Asset Liability Management Policy

It can be argued that this is the single most important policy that an organization can have.  Without properly thought out and well balanced assets vs liabilities, the organization faces certain failure at some point.  You are encouraged to use the following policy statement as the basis to build your own ALM policy.  



[ORGANIZATION NAME]’s financial characteristics are unique and change in response to market conditions, competition and the characteristics of customer use of services offered.  Therefore, the organization’s asset/liability management (ALM) policies and procedures must be reasonably flexible and continuously reviewed and modified when appropriate.  Conditions to guard against are inadequate profit margins, excessive interest rate or liquidity risk, and inefficient use of cash.  The changing relationships within ALM are cause for frequent review and evaluation.  The number of constraints and limitations are numerous and must be monitored continuously.  When negative consequences are apparent or are anticipated by trends, appropriate corrective action must occur.

The primary objective of the Asset/Liability Management (ALM) Policy is to maximize earnings and return on assets within acceptable levels of risk:

  1. Interest Rate - impact on earnings and net worth from potential short- and long-term changes in interest rates
  2. Liquidity - sufficiency of funds available to respond to the needs of savers and borrowers and to access unanticipated earnings enhancement opportunities
  3. Net Worth - adequacy relative to regulatory and internal guidelines as well as impact on asset size and resultant earnings capacity
  4. Credit - implications of asset quality relative to net worth and earnings
  5. Call - reinvestment of cash flows at lower yields due to early principal payments on mortgage loans and certain types of investments
  6. Operations - possibility of loss due to deficiencies in information systems or internal controls
  7. Legal - contracts are not legally enforceable or documented correctly
  8. Compliance - risk of violations and non-compliance with applicable laws and regulations resulting in fines, penalties, payment, or damages
  9. Event - changes in laws, regulations, or other external factors may adversely impact the organization
  10. Strategic - risk of adverse business decisions through management’s actions or inactions
  11. Reputation - negative public opinion or perception leading to a loss of confidence or severance of relationships.

While not intended to be all-inclusive, the above list contains many of the risks that can potentially affect the organization’s financial condition.  Accordingly, this policy and the other written policies of the organization have been formulated to address those risks and certain other risks inherent in the organization’s asset/liability activities.

The cornerstone of a strong asset/liability management program is the identification of key risks, having a program to monitor those risks, and establishing strategies to reduce the risks, if excessive.  This policy is designed to ensure:

  1. Stable or increasing net interest margin
  2. Adequate earnings in both ordinary and shocked interest rate environments
  3. Adequate liquidity
  4. Acceptable level of net worth.

The above aids the organization in providing competitively priced loans and other financial services to its clients, while also providing for the payment of competitive dividends on shares/deposits without sacrificing the safety and soundness of the organization.



Board of Directors

The Board of Directors is responsible for establishing and reviewing the ALM Policy and for assuring that the organization’s funds are managed in accordance with this policy.  The board will review this policy at least annually.  The board will appoint an Asset/Liability Management Committee (ALCO) and shall delegate authority to that committee to manage the organization’s funds and perform other duties as deemed necessary.  The board will review the minutes of the ALCO meetings and such other schedules and reports as may be required by this policy.  Additional information will be reviewed on an as needed basis.

Asset/Liability Management Committee (ALCO)

The Board of Directors appoints an Asset/Liability Management Committee (ALCO), consisting of:

  1. Chief Executive Officer (CEO)
  2. Director of Operations
  3. Director of Lending
  4. Two members of the Board of Directors (excluding any member of the board who may also be a member of the Supervisory Committee) to be appointed by the Chairman and President of the Board.

It shall be the responsibility of the ALCO to formulate, implement and monitor the organization’s asset/liability management program, subject to the review and approval of the Board of Directors.  The ALCO shall delegate day-to-day asset/liability authority to the CEO, who shall exercise that authority in consultation with other members of the ALCO and consistent with this and other written policies of the organization, including the Investment Policy, Loan Policy, and Business/ Strategic Plan.  Day-to-day asset/liability authority shall include the authority to adjust all of the organization’s share and loan rates, except the regular share rate, which shall continue to be established by the Board of Directors.  The CEO shall also have authority to adjust the fees that the organization may charge for any other product or service.  The rates and fees established by the CEO are subject to the pricing strategies recommended by the ALCO and approved by the Board of Directors.   Further, the ALCO or Board of Directors may change the rates or fees established by the CEO and may revoke the authority to adjust rates or fees at any time.

