Earnings

Earnings is a broad term that generally refers to the amount of money a credit union retains after deducting costs from gross income. Earnings are necessary to adequately build capital commensurate with a credit union’s current and prospective financial and operational risk exposure, economic climate, and strategic plans. Earnings can be impacted by operational inadequacies, loan and lease losses, and market changes. Earnings can be in the form of core and non-core income where non-core earnings are extraordinary gains or nonrecurring events that must be considered. A credit union’s inability to control operating expenses can also impede earnings performance.

When reviewing earnings, examiners should consider all factors relevant to earnings, including gross income, expenses, and net income (loss). Net income is the surplus (deficit) of income less expenses a credit union generates in a given financial reporting period, typically on a monthly, quarterly, or yearly basis.

Net income increases or decreases undivided earnings after a credit union closes its books for the accounting period. However, credit unions may transfer funds from undivided earnings to other retained earnings accounts, in accordance with applicable laws and accounting standards. Retained earnings includes undivided earnings, regular reserves, other reserves that are appropriations of undivided earnings, and net income as determined under GAAP.

Credit unions primarily generate income through loans, investments, and fees charged for services. Expenses include interest, PLLL, and operating expenses. However, extraordinary income or expenses will affect net income in the short term and may distort historical trends.

While credit unions are not-for-profit institutions, they need to generate positive net income for two primary reasons:

  • To cover the costs of providing members with financial services
  • To build and maintain a safe and sound level of capital (especially as the credit union grows)

This section of the Examiner's Guide addresses the following:

Last updated on October 1, 2020