Volunteers often have little or no training in asset/liability management (ALM), and as one of the most complicated areas in the credit union to understand, ALM results must be presented in a meaningful way.

That’s why, when reporting this information to the board, ALM results should be:

• Presented in a simple, summarized manner where data appears in a concise, readable report; and
• Focused on the most important part of ALM: interest-rate risk—the repricing of assets and liabilities, and how it affects financial stability.

So says “Reporting ALM Results to Directors,” a white paper from the CUNA CFO Council.

Many volunteers find it difficult to understand ALM because:

• Directors have varied skill levels and educational backgrounds, which frequently fails to include ALM in a financial institution;
• The subject matter is very complicated;
• Few directors take advantage of training materials available to them on the subject;
• Directors need to get up to speed on many issues, and ALM is but one of them;
• Directors need to prioritize where ALM falls on their “to do” lists; and
• Experts rarely simplify. Jargon and fast-paced commentary serve to confuse.

Presenting ALM findings

Experts suggest that ALM reports should contain five sections to facilitate understanding and information sharing:

1. An introduction/disclaimer. This informs readers about potential weaknesses of ALM analysis, and that they shouldn’t reply on it as unqualified assurance of results to follow.
2. An economic forecast which includes management’s actions and recommendations to the board.
3. Interest-rate risk shock tests. These describe the effects of extreme (100 to 300 basis points) interest-rate changes on net income, return on average assets, capital ratio, and net worth ratio.
4. Comparisons of the credit union’s current financial makeup with previously set board policy. Directors can quickly note if the ALM position is in compliance; violations are noted and explained here.
5. Management commentary.

Optional reporting is also a consideration. Information can be added to or substituted for a model set of reports as included in the appendix.

Such information might include net economic value, Treasury yield curve, list of assumptions, balance sheet date, income statement, yield report, and CAMEL ratio.

ALM reporting may be sufficiently completed if done quarterly. Typically, it’s an agenda item four times per year and is presented at a regular board meeting.

The report suggests an annual session to provide more in-depth examination of ALM issues. It may be advisable to bring in a third party to deal with ALM education.

Reporting of ALM results is an evolutionary process and, at some point, reporting may be changed to adapt to the board’s needs and preferences. Initially, the idea is to begin with a basic set of reports that present results succinctly and simply.

Ultimately, directors are responsible for the credit union’s well-being and should participate in ALM policy making and strategy formation.

“Reporting ALM Results to Directors” is available on the CUNA CFO Council’s website.