Directors Go Back to School

Directors are moving from the boardroom to the classroom as NCUA raises expectations of their financial knowledge.

November 1, 2011


Back to School


  • CUs must develope directors’ ability to identify and manage risk in all major operational areas.
  • A financia literacy certificate gives CUs and directors a paper trail for regulatory compliance..
  • Board focus:   The larger and more complex a CU is, the more training will be required for directors.


NCUA’s financial literacy requirements are pushing credit union directors to combine the will to offer volunteer leadership with the skills required to assess financial performance.

The agency’s Rule 701.4 requires new directors at federally chartered credit unions to learn to read and under-stand their credit union’s balance sheet and income statement within six months of joining the board. Directors already serving on their boards were required to demonstrate compliance by July 27, 2011.

Credit unions, directors, and even NCUA representatives point out that many directors already had the necessary financial skills before the rule was introduced.

Instead of worrying about which board members have achieved financial literacy—and which are lacking—many credit unions are seizing the opportunity to fill gaps in current directors’ financial skills while strengthening financial training for new board members.

Quality volunteers

The rule change prompted some credit unions to develop policies and procedures that formalize training practices, according to David Small, NCUA spokesman and assistant director of public affairs.

“Attracting volunteers with the right skill sets to serve as directors is challenging in today’s environment,” Small says. “While most credit unions ensure new directors have the tools and skill set necessary to be effective directors, they might not have formal policies to help guide this process.”
Small says training efforts should include:

  • Developing directors’ ability to identify and manage risk in all major operational areas, such as asset/liability management (ALM), investing, and lending, particularly in new business ventures;
  • Offering management support for directors’ financial skills by providing ongoing training and information; and
  • Discussing financial trends and ratios at monthly board meetings because annual training is often insufficient.

“The goal is to equip directors to make sound, informed decisions regarding routine business operations and strategic initiatives, and to understand their credit union’s financial footing,” Small says.

A systematic approach

The NCUA rule provides flexibility so credit unions and directors can devise the best route for achieving the necessary skill levels. Kevin Smith, CUNA’s director of volunteer education, says many credit unions sought training outlines and materials from CUNA and state credit union leagues.

CUNA developed a financial literacy certificate volunteers can earn by completing the self-study Volunteer Achievement Program, Credit Union Finance for Non-Financial Managers and Volunteers training, or onsite instruction. Volunteers must pass a test administered at the end of training to earn the certificate.

“Our goal in creating a certificate was to set the bar a little bit higher and streamline the paper trail for directors,” Smith says.

NCUA also has indicated that credit unions must conduct ongoing, personalized reviews of financial data and operations. Smith says the biggest challenge lies in preparing directors to address size, complexity, and risk profiles.

“The best starting point is to take an honest assessment within your board room,” Smith says. “Look for gaps. It can be as simple as asking the chief financial officer or other senior managers to address those gaps and calibrate training to get everybody to the same place.”

Proven readiness

Mike Read, board chairman at $435 million asset People’s Trust Federal Credit Union in Houston and a CUNA-certified credit union volunteer (CCUV), says the institution believed its directors already met the financial skills standards when NCUA passed its rule.

The credit union’s nine-member board includes two directors who are certified public accountants (CPAs) and a director with a PhD in economics. Six directors have completed CCUV training, and the board discusses financial issues at every meeting and holds quarterly ALM reviews.

But shortly after NCUA announced its director financial literacy rule in late 2010, the board voted to document its preparedness by having every director, director-in-training, and Supervisory Committee member obtain a financial literacy certificate.

“Our perspective was that it simply eliminated the question that could ever be raised about whether or not this board had done the proper training and preparation to meet that requirement,” Read says. The existing training budget was reallocated to cover the cost.

Directors’ experience is documented with a biography, educational and professional background statements, and transcripts of credit union training.

“We have a file on every director now that tells exactly who we are, what we are, and how we contribute to our credit union,” Read says. “We wouldn’t have done that without the introspection this rule provided.”

People’s Trust Federal also appoints two nonvoting directors-in-training who prepare to serve by attending board meetings and completing training programs. A mentoring program matches new volunteers with experienced officials for at least six months.

Next: In-house training

In-house training

Time and expense typically are the biggest barriers to providing training for new directors, says Tabitha Garvin, PhD, chief operating officer, business development, for the Montana Credit Union Network (MCUN). For example, Garvin says leaving Montana for a three-day event typically means spending a minimum of $1,000 for travel alone.

