A strategic asset/liability management committee (ALCO) monitors and manages risks associated with a bank or credit union’s balance sheet. Even more importantly, the ALCO can help identify strategies that optimize profitability, liquidity and the outside availability of funding. A recent Abrigo webinar identified strategies for ALCO members to consider as they assess common options for managing the balance sheet. Below are three examples of common options, along with important considerations and tips for evaluating each to make sure your institution doesn’t leave money on the table: 1. Manage the “Marginal Return” Impact of Balance Sheet Growth Strategies Consider: • Are our strategies allowing for profitable growth, or are we losing margin “growing”? • Are we using our limited liquidity wisely? • What other funding and investment options are there? • How can we calculate the cost to grow? Evaluate: • The marginal impact of using rate cuts to boost loan volume vs. raising loan rates/slowing lending. Will the incremental rate earned ($ volume change/$ income change) on loan growth exceed the marginal rate earned if lending slows? • The impact of loan growth on earnings given our liquidity. (How much is excess cash earning now? What would borrowing costs be to fund growth? What would it cost to raise deposits to fund growth?) • How much must volume grow to raise the yields on an average basis over 1-2 years? • Whether raising loan rates and winning fewer loans would provide a better marginal rate of return. Example: Should we reduce loan rates to regain loan volume? 2. Use Limited Liquidity Efficiently To Generate Maximum Earnings Potential Consider: • All loan growth is not equal. What is the future of certain loan segments? • What other options are there (products/structure)? • Does our commitment to a particular business fit with our stated mission/vision (vs. are we doing this because we have always offered it or because our competitors are)? 3 ALCO STRATEGIES TO MANAGE RISK AND MAXIMIZE PROFITABILITY BY DAVE KOCH, ABRIGO 10 In Touch
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