6 Must-Know Metrics From The NCUA’s Financial Performance Reports

Capital adequacy, asset quality, earnings, ALM, productivity, and growth underline quarterly financial performance for credit unions.

 
 

The NCUA produces quarterly financial performance reports (FPRs) using 5300 Call Report data provided by credit unions. The reports themselves are divided into six categories: capital adequacy, asset quality, earnings, asset/liability management, productivity, and growth (referred to by the NCUA as “other ratios”).

View your credit union’s five-quarter FPR ratios.

View your credit union’s five-year FPR ratios.

The report provides insight into a credit union’s health as the individual categories delve into safety and soundness metrics.

Here’s a breakdown of one metric within each category.

Capital Adequacy

The first category, capital adequacy, is crucial to assessing the ability of a credit union to maintain operations. Examiners look for net worth ratios higher than 7%. The NCUA also wants to ensure credit unions are properly managing debt.

“We constantly track these metrics,” says Britt Drummond, vice president of finance at Campus Federal Credit Union ($614.4M, Baton Rouge, LA). “Management gets together and says ‘here are our goals and targets.’ But as far as the examiners go, we let these metrics speak for themselves. We don’t really game plan for the NCUA.”

The solvency ratio examines assets minus a percentage of delinquencies over short-term and long-term shares. Currently, no credit unions have a solvency ratio below 100%, and the industry average is 115.23%.

Although it’s interesting and valuable for a credit union to compare itself to peers in this category, an institution’s primary goal is to make sure it is reaching certain safety and soundness thresholds.

Other Capital Adequacy Ratios:

  • Total Delinquent Loans/ Net Worth
  • Solvency Evaluation
  • Classified Assets/ Net Worth
 

 

 

Asset Quality

Asset quality, the second category, is likewise important for credit union executives to monitor carefully.

Delinquency metrics vary based on lending strategies, but it’s important to monitor institutional trends as well as how a credit union’s numbers compares to its peers.

Delinquency and net charge-offs have some seasonality, so Callahan recommends taking both a five-quarter and five-year look. Are delinquencies up quarter-over-quarter? It’s important to add context gleaned from previous years.

“If we saw delinquency had skyrocketed for some reason, we would ask if that was happening for everybody or just us?” says Kim Alexander, CFO of Blue Federal Credit Union ($932.9M, Cheyenne, WY). “That’s when we’ll start diving into what’s going on at the credit unions around us.”

Other Asset Quality Ratios:

  • Fair Market Value/ Book Value
  • Accumulated Gains/ Cost of Inventory Available for Sale
  • Delinquent Loans/ Assets

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Earnings

Earnings is the FPR category with the most metrics, and credit union executives spend a lot of time with these 14 ratios. The two that resonate most are ROA and the operating expense ratio.

“We’re working to control operating expenses,” Drummond says. “So, lately, we’ve been watching the operating expense ratios closely.”

In addition, benchmarking earnings ratios against relevant peers can provide extra value to credit unions.

“We want to see how different segments compare to us as it relates to their provision for loan loss as a measure of total assets,” says Craig Emerson, CFO of Potlatch No. 1 Federal Credit Union ($948.0M, Lewiston, ID).

OPERATING EXPENSE RATIO

FOR ALL U.S. Credit Unions | DATA AS OF 03.31.17

Source: Callahan & Associates.

Other Earnings Ratios:

  • Return on Average Assets
  • Return on Average Assets (Excluding Stabilization Expense)
  • Gross Income/ Average Assets
  • Yield on Average Loans
  • Yield on Average Investments
  • Fee & Other Operating Income/ Average Assets
  • Cost of Funds/ Average Assets
  • Net Margin/ Average Assets
  • Provision of Loan Loss/ Average Assets
  • Net Interest Margin
  • Operating Expense/ Gross Income
  • Fixed Assets and OREOs/ Average Assets
  • Net Operating Expense/ Average Assets

Asset Liability Management

The asset liability management section examines the relationship between loans and shares to address risk faced by the credit union. This section goes beyond the important loan-to-share ratio, however, and dives a bit deeper.

For example, the supervisory interest rate risk threshold/net worth (sometimes referred to as SIRRT/net worth) divides total first mortgage loans and investments over five years by net worth. This metric is one way to evaluate risk.

Other Asset Liability Management Ratios:

  • Net Long Term Assets/ Assets
  • Regular Shares/ Shares & Borrowings
  • Loans/ Shares
  • Loans/ Assets
  • Cash and Short-Term Inventory/ Assets
  • Shares and Borrowings/ Earning Assets
  • Regular Shares & Drafts/ Shares & Borrowings
  • Borrowings/ Shares & Net Worth
  • Estimated Loan Maturity

Productivity

Productivity examines operations. How efficiently a credit union runs affects each of the other categories. One important check is to balance employee performance against compensation.

“We just went through a merger,” says Blue FCU’s Alexander. “As we grew, we asked ourselves if we were the right size. We were trying to get a true apples-to-apples comparison of assets per employee and average salary and benefits per employee to right-size our self.”

Other Productivity Ratios:

  • Members/ Potential Members
  • Borrowers/ Members
  • Members/ Full-Time Employees
  • Shares per Member
  • Average Loan Balance

Growth

What the NCUA labels as “other ratios” are, in fact, growth ratios.

Growth is a great way to assess trends in the balance sheet. Comparing a credit union’s growth rates against those of its peers adds context to performance. For example, even a credit union that has posted positive growth rates for the past five quarters might want to consider more aggressive tactics if its rates are substantially weaker than peers. Conversely, credit unions with a recent merger or a particularly active few quarters might want to stay closer to the average.

“We track growth metrics to what we’ve budgeted,” says P1FCU’s Emerson. “We see how our actual performance compares to our budget and make sure our budget remains within its parameters.”

It’s worth noting the NCUA calculates growth differently from Callahan & Associates. Generally, growth takes the different between this year and last year. This is what Callahan does. The NCUA takes year-to-date performance and projects out growth. Both methods are available in Peer-to-Peer.

Other Growth Ratios:

  • Net Worth Growth
  • Loan Growth
  • Asset Growth
  • Investment Growth
  • Membership Growth

The FPR ratios serve not only as a benchmarking guide but also as a check to ensure a credit union’s call report information is correct. In this way, the NCUAs FPR reports are a valuable tool credit union’s take seriously.

“We don’t want to have errors in the call report,” says Emerson. “I go back and doublecheck the ratios on the FPR will all my internal reports to make sure what I’m reporting is exactly what the FPR kicks back.”

Callahan senior industry analyst Liz Furman contributed to this article.

 

July 17, 2017


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