W E L O O K A T T H I N G S D I F F E R E N T L Y Finance & Financial Examinations for Supervisors Da

1. W E L O O K A T T H I N G S D I F F E R E N T L Y Finance & Financial Examinations for Supervisors Dave Matthews, ILCU National Supervisors Forum 2011

2. W E L O O K A T T H I N G S D I F F E R E N T L Y What we will cover • Overview of credit union finance • The verification of investments • The benefits of a bank reconciliation • Conducting a bank reconciliation • Questions & answers • Focus on risk!

3. W E L O O K A T T H I N G S D I F F E R E N T L Y Overview of credit union finance The credit union business model • Accept savings from members • Lend funds to members • Invest what we cannot lend • Provide additional services • Use income to pay operating expenses • Use some surplus to fund reserves • Use some surplus to reward savers (dividend)

4. W E L O O K A T T H I N G S D I F F E R E N T L Y • Finance is central to most Board decisions • Board members should understand the key financial drivers of the business • However – many don’t! • Result – many decisions with major financial implications are (in effect) made by a small number of Directors

5. W E L O O K A T T H I N G S D I F F E R E N T L Y • Evidence of a “Governance” deficit! • Increasing Regulatory demands • Explain the decisions that you approved • Loans, investments, premises purchase • Planning, forecasting • Role of Supervisors in the finance function • Part of your Board Performance Review • Is the Board as a whole capable of making important decisions with a financial impact? • Supervisors also need an understanding of finance

6. W E L O O K A T T H I N G S D I F F E R E N T L Y Where is the risk? • Loans to Members • Key driver but biggest risk • Policy, procedures, assessment • Deposits & Investments • Small in number, large in size • Policy, compliance • Fixed Assets • High value, security is key • Other Assets • Cash, savings stamps, stationery, etc.

7. W E L O O K A T T H I N G S D I F F E R E N T L Y Credit Union Balance Sheet Investments 5,000 Loans 6,000 Fixed Assets 700 Other Assets 200 Total Assets11,900 Savings 10,500 Reserves 1,400 Total Liabilities 11,900

8. W E L O O K A T T H I N G S D I F F E R E N T L Y The importance of Reserves Investments 5,000 Loans 6,000 Fixed Assets 700 Other Assets 200 Total Assets11,900 Savings ## 10,500 Reserves 1,400 Total Liabilities 11,900 ## includes dividend of 1,000 from previous years

9. W E L O O K A T T H I N G S D I F F E R E N T L Y Revaluation of Premises £/€500k Investments 5,000 Loans 6,000 Fixed Assets 700 Other Assets 200 Total 11,900 Savings 10,500 Reserves 1,400 Total 11,900 Investments 5,000 Loans 6,000 Fixed Assets ** 200 Other Assets 200 Total 11,400 Savings 10,500 Reserves ** 900 Total 11,400

10. W E L O O K A T T H I N G S D I F F E R E N T L Y Write-Off of Loans £/€1.2m Investments 5,000 Loans 6,000 Fixed Assets 200 Other Assets 200 Total 11,400 Savings 10,500 Reserves 900 Total 11,400 Investments 5,000 Loans ** 4,800 Fixed Assets 200 Other Assets 200 Total 10,200 Savings 10,500 Reserves ** ??? Total 10,200

11. W E L O O K A T T H I N G S D I F F E R E N T L Y Effect on Members’ Savings Investments 5,000 Loans 4,800 Fixed Assets 200 Other Assets 200 Total 10,200 Savings 10,500 Reserves (300) Total 11,400 Investments 5,000 Loans 4,800 Fixed Assets 200 Other Assets 200 Total 10,200 Savings ** 10,200 Reserves 0 Total 10,200

12. W E L O O K A T T H I N G S D I F F E R E N T L Y Reserves are a buffer against risk Investments 5,000 Loans 6,000 Fixed Assets 700 Other Assets 200 Total 11,900 Savings 10,000 Reserves ** 1,900 Total 11,900 £/€500k extra to Reserves Investments 5,000 Loans 4,800 Fixed Assets 200 Other Assets 200 Total 10,200 Savings 10,000 Reserves ** 200 Total 10,200 Savings unaffected

13. W E L O O K A T T H I N G S D I F F E R E N T L Y Key Examinations for Supervisors • Verification of Cash • Verification of Investments • Reconciliation of Share & Loan balances • Bank Reconciliation • Trial Balance verification

14. W E L O O K A T T H I N G S D I F F E R E N T L Y Financial Examinations • In conducting an examination of the financial records of the credit union, the supervisory committee are looking for: • Discrepancies in figures recorded in the books • Independent verification of figures from source • Intentional or unintentional misrepresentation of credit union financial situation • Possible fraud

15. Verification of Investments W E L O O K A T T H I N G S D I F F E R E N T L Y • Purpose: To verify that balance is correct and is backed up by valid documentation. • Sources of information: • Nominal Ledger • Investment statements, certificates, bonds, etc. • Adjustments for income received / receivable • Legal / Regulatory Guidelines • Counterparty, amount and maturity limits • Investment Policy – does it comply?

16. Bank Reconciliation W E L O O K A T T H I N G S D I F F E R E N T L Y • Purpose: To reconcile the difference between the end of month figures in the N/L bank account and on the bank statement • Sources of information: • Bank Statement • Bank / Current A/C from CU books of account • Cheque payments book • Cash receipts book • Previous Bank Reconciliation

17. Why do differences arise? W E L O O K A T T H I N G S D I F F E R E N T L Y • Timing! • Cheques issued but not cashed • Lodgements recorded but not banked • Standing Orders not processed • Unpaid items not processed in CU books • Fees & Charges • Errors (credit union or bank) • Month End • Ongoing

18. Benefits of a Bank Reconciliation W E L O O K A T T H I N G S D I F F E R E N T L Y Bank account is fundamental to the credit union operation Key link in the financial chain Large % of receipts & payments pass through Bank balance can’t be manipulated without external collusion Most important external validation – should be completed at least monthly

19. W E L O O K A T T H I N G S D I F F E R E N T L Y Bank Reconciliation • Left - Credit Union books: • Begin with balance as per books of account • Add lodgements in bank not in books of account • Deduct payments in bank not in books of account • Right – Bank Statement • Start with balance as per bank statement • Deduct issued cheques from payments book not yet recorded in bank statement • Add lodgements from receipts book not yet recorded in bank statement • Adjusted totals should balance!

20. W E L O O K A T T H I N G S D I F F E R E N T L Y Thank you for your attention Any Questions?