What lies ahead in "examinerland?"
Bill Goedken, whose company, Profitstar, has approximately 625 credit union clients, said he was recently called into NCUA's offices to discuss numerous issues related to financial management, offering him insights into where the agency is focusing.
"We do not believe that ALM is just interest rate risk management," stressed Goedken. "It is the process of evaluating and executing actions to control your risks and reach your financial goals. The key word is control-not eliminate risks."
Beyond interest rate risk, Goedken said credit unions must also measure credit risk (especially with member business lending), liquidity risk, earnings at risk, and capital at risk.
Goedken met with all of NCUA's chief capital market specialists in Portland, Ore., in early May, and then with all chief field examiners and "second level" capital market specialists and state examiners in Salt Lake City two weeks later. Goedken pointed to a statement made by NCUA Chairman JoAnn Johnson at the CUNA CFO Conference earlier this year that "ALM is one of the most crucial credit union activities."
"I can kind of bet that ALM will be a larger focus for you this year," said Goedken. "About seven out of 10 of our clients are saying that ALM is a major focus of their exams. And three in 10 are saying it didn't even come up. So it seems to depend on your balance sheet structure and (the examiner) you get. The examiners want to know do you understand what ALM is. Do you understand everything you do at the credit union sooner or later is going to affect your bottom line? They want to know are the proper items in place? What is your ALCO doing? What are your ALM policy and policy limits? What is your education plan for ALCO and board? Have you validated the results?"
Goedken said he agrees with NCUA that education is critical.
"You've got to do it in steps and do it in pieces. You've got to show, for instance, what is earnings at risk? What is capital at risk," Goedken continued. "It's correct that most of your board members and, in fact, most of your ALCO members, don't have the same financial background that you do."
Examiners also want to know, as Goedken explained, "Do you know if you do X, how will it affect Y. And they want you to walk through that with them. They want to see more than just the numbers; they want to walk through your business sense. I really think the examiners are starting to look at your business practices as much more than just a checklist."
