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Who's on Your ALCO? [Credit Union Management](Credit Union Management Via Acquire Media NewsEdge) Field of membership, expertise, and balance sheet structure are among the determining factors. (ProQuest: ... denotes obscured text omitted.) With no set regulatory formula to guide them, credit unions can structure their asset/liability committees to marshal their internal expertiseon the board, on the executive team, and from the finance department-to tackle current and likely future challenges. Because the board is responsible for overseeing the credit union's financial performance, it makes sense that at least one director should serve on the ALCO or regularly at least listen in on decision-making, says John Murnane, CPA, partner in Orth, Chakler, Murnane & Co. (www.ocmcpa.com), Miami. About 90 percent of the credit unions Murnane works with have one or more directors-often the board chair and/or treasurer-along with the CEO, CFO, and one or two other CU executives serving on their ALCOs. "There's no regulatory mandate, but examiners' guidance (to individual CUs) says they would prefer to see at least one board member sit on the ALCO," Murnane says. "Most board members are not financial professionals, but they understand issues like interestrate risk at a high level, and serving on the committee helps develop their expertise." A sensible structure is that the credit union's financial experts run the ALCO and lead decision-making, while board representatives provide high-level guidance, he suggests. "Financial managers don't have to wait for an ALCO meeting to make decisions. Those meetings are more for monitoring and setting future direction." Representing Member Interests "With most of my credit union clients, the board members on the ALCO keep in mind that the financial managers understand the issues better than they do and they are primarily there to provide input," notes Allen DeLeon, CPA, partner in DeLeon & Stang (www.deleonandstang.com), Gaithersburg, Md. Directors serving on the ALCO represent members' interests and may raise issues about how financial decisions affect member services, DeLeon says. As just one example, a credit union holding a sizable portfolio of long-term, fixed-rate mortgages might consider managing interest-rate risk by shifting to variable-rate home loans or selling mortgages, "but either option could have an impact on member services that the board would want to weigh in on." On the other hand, some credit unions assign ALM responsibilities to their executive and finance teams, who report directly to the board for high-level guidance, he notes. ALCO composition is often related to the distribution of financial expertise between staff and board. Asset size and field of membership may also play a role in how the ALCO is organized, according to DeLeon. Larger credit unions tend to have CFOs and financial analysts with more extensive experience. On the flip side, "the balance sheets of smaller credit unions aren't as complex and they typically don't have complicated investments or diverse loans, so they don't require the same sophisticated analysis," DeLeon says. Regardless of asset size, credit unions may have access to director and volunteer candidates for the ALCO in the form of financially savvy professionals working for sponsor organizations and select employee groups. Whatever the ALCO composition, these committees must keep minutes that record their actions and rationales, and maintain the reports produced and reviewed. "Auditors look at what the ALCO is doing and how it relates to the year-end balance sheet," DeLeon says. "The consequences can be severe if it's obvious in the audit that the credit union doesn't know how to manage its balance sheet." Let's take a look at several examples on the continuum of ALCO composition and why each mix is uniquely suited to its credit union's circumstances. Calling on Directors ... ..."They have a meaningful role in the financial oversight of the credit union, especially given our balance sheet structure," Fero notes. ... Though the board and ALCO play key roles in overseeing asset/liability management and policy-making, directors leave financial operations and investment decisions to the CEO. ... Relying on Staff ... ... ... ... Useful Blend With a campus apparently well stocked with finance and business professors just across the street, University of WisconsinOshkosh Credit Union relies on directors and other volunteers willing to transfer their expertise from the classroom to the ALCO meeting. The asset/liability committee of this $25 million credit union (www.uwocu. org) is chaired by a professor who teaches banking and finance and also includes a retired management information systems professor, a strategic management professor, a former university controller who now serves as Fond du Lac County's register of deeds, and a CPA with a PhD. In all, the ALCO is composed of one director, two former directors, two other volunteers, University of Wisconsin-Oshkosh CU's operations officer, and President/CEO Scott Chicoine, a CUES member. "With these folks, you don't have to explain what a credit or debit is," Chicoine says wryly. "One of the things a lot of boards and executives have a hard time with is putting into lay terms the strategic finance decisions we make. If our ALCO thinks something is a good idea, our board is going to go along with it because they have such a trust in their background." With 11 experienced directors coming together in the wake of a merger, the board of $350 million Power Financial Credit Union had plenty of financially savvy candidates for its ALCO, says Allan Prindle, CEO of the $530 million credit union with 32,000 members. The three directors who serve on the Power Financial CU (wwov.powerfi.org) asset/liability committee alongside Prindle and the CFO serve as a "sounding board," reviewing the credit union's financial management over the past quarter and studying economic forecasts for the near future. "It's very important from a governance standpoint that they know intimately the ALM model and interest-rate risk mitigation strategies and convey that knowledge at a high level to the full board," Prindle says. With nearly 60 percent of the credit union's assets in long-term mortgages, interest-rate risk simulations are a particular focus of Power Financial CU's ALCO, he notes. Especially with the possibility of an uptick in rates on the horizon, the committee reviews rate simulations for a shock analysis of up to a 500 basis point shift. "We have a laser-like focus on rates and how that could impact the balance sheet," Prindle says. Talent Pool As these examples demonstrate, ALCO participation "depends largely on the pool of talent available at each credit union and the willingness of individuals to volunteer and be a part of it," says Ancin Cooley, principal with Synergy Credit Union Consulting (www.syncuc.com), Elgin, 111. Cooley recommends that credit unions consider board representation on their ALCOs to ensure this critical function is actively monitored and that directors serving on the committee have the opportunity to build their understanding of ALM policies and practices. Directors serving on the ALCO may benefit from regular training and education to enhance their participation on this committee so they can ask better questions and provide more insightful guidance. "The most important task in my opinion is for the ALCO to have a strong charter from the board spelling out the policies in place to guide management's decisions," Cooley says. "That charter should reflect the credit union's strategic direction and risk appetite." Resources Director Risk and Compliance Seminar (cues.org/drcs) takes place Sept. 15-16 in Williamsburg, Va. At the same location that week: CUES Director Development Seminar (cues.org/dds), Sept. 17-19. Talk with other directors about their ALCO structures when you attend Directors Conference (cues.org/dc), Dec. 7-10 in Palm Desert, Calif., or CUES Symposium: A CEO/Chairman Exchange (cues.org/symposium), Feb. 1-5, San Juan, Puerto Rico. Everyone can download the executive summary, and CUES members can download the full report, ALM Essentials, at cues.org/almessentials. Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Stoughton, Wis. (c) 2014 Credit Union Executives Society |