Financial Literacy: Understanding Financial Statements ... · PDF fileFinancial Literacy:...

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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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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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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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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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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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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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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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

20 Insight. Oversight. Foresight. SM

Understanding The Financial Statements

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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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• 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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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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• 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


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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• 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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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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• 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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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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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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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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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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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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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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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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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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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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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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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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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%


Credit Union Industry Financial Trends

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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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Credit Union Failures 2011 – 2015

Reported by the NCUA

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10

13

1110

2011 2012 2013 2014 2015

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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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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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Loan Growth


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

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Net Charge-Offs / Avg. Loans vs. Delinquency


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


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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US: Delinquent Loans / ALL

103.7%

85.4% 89.2% 87.3% 87.3%

2011 2012 2013 2014 2015

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US: Net Charge-Offs / PLL

112.2%121.7%

129.1%

110.7%

90.8%

2011 2012 2013 2014 2015

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Net Interest Income


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


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


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


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


# 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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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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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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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]

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