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The following examples are intended to help the organizing group obtain a better understanding of how to create assumptions to support a Proposed Federal Credit Union’s pro forma financial statement projections. The examples in this document are not all-inclusive of the assumptions you will need to make. Developing assumptions can be a challenge, but analyzing the data from your membership survey and researching other external data sources will help you create a well-thought-out business plan and supporting pro forma financial statement projections.
There is no required format. The information provided below is provided as an example and is not all-inclusive. The amounts and supporting statements made below are fictitious and should not be relied upon as valid assumptions for an individual PFCU’s unique circumstances and plans. Your assumptions should be supported. In some cases, assumptions can be supported by the membership survey. In other cases, industry data or other external factors may factor into your assumptions. Each organizing group should perform research and gather data that will support the assumptions formed.
Member Assumptions
| Description | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Members | 750 | 1,000 | 1,250 |
The membership assumptions above could be supported by the membership survey analysis. The conclusion reached in this membership survey analysis was that 1,000 of the 4,000 potential members would be interested in joining the credit union within two years of it opening, as shown in the table below:
| # of Interested Respondents | Impact on Population Based on Response Rate |
|---|---|
| 25% (90 of 357) |
1,000 (4,000 x 25%) |
The assumption for new members shown in the first table above include a higher initial number of new members the first year, then a slowing of new accounts in years two and three. The survey responses extrapolated from the survey responses to the total potential membership, as shown in the second table, supports the financial projections.
Loan Assumptions
The example below is the supporting analysis for used vehicle loans. The following table provides details on how the organizing group supported the used vehicle loan assumptions used. The assumptions used here included information obtained from the membership survey as well as a current market survey. You should provide analysis for each type of loan you plan to offer.
| Description | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| # of Members | 750 | 1,000 | 1,250 |
| # of Used Vehicle Loans1 | 150 | 200 | 250 |
| Average Loan Balance2 | $6,525 | $6,525 | $6,525 |
| Total Used Vehicle Loans (number x avg. balance) | $978,750 | $1,305,000 | $1,631,250 |
| Average Used Vehicle Interest Rate3 | 5% | 5% | 5% |
| Used Vehicle Loan Income4 | $48,937 | $65,250 | $81,563 |
Loan Loss Assumptions
You will need to project estimated loan losses. In this example, peer ratio data of like-sized credit unions in the local area was used to support the estimated credit losses for the allowance for loan losses (ALLL). An accountant can also help you select an annual loss factor. A copy of all data used to determine the loss rate should be included with your business plan.
| Description | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Net Charge-off Ratio5 | 0.00% | 0.5% | 1.00% |
| Projected ALLL Balance6 | 2.00% | 2.00% | 2.00% |
Please ensure your net charge-off ratio reconciles with your projections for your allowance account balance and provision expense. The table below can be utilized to complete this reconciliation:
| Description | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Total Loans | $1,000,000 | $2,000,000 | $3,000,000 |
| Ending ALLL Balance7 | 20,000 | 40,000 | 60,000 |
| Current ALLL Balance | 0 | 20,000 | 40,000 |
| Net Charge-offs | 0 | 10,000 | 30,000 |
| Provision Expense | 20,000 | 30,000 | 50,000 |
Calculation: Ending ALLL Balance Minus current ALLL balance Plus Net Charge-offs Equals Provision Expense
Deposit Assumptions
Based on the survey responses pertaining to likely share balance amounts, weighted averages could be used to support average share balances. In the following example, the membership survey data on a member’s likelihood to join the credit union was coupled with the survey data on the likely balance to support the average checking account balance:
| Likely to Open a Checking Account | Likely Balance Amount Per Account | Year 1 | Year 2 | Year 3 |
|---|---|---|---|---|
| Survey Responses: Respondents Likely to Open a Checking Account | Survey Responses: Likely Balance Amount Per Account | Assumption: Total Checking Account Balances Forecast (750 members x 15%) x $500 | Assumption: Total Checking Account Balances Forecast (1000 members x 15%) x $500 | Assumption: Total Checking Account Balances Forecast (1250 members x 15%) x $500 |
| 15% | $500 | $56,250 | $75,000 | $93,750 |
Non-Member Deposits
If you are going to obtain non-member deposits, a breakdown as shown below would help support the financial projections:
| Name of Depositor | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| ABC FCU | $100,000 | $200,000 | $250,000 |
| LMNOP FCU | $100,000 | $200,000 | $250,000 |
| QRS FCU | $100,000 | $200,000 | $250,000 |
| TUV FCU | $100,000 | $100,000 | $250,000 |
| XYZ FCU | $100,000 | $100,000 | $0 |
| Total | $500,000 | $800,000 | $1,000,000 |
In addition, the organizing group provided the following to support the non-member deposit assumptions:
- Verification that the amount of non-member deposits was within the NCUA Regulations Section 701.32 limit;
- Documentation supporting the above-named institutions committed to deposit these funds; and,
- An explanation on the decision to use non-member deposits was included in the business plan.
