April 4, 2011
By Lydia Cole
In December, the NCUA passed a rule requiring Board members of federally insured credit unions to have a “working familiarity with basic finance and accounting practices.” The extent of financial literacy that volunteers must meet varies depending upon each credit union’s complexity, but there are basic concepts, definitions, and formulas every volunteer should know. To that end, CreditUnions.com is breaking down 15 ratios by providing definitions and describing how the ratios affect the balance sheet. For personalized information on your credit union, check out Callahan & Associates’ two-year financial comparison, available on CUSP Online.
12-Month Loan GrowthLoan growth is the year-over-year change in outstanding loans. These are loans the credit union holds on its books, not the loans it makes over the course of the year. In 2010 credit unions granted $84.5 billion in first mortgage loans. Because of the low-rate environment, many credit unions sold these loans to secondary market vehicles to manage asset-liability risk. As such, these loans do not appear on credit union balance sheets.
Advanced Metric: If outstanding shares grow faster than loans, the loan-to-share ratio, a measure of credit union liquidity, decreases. In this circumstance, the credit union has additional shares available to lend if it desires.
Provision for Loan LossesThis line item is the point for transferring funds to the Allowance for Loan Loss account. As credit unions foresee or experience worsening asset quality, they may increase the provision amount to provide for additional coverage in their Allowance for Loan Loss reserve. As the recession passed and asset quality improved, credit unions nationwide decreased their annual provision amounts by nearly 25%. These cuts helped improve net income.
Advanced Metric: Once the funds have reached the Allowance account, credit unions can measure their coverage ratio by dividing the Allowance balance by total reportable delinquent loans. This metric essentially states how much the credit union has to cover loans it might not recover.
Loan Portfolio ProfileA credit union’s loan portfolio is broken into three primary classifications — real estate loans, auto loans, and all other loans. Each of these categories has characteristics that make a positive contribution to the credit union as well as creates challenges for the credit union to manage. Balancing profitability, member relationships, asset liability management policies, and operational risk across key lending areas is one of the primary jobs of credit union management.
Advanced Metric: Yield on Loans varies depending on the credit union’s loan concentration. Loan portfolios with high percentages of real estate loans have a tendency toward lower yields just as portfolios with higher percentages of high rate consumer loans (credit cards or signature loans) have a tendency toward higher yields.
More key ratios every Board member should know ...Part 2: cost of funds, net interest margin, operating expense ratio.Part 3: Delinquency, return on assets, net worth to assets.Part 4: Operating expense to income, efficiency, members per employee.Part 5: Fee income per member, member growth, average relationship per member.
Click here for a complete listing of the 15 ratios every Board member should know.
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