1 – ROA Is it positive? Is it becoming more positive or less? Keep an eye on the components that make up the ratio. ROA is a benchmark… the following are the building blocks.
1a – Gross Spread – the difference between cost of funds and yield on earning assets (loans and investments). Again, is it growing or shrinking?
1b – Non-interest Income/ Total income - How dependent are we on this income?
1c – Operating expenses / Assets – how expensive are our operations?
A to C gives a glimpse as to why ROA is either great or just making sucking sounds.
2 – Net Charge offs to total Loans. It’s not what you make, it’s what you keep that's important.
2a – As a general rule, loans that are not delinquent are not losses…. Keep this low and all good things will follow. This is the barometer of what #2 will be. (In general – we have all witnessed the phenomenon of “current to c/o” because of bankruptcy. I call these “lightning losses” …. They strike hard, without warning, and from the damndest places!)
3 – Net Worth. You have to have it and you have to keep it to fulfill the #1 rule of CU’s --- BE HERE NEXT YEAR! #1 and #2 will indicate if this is going to be a good ratio or a problem ratio. Lose sight of this ratio and you are either in PCA hell or Toast... AKA, between a rock and a hard place.
3a – RBNWR – for those of us who push the envelope in investing (because lending sucks), sometimes we need more Net Worth than the minimum 7%.
Increase income, decrease expenses, shrink assets, make better loans, and investing wisely are methods to assist you in the successful management of these ratios. It’s not complex, but it’s not easy… it takes all our waking hours to be vigilant in keeping these in balance when times get tough.
Get these three right, and life is good…. If they fall out of whack… you’ve got some (or a lot) of work to do.
If the decisions seem tough…. Refer to the #1 rule of cu’s…
The 11 ratios are easy to understand. Execution is a bitch. Don't ask me. Just ask Telesis, WesCom, Siver State Schools or any of several other credit unions that are going south in the fast lane and picking up speed. And with PCA we now have the NCUA pushing all of us downhill because sometimes gravity is just not enough. Just wait the Consumer Protection Agency will help us out with some new costly additional regulations and regulators to comply with. Are we having fun yet?
ReplyDeleteThese are great ratios and you are correct that every board should know them. However, I would caution that boards should not manage or lead the credit union by ratios. They should focus on the strategic objectives of the credit union (serving members, making a difference, living their brand, reaching their targets, etc.) and only use the ratios as a measurement of success. Leading by ratios could hurt your long term strategic growth.
ReplyDeleteI like the "Green, Yellow, Red" method. If all these are Green -- You're good to go in achieving your stated goals. If you get to Yellow or Red... those goals will have to be on hold or scaled back until you get back to Green. Your membership and size will determine where the benchmarks should be set for each credit union. You are correct... just because they are all "where they should be" (and lucky you if they are)... the board's work is far from over.
ReplyDeleteYou are a great source of wisdom. Tell me great Wisdom Master...did WesCorp focus on these ratios?
ReplyDeleteIf they did focus on these ratios what went wrong?
If they did not focus on these ratios why? Does the NCUA exam experts focus on these ratios?
Please do share oh great 1st Thoughts On Everything?
Did the WesCorp CEO Directos focus on these ratios?
What went wong?