CUNA News
  • LOG IN
  • Create Account
  • Sign Out
  • My Account
  • LOG IN
  • Create Account
  • Sign Out
  • My Account
  • Topics
    • Community Service
    • Compliance
    • Credit Union Hero
    • Credit Union Rock Star
    • Credit Union System
    • Directors
    • Human Resources
    • Leadership
    • Lending
    • Marketing
    • Operations
    • Policy & Issues
    • Sales & Service
    • Technology
  • Credit Union Magazine
    • Buyers' Guide
    • COVID-19
    • Digital Edition
    • Credit Union Hero
    • Credit Union Rock Star
    • Subscribe
    • Advertise
    • Contact
  • Advertise
  • Awards
    • Nominate Credit Union Hero
    • Nominate Credit Union Rock Star
  • Podcasts
  • Videos
  • Jobs
  • Contact

News

Home » Credit union finance 101
Directors

Credit union finance 101

Every director must have a basic understanding of several financial concepts.

July 9, 2021
Tim Harrington
One Comment
Credit union finance 101

Credit union directors come from all walks of life. Some are familiar with business and financial issues, some aren't. Even if you come from a business or financial background, there's a good chance that background isn’t in banking or credit unions. 

I’m a certified public accountant, and when I began to audit credit union clients 30 years ago, I realized the methods, issues, and key ratios credit unions use aren’t the same as what other businesses use. 

I had to learn the nuances of credit union finance—and you do, too. 

Credit Union Directors Newsletter

Directors have a legal obligation to understand key financial information. It’s even written into law with NCUA regulation 701.4. 

Here are some important financial concepts every director and supervisory committee member needs to know: 

► Capital or net worth. Know why capital is important, where it comes from, and how much is enough for their credit union. 

Capital comes from profit. Once credit unions make a profit, it becomes “historical” and converts to capital. This is the stabilizing factor that keeps credit unions afloat in bad economic times. Capital is king. 

► Return on assets (ROA) is a measure of profit. Capital comes from profit, and ROA is how we report profit. What most directors don’t know is that ROA is the end result of an equation called the spread analysis, which contains the “five puzzle pieces of profitability:” 

  1. Yield. 
  2. Cost of funds. 
  3. Provision for loan losses. 
  4. Operating costs. 
  5. Noninterest income. 

These five puzzle pieces are the only things you have to manipulate to achieve the ROA you need. 

You also need profit. Profit is not a bad word or a bad thing to earn from your members. Profit is essential to survival. 

► Allowance for loan losses (ALL). This is an amount that revalues your reported loan portfolio balance to what you are likely to collect. 

This large negative number on your balance sheet is a bit of a mystery for most directors. It is scheduled to change, and will likely become a bigger negative amount by Jan. 1, 2023. That's when the new current expected credit losses (CECL) method comes into use. 

CUNA Credit Union Finance for Boards & Committees eSchool

CUNA Credit Union Finance for Boards & Committees eSchool

► Asset/liability management (ALM). This is the rocket science of credit union oversight. It’s one of the more complex areas to understand, yet vital to know where your credit union may be headed financially as interest rates change. 

What you essentially look for is how much capital is at risk as interest rates change. Credit unions make fixed-rate loans in a variable-rate world. The effects of changing interest rates must be projected so you can predict what will happen to your credit union as time marches on. 

Financial ratios and statements may seem like a foreign language. But once you become familiar with the key elements, you can trust your knowledge of how your credit union is performing. 

TIM HARRINGTON is the founder and CEO of TEAM Resources (forteamresources.com). Contact him at tharrington@forteamresources.com.


This article initially appeared in Credit Union Directors Newsletter, which provides strategic insights for policymakers. Subscribe now to the print or PDF version.

KEYWORDS Directors Newsletter financial well-being

Post a comment to this article

Report Abusive Comment

Credit Union Magazine: Spring 2023

Spring 2023

Credit Union Magazine’s Spring 2023 issue features the 2023 Credit Union Heroes and examines CUNA-League advocacy priorities, board leadership, the impact of financial well-being efforts, fee-related compliance issues, predictions for the year ahead, and more.
Digital Edition •  Subscribe

Trending

  • CUNA Mascot Madness: Voting opens for East Region

  • Mascot Madness: East winner crowned; Midwest voting opens

  • League leaders highlight credit union difference, safety, soundness

Tweets by CUNA_News

Polls

CUNA Mascot Madness: Which Midwest Region mascot is your favorite?

View Results
More

Champion for the Credit Union Movement

Credit Union National Association is the most influential financial services trade association and the only national association that advocates on behalf of all of America's credit unions. We work tirelessly to protect your best interests in Washington and all 50 states. We fuel your professional growth at every level and champion the credit union story at every turn.

More CUNA

  • Membership
  • Contact Us
  • Careers

Resources for

  • Credit Union Advocates
  • Leagues
  • Press
  • Providers

Our Affiliates

  • American Association of Credit Union Leagues (AACUL)
  • Credit Union Awareness
  • Credit Union House
  • CUNA Strategic Services
  • National Credit Union Foundation
GET CUNA UPDATES
© 2023 Credit Union National Association | ADA Compliance Notice & Legal
Email Us