Hit the books (advanced)

1. Ryan Sturgis, Senior Manager Aran Loftus, Manager Hit the books (advanced)

3. 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

4. Key Financial Relationships

5. 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!

6. 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.

7. 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

8. 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

9. Common Ratio Analysis - Earnings Quality of earnings : • Yield on average earnings assets • Cost of funds • Net interest margin • Efficiency ratio • ROA

10. 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

11. 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

12. 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

13. Questions Aran Loftus (503)478-2267 aran.loftus@mossadams.com Ryan Sturgis (503)478-2280ryan.sturgis@mossadams.com