“Some credit unions enjoy healthy returns on assets because they’re doing their homework,” says Emily Hollis, partner at ALM First Financial Advisors. “They’re not doing all prime loans. Some are going down a credit tier but protecting against the risk by pricing loans correctly,” which requires rigorously appraising members and doing ALM forecasting.
“Some credit unions in California and Florida are countering the effects of downsized housing markets by merging, often as equals,” Hollis says. “Others are looking into derivatives, a strategy that requires a lot of knowledge to do correctly. Then they’re cutting expenses and hedging.”
Many larger credit unions are taking a special interest in hedging, Hollis says. Adding mortgages to their balance sheets puts credit unions in a quandary: When will rates rise? Should they sell now and sit on a small yield but be safe? What if rates rose quickly—or not at all?
“With ALM you can simulate these scenarios,” Hollis says. “But often the result makes a credit union say, ‘We don’t want to look like this.’ So if we say, ‘Then sell your mortgage portfolio,’ and they say ‘no,’ we recommend hedging. Hedging is like taking out an insurance policy: Chances are you won’t need it over the short-term.”
Boebel says some credit union managers perform ALM only because it’s required. “Much of their reluctance comes from what’s involved: training, buying software, and dealing with outside vendors.
It’s one more resource to invest in compared to, say, hiring a loan officer, whose expense and revenue generation are quick to appear. ALM is more abstract, and its good effects are harder to see.”
Boebel sees a noticeable shift to outsourcing some ALM functions. “But outsourcing doesn’t absolve management from understanding the product, its uses, and its underlying assumptions.”
Heath says outsourcing appears to be an easy solution to keep examiners off credit unions’ backs. “The drawback, though, is that you’re three months behind in knowing what’s going on in the market. That’s fine as long as things are going smoothly. But rapid market change will find you unprepared.”
Heath advises making ALM part of every decision.
“ALM involves constant planning for possible future scenarios even if they never come true,” he says. “Everything you want to ask about increasing income, dealing with increased liquidity, reducing share rates, and how members might react are easily modeled with ALM.”