a) Examine the proposed 1999 annual budget for Phenix in the appendices. Were the key financial ratios set in September 1998 for the 1999 fiscal year readily achievable? What other budget assumptions, if any, would you have recommended be changed?

Phenix Federal Credit Union CR16-02-1674.0 Appendix C: Proposed Phenix 1999 Annual Budget Actual Budget Budget Budget BALANCE SHEET 12/31/97 12/31/97 12/31/98 12/31/99 Total Loans $ 20,103 $ 21,293 $ 21,861 $21,399 Allowance for Loan Losses (168) (124) (183) (187) Cash and Cash Equivalents 740 699 751 653 Total Investments 5,610 4,558 5,857 6,725 Land and Building 304 304 298 292 Other Fixed Assets 524 446 563 334 Other Real Estate Owned (Foreclosed) 0 0 Other Assets 178 484 191 228 TOTAL ASSETS $ 27.291 $ 27.659 $ 29.338 $29.445 Accrued Dividends Payable on Shares 129 213 208 213 Accounts Payable 480 (19) (408) 283 TOTAL LIABILITIES 609 194 (200) 496 Total Shares and Deposits 23.299 23,927 25,719 25,175 Regular Reserves 1,026 1,064 1,064 954 Undivided Earnings 2,357 2,474 2,755 2.582 TOTAL LIABILITIES AND EQUITY $ 27.291 $ 27.659 $29.338 $ 29.445 Actual Budget Budget Budget INCOME STATEMENT 12/31/97 12/31/97 12/31/98 12/31/99 Interest on Loans 2,107 2,187 2,176 2,147 Income from Investments 307 244 320 339 Fee Income 461 482 521 660 Late Charges on Loans 40 21 41 36 TOTAL GROSS INCOME 2,916 2,934 3,058 3,182 Employee Compensation and Benefits 768 831 783 805 Travel and Conference Expenses 40 50 43 43 Office Occupancy Expense 92 27 29 67 Office Operations Expense 484 413 484 195 Educational and Promotional Expenses 43 41 46 55 Loan Servicing Expense 26 26 28 53 Professional and Other Services 257 248 276 317 Loan Loss Provision 205 143 176 189 Operating Fees 6 8 6 9 Other Miscellaneous Operating 68 34 73 24 TOTAL OPERATING EXPENSES 1.990 1.820 1,944 2,056 INCOME FROM OPERATIONS 925 1,114 1,114 1,126 Gain on Disposal of Fixed Assets 0 0 0 0 Dividends on Shares (806) (843) (833) (838) NET INCOME 120 271 281 288Phenix Federal Credit Union CR16-02-1674.0 Table 4. Current Yield Data 5 Month Average Current Month Loans 10.34% 10.30% Investments 5.48% 5.99% Late Charges/Total Loans .0142% 0154% Other Fee Income/Total Assets 2.02% 2.29% Dividends/Average Assets 2.95%* *9 month average for 1998 Massey then submitted a proposed 1999 annual budget (Appendix C) to the Board for approval.Phenix Federal Credit Union CR16-02-1674.0 Appendix B. Proposed Phenix 1999 Annual Budget Assumptions The key assumptions in this budget were: Balance Sheet: Total asset growth of 5% . Achieving share/asset and loan/share ratios of 85.5% and 85% precisely $6 K depreciation on land and buildings, as in 1998 5% growth in Other Fixed Assets, Cash, and Other Assets Total Investments are set to be Total Assets less Total Loans, and all Other Assets Regular Reserves are unchanged Undivided Earnings =undivided earnings from 1998 + 1999 net income . Accrued Dividends = 25% of dividends on shares; i.e., 3 months of dividends Accounts Payable = Total Liabilities and Equity -- all other liability and equity accounts Income Statement: Gross income items = lowest IR in Table 4 * average loan or investment balance Dividends on Shares = lowest IR in Table 4 * average share balance Other Income = used higher rate in Table 4 as fee rates are raised Compensation increased by cost of living of 1.3% + $26,000 for new employees . Office Operating Expense unchanged from 1998 . Office Occupancy Expense retains the same ratio to Total Assets as in the 1998 budget . Loan Loss Provision = increase in Loan Loss Allowance + charge-offs, with charge-offs = 0.75% of average loans . Other Operating Expenses retain the same ratio to Total Assets as in 1998 actualsSetting Target Financial Ratios Table 2 compares the financial targets set for the current budget to those of the previous year and actual performance, if available. Table 2. Financial Ratio Targets Actual Jan.-Sep. Budget Budget Financial Targets 1997 1998 1998 1999-2003 Key Goals: Total Operating Expenses Less Loan Loss Provision/ Total Assets* 6.54% 6.89% 6.00% 6.25% Capital/Total Assets # ** 12.40% 13.05% 12.00% 12.00% Annual Asset Growth 1.03% 1.98% 7-8.00% 5.00% Delinquent Loans/TL # 1.22% 1.28%* 1.00% 1.00% Charge-offs/Total Loans# 0.79% 0.77%* 0.75% 0.75% Other Budget Objectives: Return on Average Assets # 0.59% 0.11% 1.50% 0.65% Total Loans/Total Shares 86.3% 86.2% 89% 85% Total Shares/Total Assets 85.4% 85.5% 86.5% 85.5% *Annualized *Capital is defined as the loan loss allowance, regular reserves, and undivided earnings # a key ratio used to determine a credit union's CAMEL rating