Now You Know Your ALMs


April is Financial Literacy Month and credit unions are doing their part to help their members of all ages learn about financial wellbeing. Cooperatives are getting the word out about saving for retirement, how credit works, and other helpful information for the under- and un-banked.

As long as we’re asking how well our members understand finances, as participants in the credit union industry, we should be asking ourselves how well we understand the finances of our organizations.

Whether you’re an employee of a credit union or perhaps a board member, you may have gone into the job with little to no accounting experience. Since leadership and learning are indispensable to each other, as John F. Kennedy put it, this month I’ll be covering some basic financial education to enrich our own understanding of credit unions and the ways they operate.

Any good workout starts with some light stretching. So we’ll get started with some often seen and used acronyms in the credit union world, with a bird’s eye view of what they mean and how they fit into operations. While not all strictly accounting terms, I hope to help you avoid any confusion you might have while on the job.


Generally Accepted Accounting Principles, or GAAP, provide basic guidelines and rules for standardizing your financials. To put it another way, employing Generally Accepted Accounting Principles in your accounting ensures that members, the board, and examiners can glance at your financial statements and expect them to be clear, consistent, and comparable with other organizations.

This is not to be confused with “gap” in the lending world! Gap insurance is optional car insurance that helps cover the gap between the depreciated value of your vehicle and what you still owe.


The Financial Accounting Standards Board is the nonprofit organization that sets the accounting and financial reporting standards for credit unions, among many other organizations. For example, FASB has been instrumental in bringing about the new accounting model CECL (Current Expected Credit Loss—more on this one later!).


Return on Assets, or ROA, is calculated by dividing net income by average assets. In simple terms, ROA illustrates how profitable the organization is relative to its total assets. The more efficient you are at deploying your assets, the greater your net income and thus ROA.

With credit unions, however, you don’t want to assume that a lower-than-average ROA necessarily means inefficient management. It may depend on your credit union’s larger strategy for managing profits. For example, if you pass profits on to the members in the form of better rates and lower fees, your net income will decrease, “negatively” affecting your ROA.

CAMEL, but now he has a friend

A supervisory rating system employed by the NCUA to determine risk, CAMEL has long stood to represent Capital Adequacy, Asset Quality, Management Capability, Earnings, and Liquidity Risk. As of April 1, 2022, NCUA adopted ‘S’ for Sensitivity to Market Risk, making the new version CAMELS. (Better than CAAQMCELRSMR to be sure.)

CAMELS is essentially a tool for the NCUA and its examiners to assess the risk profile of your credit union independent of your peers. To do so, they look both at quantitative data, but also qualitative factors. Ratings given are from a 1 to 5 scale, where a 1 indicates safe and sound operations and 5 indicates a credit union in serious need of action to improve critical deficiencies.


Asset/Liability Management, or ALM, is a risk mitigation process for credit unions whereby they match assets and liabilities with similar maturities or interest rates. Or as the Credit Union Times puts it: “ALM helps credit unions make decisions on what loan, investment and borrowings the financial institution should pursue, as well as the rates to offer, in order to make profitable loans while mitigating risks.”

While expected from a regulatory standpoint, a well-developed ALM model can help a credit union not just mitigate risk, but also make the institution more profitable.


It’s not a typo! The industry just loves its acronyms. Anti-Money Laundering, or AML, goes hand-in-hand with the Bank Secrecy Act (BSA), and is designed to protect financial institutions from bad actors. Credit unions are required to comply with BSA rules, as well as to establish an AML compliance program.

But BSA/AML rules are not just a box to be checked. Well-managed programs can and do protect the credit union from serious reputational and financial risks, from malicious actors both outside and inside the organization.


The Allowance for Loan and Lease Losses, or ALLL, is an account funded by the credit union meant to estimate the probable incurred losses on that credit union’s loan portfolio (i.e. how much they might lose from defaulted loans).

The main purpose of the ALLL is to ensure that the credit union has adequate reserves in the event members default on their loans, thereby not jeopardizing the safety and soundness of the credit union. When a charge off on a loan is necessary, funds are debited from the ALLL and credited to the charged-off loan. Conversely, if some recovery is made, whether in full or partial, the ALLL is credited back.


Now that you know what ALLL is, throw it out, because CECL, or Current Expected Credit Losses, is in town (or will be very soon). CECL is the relatively new standard for calculating expected losses first announced by FASB in 2016. Where ALLL accounts for losses expected over the next twelve months, CECL seeks to be more proactive in accounting for unexpected losses, looking at the entire life of a loan.

The goal in developing CECL was to prevent situations arising from underfunded loan loss accounts, especially as was seen in the wake of the 2007-2008 financial crisis; a problem many have argued plagued large banks more than credit unions. In an October 2021 letter, CUNA called it “one of the most problematic and arguably unnecessary regulatory requirement in recent history,” purporting that it will make it more difficult for credit unions to serve low-income households and communities.

Just scratching the surface

There are many more acronyms that you may have run across and stared befuddledly at. If there are any in particular you’d like to know a little more about, drop a comment below. In the coming weeks, I’ll be covering other topics at a high level, including financial statements, important ratios for management to follow when seeking to understand their credit union’s performance, and I’ll go a little more in-depth into the CAMELS rating system.


  • Esteban Camargo

    As a supervising editor of CUSO Magazine, Esteban reviews and edits submissions, assists in the development of the publishing calendar, and performs his own research and writing. His experience provides CUSO Mag with a seasoned writer and content curator, able to provide valuable input to contributors, correspondents, and freelance journalists. Esteban has worked at CU*Answers since 2008 and currently serves as the CUSO's content marketing manager.

  • chip+filson#1

    April 7, 2022

    The S in CAMEL will be the hot button issue this year in exams CU’s will see increased NEV modeling by examiners and DOR’s issued mandating changes to the balance sheet composition. Modeling is only as accurate as the assumptions used. NCUA’s standard IRR assumptions for average weighted share lives is not realistic and can lead to very misleading NEV projections.


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