MCUN removes these barriers through its Smart MOVES program, which delivers training for directors at their credit unions. To date, Garvin has visited 15 of Montana’s 57 credit unions to provide two-hour financial reports and management training sessions, typically offered before or after a board meeting. The network also offered financial skills training at its annual conference and links credit unions to training resources on its website.

A Smart MOVES financial training session costs $480 plus mileage for MCUN member credit unions with assets of less than $20 million, with scholarships available to cover up to half the fee. Larger credit unions pay $740. Garvin has driven more than six hours one way to present financial training.

She says the investment in training pays off when directors gain confidence in assessing financial issues.

“We’ve had tough economic situations and yet some credit unions have improved their net worth after being on a downhill slide for years,” Garvin says. “Their boards have made some amazing decisions that helped them grow not only their assets but their net worth.”

Some credit unions follow the financial sessions with additional training on topics such as evaluating the CEO. Strategic planning sessions are also popular.

Multiple training sessions helped one board cope when its chairman resigned due to illness, while another board that replaced almost half of its board at one time was able to quickly help new directors get up to speed.

Risk assessment

Gordon Sam, CCUV, board chairman at $346 million asset Pearl Harbor Federal Credit Union, Waipahu, Hawaii, has attended financial skills training presented by the Hawaii Credit Union League, NCUA, and a CPA firm. Earlier, he completed graduate-level courses that covered financial reports to obtain a master’s in business administration.

Sam says NCUA expects directors of larger, more complex credit unions to obtain additional training that prepares them to tackle more complicated issues.

“Looking only at the balance sheet and the income statement won’t be sufficient for most credit union boards,” Sam says. “You need to understand risk and set limits for risk.”

NCUA Letter No. 11-FCU-02, “Duties of Federal Credit Union Boards of Directors,” says directors must understand credit, liquidity, interest rate, compliance, strategic, transaction, and reputation risk.

In addition, directors must have a firm grasp of the internal controls that limit and control these risks. Sam says meeting that standard at a large credit union in an area such as office operations could require tracking 40 to 50 sub-items, with the board and management determining how many items are tracked and selecting the tracking method.

“NCUA will make risk assessment an issue,” he says. NCUA is expected to scrutinize interest-rate risk due to concerns that a rapid increase in interest rates could create losses for credit unions with long-term, fixed-rate loans or long-term investments.

Other areas that deserve additional scrutiny include credit risk and concentration risk, especially in fixed-rate real estate loans, participation loans, indirect lending, and member business loans.

Sam notes that the agency’s website offers a two-page summary of each credit union’s financial performance with a review of key ratios and trends for the previous five quarters. This information can be combined with the 5300 Call Report, which delivers details on the percentage of shares in interest-sensitive accounts, categories of loans with the highest delinquencies, and the amount held in long-term real estate loans and investments over five years.

People’s Trust Federal experienced NCUA’s focus on risk assessment this spring when examiners asked for the development of an enterprise-wide risk management policy rather than relying on existing, separate policies for specific types of risk.

“It was a semantic difference but it was an important difference for the examiner,” Read says. People’s Trust Federal has since created a single, all-encompassing policy addressing all risk areas.

Next: Volunteer recruitment

Volunteer recruitment

NCUA has amended Rule 701.33 to prohibit federally chartered credit unions from indemnifying volunteers or employees from liability associated with certain forms of misconduct.

Sam believes concerns about potential lawsuits will encourage directors to pay more attention to financials and risk—but they could also make it more difficult to recruit volunteers.

To prevent problems, Sam encourages credit unions to examine their insurance policies and check bylaws related to indemnification. “The new requirement may lead to potential suits against board members should the credit union cause large losses to the insurance fund or if your credit union is conserved.”

But Read argues the financial skills rule could also make it easier to recruit volunteers seeking an opportunity to gain new skills. “We’ll help them get smarter.”

Keep it simple

Many credit unions mistakenly think they must participate in expensive, formal training programs to satisfy director financial literacy requirements, says Dan Morrisey, treasurer/CEO of $2 million asset Queen of Peace Arlington (Va.) Federal Credit Union.

Instead, Morrisey says credit unions can help directors achieve financial proficiency by linking them to flexible online training options, sharing educational materials they already own, or presenting information at board meetings.

Morrisey, for example, asks new directors to complete a recorded webinar called “CU Financials for Dummies” and then meets with them one-on-one to review the credit union’s balance sheet and income statement.

He also encourages board members to attend local chapter meetings, talk with other credit unions, and read industry publications to stay aware of current challenges and potential solutions.













  • CUNA:
  1. 2011-2012 Credit Union Environmental Scan
  2. Credit Union Directors Newsletter
  3. Director financial literacy resources