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Credit union finance 101 – CUNA News

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. 

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 ( Contact him at

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