<p>Credit union members expect more. Credit union members demand more. An increased emphasis on asset liability management (ALM) practices and procedures will significantly help credit unions operate more productively in an increasingly complex environment. In other words, credit unions will be able to do more. And that will not only help keep members, it will help keep them happy. To be competitive, credit unions must continue to offer more products and services to meet the demands of an increasingly sophisticated membership. But recently, credit unions have been trying to meet these member expectations while contending with a roller coaster economy. Fortunately, utilizing the tools of asset liability management offers a sane plan to keep credit unions on course amid the constant changes. Corporate credit unions are playing a more significant role in helping credit unions to fully utilize ALM. ALM has been around since the late 1970s. It has long since lost its newness. And in some cases, ALM now wears the "been there, done that" look. But with credit unions buying more complex investments and originating a greater amount of fixed-rate real estate loans, ALM is now a major focus area for NCUA. Regulators are expecting credit unions to pay closer attention to ALM practices. Little has changed over the years in the definition of ALM. In a nutshell, it remains a process for identifying balance sheet risks, measuring and monitoring them, generating an accurate reporting system, and using all in a combination to assist credit unions in their strategic decision-making process. While the definition may not have changed, the marketplace demands a more aggressive usage. By implementing a comprehensive and active ALM process, credit union managers turn into strategists who ensure that the impact to balance sheet is being measured and monitored before and after new services are offered. Using ALM as a management tool can help stabilize or improve earnings in a fluctuating interest rate environment, while keeping members happy at the same time. It is the way to maximize a credit union's operation. But way too often, ALM management techniques go underutilized. Promoting active ALM activities is akin to advocating daily exercise. Everyone agrees in theory that it is a good idea, but breaking a sweat is a hard reality. However, by putting forth the effort, rigorous exercise keeps a person in shape and leads to greater health. Credit unions should strive for similar ALM fitness. Part of that fitness plan involves a changing mindset. Indeed, while NCUA examiners are requiring an emphasis on asset liability management, credit unions themselves ought to give the ALM process a greater workout. Corporate credit unions can and should play a role in advocating and supporting a greater emphasis on ALM, and then provide follow-through with support in the form of services and consultation. The goal is aggressive ALM- a dynamic process that incorporates frequent monitoring. A once-a-year ALM reading does little today to help credit unions remain fiscally healthy and competitive. Recent history underscores the need. The high-flying economy of the late 1990s sank in 2001. Loan demand dropped. And as a result, the target Fed Funds rate fell 475 basis points in 2001. During this time, members shied away from the stock market and deposited their cash into credit unions that had no choice but to place it in investments that offered lower and lower returns. The portion of credit union total assets directed toward cash and investments grew at more than 34% in 2001. However, the lower interest rates stimulated one area of borrowing-the demand for fixed-rate mortgages and refinancing. Credit unions had been steadily increasing the percentage of fixed rate real estate loans in their portfolios in recent years, and the demands of 2001 only added to that balance sheet shift. First mortgage real estate fixed rate loans grew more than 18% during 2001 while the balance of total loans grew by 8%. Average return on assets (ROA) had been growing in credit unions-reaching 1.20% in 2000. But ROA tumbled to below 1% during 2001. The indication is that credit unions may not have moved quickly enough to match economic conditions. A more aggressive application of ALM procedures could have softened the ROA fall. Now as it appears the economy has bottomed out. Economic indicators are improving and the Federal Reserve has changed its stance to neutral-a sign that as the economy improves, interest rates will increase. And again, new stresses will be placed on credit unions. The target Fed Funds rate fell 475 basis point in one year. Now it is doubtful it will climb back up that far in one year-but experience tells us it is possible. Economic conditions can change quickly and credit unions need to be more aggressive with their ALM strategy if they are to be most efficient. Many credit unions have ALM programs. Some are good. Some are not so good. Some utilize default models that really aren't applicable for a credit union's needs, while some employ excellent risk measurement modeling tools. However, more sophisticated tools often require credit union expertise and staff resources than some credit unions have. Despite some out-of-the-box software solutions, ALM success comes down to the people behind the process and management's ability to use ALM as a strategic tool. Is staff savvy about ALM? Do they utilize it as a management tool, instead of merely a tool to meet regulators' expectations? And as part of that management process, is the ALM process utilized on a frequent enough basis to allow the credit union to adjust in a fast changing environment? These questions point to the need for increased ALM activism. NCUA is right to raise the bar on this issue. Indeed, credit unions ought to aggressively seek ALM training and utilization of these tools so that they can maximize their service to members. The ALM process and management of balance sheet risk may appear to be a daunting assignment, but there are options and assistance available. Used as an strategic management tool, credit unions can employ ALM to: competitively price loans and shares; achieve profitability of capital goals; structure products and even identify on-balance sheet remedies to mitigate risk. And off-balance sheet solutions-such as derivatives and other complex ingredients-are emerging as effective tools to allow credit unions to do more to meet member expectations. While credit unions lavish energy on architecturally appealing facilities and on-line convenience, its future success may be more dependent on developing a dynamic ALM process.</p>