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Ideally, credit unions’ earning assets must have a fair portion in both long-term investments and short-term loans that turn over more frequently, DeGroote says. “Credit unions have to recognize which elements are in their control and which aren’t. If interest rates rise and competitors begin raising their deposit rates, credit unions can’t control this. They’ll have to pay more for funds or watch them walk out the door.”
He says the focus needs to be on elements credit unions can control. “A basic rule of ALM is a balanced ledger. As the cost of funds increases, credit unions must adjust pricing accordingly on the other side of the ledger to maintain a sufficient spread.”
ALM providers say common mistakes credit unions make with ALM involve their motivation for using it and how they manage it. “Looking at ALM as a one-time exercise to satisfy examiners is a mistake,” says DeGroote. “It comes down to managing both sides of the ledger competently and consistently, quarter in and quarter out.
“Credit unions must also do a better job of innovating and listening to members to develop strategies,” he continues. “They need to consider their market area and find different ways to generate revenue.”
Flynn agrees member feedback is crucial, especially when competing with other providers for good loans. “The key is finding out what types of loans your members are most interested in at this time and then structuring them in the best way for the credit union. One idea is to spend some time talking with a group of 10 to 20 members to get their feedback.”
Other mistakes credit unions make, she adds, include underestimating the power of ALM technology as a forecasting tool and not involving key decision makers in the process.
“ALM allows you to test different pricing and structure options,” Flynn says. “Once you’re satisfied with the specific characteristics of the loan, you can go out into the lending market with more confidence.”
DeBree advises taking the necessary time to conduct ALM, not rushing through assumptions or the fact-gathering process. “For example, an ALM assumption that factors in 30-year, 6% mortgages would not be realistic. The models have to be plausible. Also, doing ALM purely as a way to satisfy regulatory requirements means never learning how to integrate it as an important decision tool.”
Flynn suggests two steps to enhance the ALM process:
- Make realistic assumptions about the speed at which members prepay auto loans and mortgages. Base one set of assumptions on your own credit union’s unique prepay experience, in addition to the prepayment speeds being predicted for the country as a whole; and
- Model troubled debt restructurings accurately. Don’t base them on overly optimistic expectations.
DeGroote reminds credit unions that the composition of their deposit accountholders will change as rates increase because consumers are more sensitive to savings rates than they used to be.
“They’re shopping for bargains,” he says. “That’s where the ability to inspire loyalty becomes incredibly important. Credit union management must put more effort into inspiring loyalty than ever before.”