Take Responsibility for Your Financial Literacy
(This post is also available in the March 2017 edition of the CUNA Directors’ Newsletter.)
Regulators hold volunteers accountable for understanding key measures and ratios that indicate a CU’s health.
It’s time for the annual exit interview with credit union regulators. You’ve been told they finished your regulatory exam and have requested the entire board’s presence. If this development hasn’t already alerted you to an issue, the six regulators awaiting you in the board room does.
You look around the board room and see anxiety in the CEO’s face, urgency in the regulators’ faces, and a bit of confusion and concern in your fellow directors’ faces.
Houston, we have a problem: Your credit union is losing money. Your net worth ratio is taking a plunge, and you’re losing assets. “And,” they say, “it’s your fault.”
This stunning news leaves you with two questions: Why didn’t anyone warn me? And why is it my fault if I’m just a volunteer?
Serving as a credit union board member might be voluntary, but the position carries a significant amount of responsibility.
Among the duties NCUA lists in Regulation 701.4 is this little tidbit: Each director, “at the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, [must] have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the federal credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors.”
Directors don’t need to parse out numbers like a CPA with lots of free time. But you do need to know your basic ratios—how they work and what they mean, enough so to be able to ask the right (“appropriate and substantive”) questions. Directors can’t wait for someone else to inform them about the credit union’s financial condition.
If you serve on a credit union board, you need to ask basic questions such as these—and just as important, understand the answers:
* Are we financially sound?
* Do we have adequate net worth or capital? How much capital is enough—and if we need more, where does it come from?
* Is our financial condition improving or declining?
* Are we profitable, or profitable enough? How much profit do we need—and if we need more, how can we get it? Additionally, what elements of income and expense lead to profit?
* Are we growing? Are we growing fast enough, or too fast? Are we growing in the right ways?
* Is our business model working? Do we understand our business model? And is it designed to give us the profit, capital, and growth we want?
* Are we headed in the right direction financially? In exactly which direction do we want to go? Against what strategic measures can we compare ourselves, and are we succeeding?
Directors need to see the big picture and understand key measures and ratios. They also need to have a system to monitor key measures and ratios so they can determine whether the credit union is moving in the right or wrong direction.