Financial Management, Accounting, and Asset-Liability Management
Credit union financial management centers on safety and soundness, measured through capital, asset quality, earnings, and liquidity. Key metrics: net worth ratio (net worth / total assets), return on assets (ROA), net interest margin (NIM), and delinquency and charge-off ratios. A well-capitalized credit union is defined by regulatory thresholds; questions often test the net worth ratio concept rather than exact tiers - know that higher is generally safer and that the NCUA sets prompt corrective action thresholds.
Accounting: shares are liabilities (member deposits), loans are assets, and equity is "net worth." Revenue comes from interest on loans and investments; expenses include dividends on shares, operating costs, and provision for credit losses. The allowance for credit losses is a contra-asset that reduces net loans.
Asset-liability management (ALM): the central risk is interest rate risk, arising from mismatched repricing of assets and liabilities. Gap analysis measures the difference between rate-sensitive assets and liabilities; a positive gap means more assets reprice than liabilities (benefits when rates rise). Duration measures sensitivity. Liquidity ensures the credit union can meet withdrawals and loan demand.
Worked example: A credit union has $100M in assets and $10M in net worth. Net worth ratio = 10%. If it earns $800,000 net income, ROA = 0.8%. If the board debates adding long-term fixed-rate loans funded by short-term shares, the ALM concern is that rising rates would squeeze NIM because liabilities reprice faster than assets.
Traps: confusing NIM with ROA; treating shares as assets; and assuming a positive gap is always beneficial regardless of rate direction.