
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Financial Institutions Group
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Loan Growth
Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 3.72 3.43 2.46 1.45 -1.02 -1.39
50-100m 6.12 5.25 4.08 2.84 0.30 -0.88
100-500m 8.32 8.07 6.98 4.59 0.98 -0.38
500m-1b 11.32 11.29 9.38 6.31 1.75 -1.06
1-10b 12.52 12.49 9.17 5.61 3.31 -0.39
5353
Net Charge-Offs / Avg. Loans vs. Delinquency
Source: Callahan Peer2Peer
1.6%
1.2%
1.0%0.9% 0.8%
0.9%
0.7%0.6%
0.5% 0.5%
2011 2012 2013 2014 2015
Delinquent Loans to Total Loans Net Charge-Off/Avg Loans
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Financial Institutions GroupNet Charge-Offs / Avg. Loans
54Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 0.47 0.49 0.53 0.58 0.66 0.79
50-100m 0.47 0.48 0.52 0.49 0.67 0.81
100-500m 0.45 0.47 0.54 0.67 0.83 1.03
500m-1b 0.43 0.44 0.49 0.69 0.86 1.06
1-10b 0.40 0.44 0.54 0.76 0.99 0.89
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Financial Institutions GroupDelinquency
55Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 1.24 1.28 1.41 1.48 1.60 1.74
50-100m 1.05 1.17 1.23 1.28 1.47 1.57
100-500m 0.93 0.93 1.06 1.15 1.43 1.62
500m-1b 0.75 0.78 0.91 1.05 1.15 1.59
1-10b 0.71 0.76 0.97 1.16 1.70 1.36
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US: Net Charge-Offs / Delinquent Loans (1 year change)
Source: Callahan Peer2Peer56
53.1%
47.3%
51.0%51.7%
52.2%
2011 2012 2013 2014 2015
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Financial Institutions Group
Source: Callahan Peer2Peer57
US: Delinquent Loans / ALL
103.7%
85.4% 89.2% 87.3% 87.3%
2011 2012 2013 2014 2015
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Financial Institutions Group
Source: Callahan Peer2Peer58
US: Net Charge-Offs / PLL
112.2%121.7%
129.1%
110.7%
90.8%
2011 2012 2013 2014 2015
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Financial Institutions Group
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Net Interest Income
Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 3.02 3.03 3.06 3.22 3.41 3.58
50-100m 3.08 3.09 3.10 3.26 3.45 3.55
100-500m 3.04 3.03 3.01 3.13 3.33 3.41
500m-1b 2.96 2.99 2.90 2.90 3.10 3.28
1-10b 2.63 2.62 2.57 2.73 2.95 3.09
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Financial Institutions GroupFee & Other Income/Avg. Assets
60Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 1.03 1.04 1.44 1.04 1.05 1.08
50-100m 1.28 1.28 1.30 1.29 1.35 1.06
100-500m 1.44 1.44 1.62 1.54 1.46 1.48
500m-1b 1.47 1.41 1.78 1.49 1.33 1.39
1-10b 1.33 1.29 1.42 1.43 1.28 1.26
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Financial Institutions GroupOperating Expense/Avg. Assets
61Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 3.56 3.60 3.66 3.71 3.88 3.99
50-100m 3.70 3.70 3.74 3.78 3.95 4.02
100-500m 3.67 3.63 3.71 3.72 3.80 3.83
500m-1b 3.46 3.42 3.42 3.42 3.49 3.54
1-10b 2.85 2.78 2.81 2.83 2.92 2.91
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Return on Assets
Source: Callahan Peer2Peer
Assets 2015 2014 2013 2012 2011 2010
10-50m 0.29 0.27 0.22 0.30 0.21 0.01
50-100m 0.47 0.47 0.43 0.49 0.41 0.21
100-500m 0.56 0.61 0.60 0.67 0.53 0.34
500m-1b 0.70 0.81 0.76 0.83 0.68 0.52
1-10b 0.85 0.91 0.95 1.04 0.80 0.34
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US Net Worth Ratios
Source: Callahan Peer2Peer
# of Credit Unions
Dec. 2012
% of Total
Dec. 2013
% of Total
Dec. 2014
% of Total
Dec. 2015
% of Total
7% or above 6,653 96.5% 6,492 97.1% 6,254 97.7% 5,997 97.5%
6% to 6.99% 170 2.5% 132 2.0% 96 1.5% 111 1.8%
4% to 5.99% 56 0.8% 51 0.8% 36 0.6% 30 0.5%
2% to 3.99% 12 0.2% 7 0.1% 12 0.2% 4 0.1%
0% to 1.99% 3 -% 3 -% 2 -% 5 0.1%
Less than 0% 0 -% 2 -% 2 -% 1 0.0%
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Possible Questions to Ask from Your Analytical Review
Allowance for Loan Losses• Why is the ALL balance as of June 30, 2016 lower than it was
at June 30, 2015 when gross loans to members increased and delinquency has more than doubled?
• Why are the recovery payments on charged-off loans down $50,000 (33.3%) this year ($100,000) versus last year ($150,000)?
• Is management adhering to the charge-off policy?
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Financial Institutions Group
Possible Questions to Ask from Your Analytical Review
Other Real Estate Owned (OREO)• Why did our foreclosures increase so dramatically (from
$500,000 to $2,500,000 = 500%) between years?• Are these foreclosures still part of the reportable
delinquency?• How many additional foreclosures are expected in the next
six months?• What are the expected losses on the foreclosures currently
owned?• How do we market these properties for sale?
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Possible Problems Identified
• ALL• Management didn’t provide an adequate loan loss reserve to
address the significant increase in loan delinquency and the escalating number of foreclosures. A closer review of these trends disclosed that the collections department was severely understaffed and operated without a competent manager for more than 9 months. This error overstated loans to members, net income, and undivided earnings by $2,000,000.
• OREO• Foreclosed property was transferred to OREO at the outstanding
loan balance vs. the property’ fair value. This error overstated assets, net income, and undivided earnings by $1,500,000.
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Financial Impact of Identified Problems
• Net income / ROA ratio• Originally reported $1,900,000 in retained earnings and ROA of
0.66%• After adjustments, net income became a net loss of $1,600,000
and an ROA of (0.56%)
• Retained earnings / Net worth ratio • Originally reported $21,900,000 in retained earnings and net worth
of 7.3% (well capitalized)• After adjustments, retained earnings became $18,400,000 and net
worth was 6.13% (adequately capitalized)
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Financial Institutions Group
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Call Report Requirements
• Statement of Financial Condition• Statement of Income and Expense• Miscellaneous information• Delinquent loans by collateral type• Additional delinquency information• Loan charge-offs and recoveries• Liquidity, commitments, and sources
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Financial Institutions Group
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Call Report Requirements
• PCA net worth calculation worksheet• Specialized lending
• Indirect loans• Real estate• Loans purchased and sold• Business lending
• Investments, supplemental information• Credit Union Service Organizations (CUSOs)
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Questions?
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Thank you
Joseph A. Zito, CPA, MBAShareholder Office: (248) 244-3068Cell: (586) 291-4311Email: [email protected]