Operating Expense Assumptions
The assumptions for the cost of all operating expenses should be broken down and supported as much as possible. For each category, provide supplemental support as necessary. The following table is an example of how to show operating expenses broken down into various categories:
| Operating Expenses | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Compensation | $97,500 | $101,400 | $105,456 |
| Manager plus 1.5 FTE @ 4% annual increase. Manager @ $60,000, 1 FTE @ $30,000 and 0.5 FTE $15,000 | N/A | N/A | N/A |
| Association Dues | $257 | $563 | $989 |
| League dues (total assets x 0.0002) | N/A | N/A | N/A |
| Office Occupancy | $0 | $0 | $0 |
| Rent – $0 a month – see letter of support provided by sponsor8 | N/A | N/A | N/A |
| Office Operations9 | $62,976 | $68,014 | $73,455 |
| Telephone - $300 – attached a quote from telephone company | N/A | N/A | N/A |
| Banking Fees - $250 – attached a list of fees and anticipated usage | N/A | N/A | N/A |
| Postage - $600 – attached a list of anticipated postage for statements and marketing | N/A | N/A | N/A |
| Statement Processing – $500 – attached a statement processing quote | N/A | N/A | N/A |
| Hardware maintenance - $500 – attached a maintenance quote | N/A | N/A | N/A |
| Software maintenance - $300 – attached a software maintenance quote | N/A | N/A | N/A |
| Bond Coverage – $500 - based on Section 713.5 of NCUA Rules and Regulations | N/A | N/A | N/A |
| Supplies - $300 – attached a list of anticipated supplies and costs | N/A | N/A | N/A |
| Payroll service - $350 – attached a payroll quote | N/A | N/A | N/A |
| Depreciation of furniture, fixture, and equipment - $1,305 – see list of anticipated furniture, fixture, and equipment and depreciation schedule | N/A | N/A | N/A |
| ATM card expenses - $343 – attached an ATM services quote | N/A | N/A | N/A |
| Year 2 and 3 – 8% annual increase | N/A | N/A | N/A |
Income Assumptions
As you analyze and project the amount of loan income, they will need to support their income assumptions. In this example, the organizing group used historical data from local area credit unions that serve a similar FOM to support its own income assumptions:
| Interest Income | Year 1 Assumption |
|---|---|
| Loans | N/A |
| Used Vehicles | Projected Used Vehicle Balance ($978,750) @ a projected weighted average rate of 5 percent = $48,93710 |
| Investments | N/A |
| Certificates of Deposit | Average rate: 12-month CD (1.50 percent) X CD investment portfolio size ($1 million) = $15,00011 |
Another area that will contribute to revenue is fee income. In this example, the organizing group provided a table of various fees to be charged, their projected fee amount, and the income derived from these fees:
| Non-Interest Income12 | % of Members Each Month13 | Fee Income Generated Each Month (Year 1) |
|---|---|---|
| Mo. Checking Account Fees ($10) | 100% | 112 checking accts * $10 = $1120 |
| Checking NSF Fees ($15) | 15% | 112 checking accts * 15%* $15= $252 |
| Stop Payment Fees ($10) | 1.5% | Membership (750) * 1.5% *$10= $112 |
| Business Account Fees ($25) | 3% | Membership (750) * 3% * $25= $562 |
| Account Research ($15) | 1% | Membership (750) * 1% * $15= $112 |
| Money Order Fees ($2.5) | 8% | Membership (750) * 8% * $2.5= $150 |
| Wire Fees ($10) | 6% | Membership (750) * 6% * $10= $450 |
| Loan Late Fee ($15) | 5% | Membership (750) * 5% *$15= $562 |
| Total Monthly Non-Interest Income | N/A | $3,320 |
Cost of Funds Assumptions
The cost of funds assumptions could be supported by performing a rate survey of local share rates. The following table is an example of cost of fund projections:
| Dividend Expenses14 | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Regular shares | 1.00% | 1.00% | 1.00% |
| Checking | 0% | 0% | 0% |
| Youth | 0% | 1.00% | 1.00% |
| Money Market | 0% | 1.25% | 1.25% |
| 6-Mo. Share Certificates | 2.0% | 2.05% | 2.20% |
| 12-Mo. Certificates | 2.4% | 2.55% | 2.70% |
| 24-month Certificates | 2.80% | 3.00% | 3.15% |
| Non-Member Certificates | 0% | 0% | 0% |
Footnotes
1 The number of loans should be supported. In this example, the membership survey data indicated 20% of members would be interested in a used vehicle loan.
2 The average loan balance should be supported. In this example, the average loan balance estimated from the membership survey data was $6,525.
3 The average interest rate should be supported. In this example, a market survey of local auto loan interest rates supported an average interest rate of 5 percent.
4 Used Vehicle Loan Income was calculated by multiplying the average interest rate (5 percent) by the Total Used Vehicle Loans estimated in each year.
5 Peer charge-off data was used for credit unions in the region.
6 Peer ALLL balances were considered in selecting this target ratio.
7 The balance is calculated based on 2 percent of the loan balance.
8 The organizing group provided a letter from the sponsor agreeing to provide free office space.
9 The organizing group provided supporting detail for each type of office operations expense.
10 The credit union provided an analysis on the weighted average used vehicle loan interest rate for local peer credit unions (5 percent). This interest rate was multiplied by the projected vehicle loan balance.
11 A local rate survey performed by the organizing group supported a 1.5 percent return on 12-month CDs. The projected 12-month CD balance was multiplied by this rate.
12 The credit union performed a fee survey of local credit unions to support the anticipated fees to be charged.
13 The credit union provided data from local financial institutions that supported the percent of members that are charged a fee for various products each month.
14 A rate survey of local credit unions was provided by the organizing group to support the dividend rate assumptions.