Credit Union Sustainability: A long term model for success.

Report
Benchmarking with a Purpose
Ask 50 people what is important
and what should be measured.
You will get 50 different answers.
2
Objective:
Develop a benchmarking
framework to guide leaders
toward key aspects about
strategies and operations.
3
Objective is not:
Detailed process metrics
Detailed market analytics
(narrowly focused; difficult to collect/compare)
Internal policy
Regulatory requirements
(no universal standards; subject to interpretation)
4
Benchmarking must be a part of
your planning process.
Difficult to set a course, and
monitor environment without
a reference point.
5
Why ROA is a horrible
benchmark of success…
6
Singular Profit Mandate
Maximize
Return
7
Credit Union Dual Mandate
Minimize ROA
Maximize ROA
Provide tangible
benefit to members
Stay adequately
capitalized
8
Priority #1 Should Be…
Credit Union
Sustainability
• Long Term Survival/Prosperity
• Recurring Value for Members
• Job Security for Employees
9
Expense
Growth
Capital
Growth
(ROE)
Industry
Dynamics
Credit Losses
Circle of Life or
Spiral of Death
Balance
Sheet Growth
Net Revenue
Engine
10
Expense
Growth
Slow Death
Capital Ratio
Capital
Growth
(ROE)
Credit Losses
10.0%
9.6%
9.3%
8.9%
8.6%
8.3%
Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs
Balance
Sheet Growth
Net Revenue
Engine
11
Expense
Growth
Sustainability
Capital Ratio
Capital
Growth
(ROE)
Credit Losses
10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs
Balance
Sheet Growth
Net Revenue
Engine
12
Expense
Growth
Prosperity
Capital Ratio
Capital
Growth
(ROE)
10.0%
10.3%
10.7%
11.0%
11.2%
11.5%
Credit Losses
Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs
Balance
Sheet Growth
Net Revenue
Engine
13
Expense
Growth
Capital
Growth
(ROE)
Grow Capital
Faster than
Assets or Die!
Balance
Sheet
Growth
Credit
Losses
Net
Revenue
Engine
14
Benchmarking requires everyone
on the “same sheet of music”
15
Balance Sheet Mapping (Simple Example)
Assets
Loans
Surplus Funds
Loan Loss Reserve (ALLL)
Non-Earning Assets
Liabilities & Equity (Net Worth)
Relationship Funding
Rate-Sensitive Funding
Other Liabilities
Equity Capital (Net Worth)
16
Income Statement Mapping (Simple Example)
Net Revenue
Interest Income
Interest/Dividend Expense
Non-Interest Income
Net Revenue ROA
Top line ROA.
Operating Expense
Personnel, Premise & Other Operating Expense
Surplus before Provision
ROA after operating expense.
Credit Loss Expense
Provision for Loan Loss Expense
Surplus after Provision
ROA after credit loss expense.
Extraordinary Items
Unusual income/expense and gains/losses
Income Taxes
As applicable
Net Income
ROA after all items.
17
Growth
Sustainability Benchmarks
Product Mix
Interest
Rates
Operating
Expense
Capital Growth
(ROE)
ROE Must Meet or
Exceed Asset Growth
Credit Losses
Capital
Adequacy
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Growth
Key Benchmarks Include…
Balance Growth
Loans as Percentage of Assets
Product Mix
Relationship Funding as Percentage of Assets
Rate Sensitive Funding as Percentage of Assets
Interest
Rates
Operating
Expense
Non-Interest Income as Percentage of Assets
Offer Rate: Loans
Yield: Surplus Funds
Offer Rate: Relationship Funding
Offer Rate: Rate Sensitive Funding
Credit Losses
Capital
Adequacy
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The battle is NOT won or lost on
the income statement; it is won or
lost on the balance sheet.
Income statement is what has happened;
Balance sheet is what is going to happen.
Where do you want to go?
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Establish Target Product Mix
100%
90%
Product Mix: Percentage of Assets
1.50%
Target/Peer
80%
1.10%
70%
1.00%
65%
60%
55%
50%
40%
35%
30%
0.50%
20%
10%
0%
0.00%
Rate Senstive
Lowest
Relationship
Loans
Strategic Value
Non-Int Inc
Highest
21
Chart Current Product Mix
100%
90%
Product Mix: Percentage of Assets
1.50%
CU
80%
1.10%
70%
1.00%
65%
60%
55%
50%
40%
35%
30%
0.50%
20%
10%
0%
50%
40%
55%
0.90%
Rate Senstive
Relationship
Loans
Non-Int Inc
0.00%
22
Identify Product Mix Gaps
100%
90%
CU
Product Mix: Percentage of Assets
1.50%
Target/Peer
80%
1.10%
70%
1.00%
65%
60%
55%
50%
40%
35%
30%
0.50%
20%
10%
50%
40%
55%
0.90%
Rate Senstive
Relationship
Loans
Non-Int Inc
5.6 Years
Away
4.3 Years
Away
5.1 Years
Away
0%
Years to Target at
5% Growth Rate
0.00%
23
Understand Implication of Gaps
100%
90%
80%
1.50%
Product Mix: Percentage of Assets
4.25%
4.10%
CU
4.00%
Target
1.10%
70%
1.00%
65%
3.75%
60%
55%
50%
75
bps
3.50%
40%
35%
0.50%
30%
3.25%
20%
10%
0%
50%
40%
Rate Sensitive Relationship
55%
0.90%
Loans
Non-Int Inc
0.00%
3.00%
3.35%
NR ROA
Improving product mix improves ROA by 75 bps
24
Establish Target Offer Rates
8.00%
Offer Rates
CU
Peer
6.00%
5.25%
4.00%
2.00%
1.10%
1.00%
0.20%
0.00%
Rate Sensitive
Relationship
Investments
Loans
Current
1.25%
0.20%
1.00%
5.00%
Target/Peer
1.00%
0.20%
1.10%
5.25%
Variance
0.25%
0.00%
(0.10%)
0.25%
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Growth
Product Mix
Interest
Rates
Operating
Expense
Key Benchmarks Include…
Efficiency Ratio
Credit Losses
Total Expense / Activity Balance
Activity Balance / FTE
Activity Balance / Branch
Capital
Adequacy
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Efficiency Ratio
Efficiency Ratio Ranges
• Efficiency Ratio
Operating Expense as a
percentage of net revenue
$75 Operating Expense
/ $100 Net Revenue
= 75% Efficiency
= 25% Remaining to cover credit
losses and provide capital growth
> 100%
90-100%
Failure is Imminent
Slow Death
80-90%
Skating on Thin Ice
75-80%
Surviving
70-75%
Thriving
60-70%
Highly Productive
<60%
Extremely Productive
(or getting greedy)
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Activity Balance
• Loan Balance, plus
• Relationship Funding Balance, plus
• Non-Interest Income Equivalent Asset Balance
(Non-Interest Income / Net Interest Margin)
If net interest income was an asset,
how big would it be?
