ALM Needs Change as the Balance Sheet Changes

The credit union business model is not static; neither is the balance sheet.  As the balance sheet changes credit unions may need to assess the functionality of their ALM solution. 


As credit union balance sheet positions shift over time, credit unions require ALM solutions that can evolve with their needs. Over the past four years, asset growth for credit unions with over $50 million in assets has averaged 48 percent. The drivers of growth on the asset side are loans (auto and real estate) and investments. Real estate loans have gone from $56.5 million to $97.4 million – a 73 percent growth rate in four years! Auto loans have also increased by nearly 44 percent. The investment portfolio has grown from $63.2 million to $89.5 million, an impressive 42 percent increase. Share growth has driven loan growth, which was in turn led by real estate lending.

Shifting Balance Sheet Positions
The table below illustrates how several key balance sheet categories have changed over the past four year, for the average credit union with over $50 million in assets:



Change as a percentage
of total assets

Real Estate Loans








Gov’t & Agency Securities




Money Market Shares




Share Certificates




While the changes as a percent of total assets look small, they actually represent material changes to the balance sheet structure. Real estate loans are now 32 percent of assets versus 28 percent four years ago. This is significant given the distinct interest rate sensitivity of mortgages. In the investment portfolio, cash is down from 11 percent to 6 percent of assets; government and agencies securities have risen from 12 percent to 15 percent of assets. The data suggests that credit unions are extending the duration of their assets.

When we consider the liability side of the balance sheet we see some concentration changes there as well. Share certificates have fallen from 25 percent to 21 percent of assets. Money market shares have increased from 14 percent to 16 percent of assets. With the decline of share certificates and increase of money market shares, the argument can be made that liabilities are shortening.

Even if the change is small concerning the lengthening of assets and shortening of liabilities the question arises: are credit unions being rewarded for the risk associated with a duration mismatch? Over the past four years, Return on Assets (ROA) has fallen 2 basis points to 0.97 percent. Net-interest margin has fallen 30 basis points to 3.19 percent, and the net worth ratio has fallen by 30 basis points to 9.43 percent. The major factors influencing these trends have been the shape of the yield curve and level of interest rates. These factors are generally outside of management’s control.

The Rise of Fee Income
One factor that remains directly in management’s control is fee income. Fee income has seen substantial growth, representing 13.3 percent of total income today compared to 1.2 percent four years ago. More importantly fee income is now 82 percent of net income compared to 69 percent five years ago. If credit unions are becoming more dependent on fee income as opposed to their loan and investment income, perhaps their thinking on their ALM process should be altered too.

Matching Solutions with Needs
Credit unions whose balance sheets are staying the same on a relative basis might be less inclined to commit dollars and resources in systems providing functionality that is beyond their requirements. Alternatively, for credit unions that have seen a substantial change in the makeup of their balance sheets, it would be prudent to survey the landscape of ALM solutions to see if new solutions better meet their requirements.




Sept. 19, 2005


  • Our board is committed to providing our core services, savings and loan products without charging fees. However, we are finding that fee income is a growing and necessary component to our profitability. We are trying to increase it using user optional (Overdraft Privilege, Skip-A-Payment), user usage commissions (interchange, insurance) and abuse fees (NSF, late payment). We make every effort to provide the highest savings rates and lowest loan rates in our area on our products. The 40-year low market interest rates and now the regular 25bp market rate increases have provided a challenge for us. Our ALM model has made managing our balance sheet and the associated interest rate risk less of an uncertainty and more of an educated decision-driven process.