As humans, we rely on medical diagnostic tests to help uncover potential health issues. Through annual physicals we can uncover issues related to diabetes, cancer, heart disease, and other medical issues. In my own case, blood tests performed during my annual physical revealed concerns over a rise on my PSA levels which led to a biopsy of my prostate uncovering that I had early stages of prostate cancer. This in turn led me to surgical specialist with the opportunity to provide a cure in the form of surgery.
It is surprising how few financial institutions use diagnostic tools to uncover potential problems of their own. Similar to an annual physical, an external benchmark is a diagnostic tool that can help a financial institution uncover potential issues or problems within their organization. Benchmarks are typically designed by third parties and often require third party administration to help manage the benchmarks and ensure an apples-to-apples comparison.
But, what if a financial institution does not want to pursue a more expensive and possibly time-consuming “physical” like an external benchmark may provide. Are there ways for a financial institution to perform a self-diagnostic before they spend money on a third party?
Publicly available tools exist that both banks and credit unions can use to help them understand whether symptoms of potential problems exist. Perhaps the best source of this information can be found at the FDIC and NCUA web sites. Reports generated from quarterly call reports such as the Uniform Performance Banking Reports (UBPR) for banks and the Financial Performance Reports (FPR) for credit unions can be useful tools.
While a tremendous amount of information is available in these reports, it can be a bit like boiling the ocean when trying to find some key numbers to focus on to determine if your organization may have symptoms of lurking problems. The following tables summarize some of the key metrics I utilize; including actual metrics pulled from a UBPR and FPR.
Table 1: Key Metrics from the UBPR for Banks
| Metric | Bank | Peer Group | Comments |
| Interest Income (Page 1) | 4.55% | 3.92% | This bank appears to be healthy from an income and earnings perspective. However, there is an issue with expense control that is largely driven by potential overstaffing issues. While their efficiency ratio is good, their assets per employee and personnel expense categories are symptomatic of potential issues in the future, particularly if the economy were to shift and income were to fall off. A study of drivers of high personnel may help. |
| Interest Expense (Page 1) | 0.13% | 0.40% | |
| Noninterest Income (Page 1) | 0.75% | 0.76% | |
| Net Income (Page 1) | 1.64% | 1.04% | |
| LN and LS Allowance to Total LN and LS (Page 1) | 1.14% | 1.35% | |
| Tier One Leverage Capital (Page 1) | 8.44% | 10.19% | |
| Personnel Expense (Page 3) | 1.96% | 1.6% | |
| Occupancy Expense (Page 3) | 0.4% | 0.35% | |
| Total Overhead Expense (Page 3) | 3.29% | 2.86% | |
| Efficiency Ratio (Page 3) | 63.54% | 66.27% | |
| Average Personnel Expense per Employee - $000 (Page 3) | 57.53 | 74.6 | |
| Assets per Employee - $Million (Page 3) | 3.01 | 5.00 |
Table 2: Key Metrics from the FPR for Credit Unions
| Metric | Credit Union | Peer Group | Comments |
| Net Worth / Total Assets (Page 2) | 9.09 | 10.97 | This credit union appears to be struggling somewhat with some loan issues as evidenced by their higher delinquent loan ratio. There is also some concerns with interest income and other fee income. Expenses are also high and there may be issues with potential overstaffing. Based on this, this credit union may want to consider outside assistance to review both expenses and income. |
| Delinquent Loans / Total Loans (Page 2) | 2.09 | 0.71 | |
| Gross Income / Average Assets (Page 2) | 4.41 | 4.74 | |
| Fee and Other Operating Income / Average Assets (Page 2) | 1.13 | 1.43 | |
| Cost of Funds / Average Assets (Page 2) | 0.42 | 0.47 | |
| Operating Expense / Average Assets (Page 2) | 3.67 | 3.23 | |
| Operating Expense / Gross Income (Page 2) | 83.24 | 67.45 | |
| Total Loans / Total Shares (Page 2) | 71.00 | 79.15 | |
| Members / Potential Members (Page 2) | 7.26 | 18.58 | |
| Members / Full Time Employees (Page 2) | 299.82 | 390.06 | |
| Salary and Benefits / Full Time Employee (Page 2) | $68,989 | $74,348 |
Regular self-monitoring of diagnostic information like the one presented above may provide a financial institution with the ability to ward off future problems and issues.