28
Activity Balance Benchmarks
• Expense as Percentage of Activity Balance
(expense leverage into strategic drivers)
• Activity Balance per Branch
(branch network leverage)
• Activity Balance per FTE
(human leverage)
29
Operating Expense
Productivity Metrics
CU
CU
Peer
CU
Peer
Peer
Peer
CU
Efficiency Ratio
Op Exp / Activity Bal
Activity Bal / Branch
Activity Bal / FTE
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Growth
Product Mix
Interest
Rates
Operating
Expense
Credit Losses
Key Benchmarks Include…
Leading Indicators: Underwriting
Capital
Adequacy
Leading Indicators: Post Underwriting
Lagging Indicator: Net Charge-Offs
Self Insurance Fund: Loan Loss Reserve
31
Asset Quality Pipeline
Credit Quality Metrics
CU
CU
CU
Peer
Peer
Peer
Peer
Peer
CU
CU
Avg Credit Score
Delinq 0-30
Delinq 30-90
Net Charge-Offs
Loan Loss Reserve
32
Growth
Product Mix
Interest
Rates
Operating
Expense
Credit Losses
Key Benchmarks Include…
Capital
Adequacy
Capital / Total Assets
Risk Based Net Worth Requirement
33
Growth
Peer Groups Thoughts…
• Rule #1: Perfect peer does not exist (Sasquatch)
Product Mix
Interest
Rates
Operating
Expense
Credit Losses
Capital
Adequacy
• Population: 10-30 Peers
• Span of Data 3-5 Yr History
(NEVER Annualize Current Year)
•
•
•
•
•
Asset/Branch Peer
Geographic Peer
Charter Peer
Custom Peer
Mixed Peer
• Tradeoffs exist; can’t be best at everything.
34
Growth
Product Mix
Interest
Rates
Operating
Expense
Local/regional peer may be best.
Industry best practice peer (indifferent to location)
Local/regional peer may be best.
Equivalent asset/branch peer may be best.
Credit Losses
Local/regional peer may be best.
Capital
Adequacy
Local/regional peer may be best.
35
Sample Benchmarking Scorecard
Top
Middle
Bottom
Loan Growth
Growth
Relationship Funding Growth
Member Growth
Net Revenue ROA
Product Mix
Non-Interest Income
Loans
Relationship Funding
Interest
Rates
Net Interest Margin
Loan Yield; Offer Rate
Surplus Funds Yield
Operating
Expense
Relationship Funding Offer Rate
Rate Sensitive Funding Cost; Offer Rate
Efficiency Ratio
Total Expense / Activity Balance
Credit Losses
Activity Balance / Branch
Activity Balance / FTE
Delinquencies
Capital
Adequacy
Net Charge-Offs
Loan Loss Reserve
Capital Ratio
Risk Based Net Worth Requirement
36
Member Value Assessment
• Member value is created when:
– Product mix is stronger than peer/target
– Interest rates are favorable to members (ROA drag)
– Productivity is greater than peer
– Credit losses are fewer than standard(s)
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1.20%
Return on Assets
1.00%
Return on Assets
1.00%
0.80%
0.70%
0.60%
0.40%
0.35%
0.25%
0.20%
0.15%
0.00%
Peer ROA
CU ROA
Creating
Producing ROA
Member Benefit
Lift
Potential
Improvement
Opportunity
38
Member Value Assessment
1.20%
1.00%
Return on Assets
1.00%
0.80%
0.70%
0.60%
0.40%
0.35%
0.25%
0.20%
0.15%
0.00%
Peer ROA
CU ROA
Creating
Producing ROA
Member Benefit
Lift
Potential
Improvement
Opportunity
39
Member Value Assessment
1.20%
0.35%
0.35%
Return on Assets
1.00%
0.80%
Reduce member favorable pricing.
0.70%
0.70%
0.65%
0.60%
0.40%
0.25%
0.20%
0.15%
0.00%
Peer ROA
CU ROA
Creating
Producing ROA
Member Benefit
Lift
Potential
Improvement
Opportunity
40
Benchmarking with a Purpose

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