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Ryan Sturgis, Senior Manager Aran Loftus, Manager HIT THE BOOKS (ADVANCED) The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Objectives • Understand financial statement relationships • Overview of common ratios (although not perfect) utilized in the industry • Enhance ability to make sense of your CU’s financials • Identify key estimates and how they work • Increase your knowledge of relevant questions to ask Key Financial Relationships Balance Sheet/Variable Income Statement Investments Interest income, impairments, gains/losses on sale Loans Interest income, late fees, servicing income, gains/losses on sale, provision for loan losses, loan servicing expense Share Accounts Dividend expense, service charges, interchange Equity Net income/loss # Employees Payroll expense, benefits, other Call Report and FPRs as a Tool • Quarterly reports used by regulators • Provides summarized financial information – – – – Balance sheet Income statement Various ratios Mix of assets • But it’s just the beginning! Common Ratio Analysis - Liquidity • Loans-to-Shares Ratio – A higher ratio can signal liquidity problems if the credit union faces high delinquency levels, heavy savings withdrawals, or high loan demand. • Loans-to-Assets Ratio – Loans are very important to members as well as a source of yield. Yet, a high ratio would indicate lower liquidity levels. • Long-Term Assets to total Assets – Long-term assets include loans with extended maturities, fixed assets, and long-term investments. A higher ratio is an indicator of less liquidity. Common Ratio Analysis – Asset Quality Risk in the earning asset portfolios: • • • • • • Delinquent loans to total loans Non-performing assets to total assets Net charge-offs to average loans Modified loans to total loans Negative equity loans Fair value of investments to amortized cost Common Ratio Analysis - Capital Measures of capital adequacy: • Gross Capital Ratio – Undivided earnings, regular reserves, OCI, plus the allowance for loan losses – Essentially total capital strength to assets • Net Worth Ratio – Regular reserves and undivided earnings • Texas Ratio – NPA to equity plus ALLL (lower the better) • Non-performing loans (assets) to capital - Declining ratio is positive Common Ratio Analysis - Earnings Quality of earnings : • • • • • Yield on average earnings assets Cost of funds Net interest margin Efficiency ratio ROA Understand The Ratios….The Story of Telesis • • • • • • • • High performing for many years Great loan yields, NII, ROAA……but Concentrated revenue (CRE and fees/servicing) Leveraged growth w/high cost debt Reaching out of core market Simplistic ALL model Market downturn Failure The Subjective Impact • Allowance for loan losses (ALL) – – – – Estimate of incurred losses within the portfolio History is a base and combine with current trends Should mirror your complexity Very subjective and should be questioned • Repossessed/Foreclosed assets – Carry at estimated net realizable value (if you sold it today) – What are current valuation techniques? • Impaired loans, including TDRs – Impacts ALL significantly – Typically reserved for at collateral value – TDRs typically include projected cash flow Regulatory Hot Buttons • Asset Liability Management and Interest Rate Risk – Concentration limits to net worth – Interest rate risk exposure! – Liquidity • Credit Quality – – – – Environmental risk factors Migration studies/Negative equity Concentrations Shock testing Questions Ryan Sturgis (503)478-2280 [email protected] Aran Loftus (503)478-2267 [email protected]