ALM is a subject that has constantly evolved over the years.  It is expected that the knowledge level of the credit union personnel responsible for ALM evolve as well. ALM is a process and involves more than simply reporting on ALM result or just having an ALLL Policy

Here are some key points to remember relative to ALM:

  • ALM is the process of coordinating actions to control the credit union’s risk and reach it financial goals;
  • Every action taken by the credit union sooner or later affects the ALM position;
  • Good ALM measurement and management processes are a must;
  • The ALM Policy sets the guidelines for the ALM process including key measurements; and
  • The “red zone” shows whether the credit union is in compliance with these measures.  If not, take action.

ALCO and the board should be aware of ratios or trends that may signal an existing or potential problem by analyzing the past, present, and future direction of the credit union.

ALCO should be alert for the appearance of “red flags”, investigate their sources, and if necessary, develop action plans to address the issues.

Asset-Liability Red Flags:

1.      Changes in the level and trends of aggregate interest-rate exposure;

2.      Significant changes in net interest income;

3.      Not understanding/documenting key assumption of the budget;

4.      The inability of the measurement system to provide reports that quantify risk exposure;

5.      Unexplainable variances to the budget greater than 20 percent;

6.      Frequent exceptions to the asset liability policy, liquidity policy,investment policy or lending policy;

7.      Improper tools to monitor or measure financial performance;

8.      Rapid asset growth funded by wholesale, volatile liabilities, or brokered deposits;

9.     Capital growth rate is less than asset growth rate;

10. Increasing levels of past-due and non-performing loans, loan losses and interest earned but not collected;

11. Annual net-charge-offs that exceed the balance of the allowance for loan loss;

12. Significant increases or decreases in the percentage of long-term assets to total assets; and

13. Aggressively seeking new deposits without having a place to profitability put the funds to work.

Remember a good ALM process helps serve the membership.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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