In line with its responsibility for formulating, implementing and monitoring the organization’s asset/liability management program, the ALCO will meet at least quarterly to:

  1. Establish or review annual performance goals for the organization. 
  2. After considering economic climate, prior financial performance, budget projections, and the organization’s Business/Strategic plan, the ALCO will, at a minimum, monitor the results of:
  • Net income
  • Return on assets
  • Net interest margins
  • Loan growth
  • Share growth
  • Share (liability) structure
  • Long-term assets
  • Liquidity
  • Real estate loans
  • Net worth.

The ALCO will identify specific strategies for the loan and investment portfolios, shares/deposits, and sources of cash flow and liquidity that will enable the organization to meet the goals established.

  1. At least semiannually, the ALCO will identify and monitor the interest rate risk present in the balance sheet:
  2. The ALCO shall prepare or cause to be prepared an analysis of the interest rate risk present in the balance sheet using Net Interest Income (NII) Simulation and Net Economic Value (NEV) Analysis.
  3. The ALCO will establish specific thresholds for an acceptable level of interest rate risk in the balance sheet, subject to the following limitations:

NII should not vary by more than +/-25.00% over the next 12- months after giving effect to an immediate and sustained parallel shift in the Treasury Yield Curve of 300 basis points (+/-), and

The credit union must project a positive net income over the 12-month observation period.

NEV should not vary by more than +/-25.00% after giving effect to an immediate and sustained parallel shift in the Treasury Yield Curve of +/- 300 basis points, and

The resulting NEV Ratio may not be less than 6.00% after giving effect to the specified interest rate shift of +/-300 basis points.¨


 The ALCO will develop appropriate strategies to meet the interest rate risk thresholds it has established.

At the next available board meeting following the quarterly meeting of the ALCO, the ALCO will present to the Board of Directors a written report detailing the recommended performance goals and interest rate risk thresholds.  In addition, the ALCO will recommend strategies to meet those goals and reduce interest rate risk, if excessive in relation to the policy limits.  Recommended strategies to reduce interest rate risk may include any or all of the following:

  •  Selling longer-term assets, including longer-term real estate loans
    • Limiting new investments to obligations that reprice or mature in less than one year
    • Adjusting the existing maturity distribution and/or structure of the investment portfolio (for example, by reducing the number of instruments that contain embedded options) to mitigate asset or liability sensitivity, as applicable
    • Strategic pricing of credit union products, including emphasizing shorter-term consumer loans
    •  Securing long-term fixed rate funding
    •  Reconsideration of risk limits.

ALCO’s strategies should be designed to correct the out-of-policy condition within 180-days and must be approved by the Board of Directors.    However, the board recognizes that risk-reducing strategies take time and may have to be implemented over a period in excess of 180-days, depending on the extent of the risk and prevailing economic conditions.   Accordingly, the board may approve an extension to the 180-day time frame when, in its judgment, economic and interest rate conditions warrant such an extension.  To continue to operate outside of the 180-day time frame, or any longer period approved by the Board of Directors, will require the further review and approval of the board.

It is the responsibility of the ALCO to meet at least quarterly (or more frequently depending on economic and interest rate conditions) to:

  • Evaluate the general economic environment, local business climate, sponsor(s) business climate, and potential short-term direction of interest rates.
  •  Evaluate balance sheet performance by:
    •  Comparing actual performance against the performance goals established.
    • Reviewing NII Simulation and NEV Analysis and other available information, such as the maturity distribution of the investment portfolio, to identify any significant changes in interest rate risk in the balance sheet.
    • Evaluating the organization’s effectiveness in meeting its liquidity needs for the prior six-months including lines of credit available.  As a part of this evaluation, ALCO will determine that the following liquidity limitations have been met:
    •  Loans to Assets not greater than 95.00
    • Cash plus short- term investments (maturity or repricing less than 1-year) to assets not less than 10.00%
    • Borrowings to total shares, deposits and net worth not greater than 10.00%
    • Non-client deposits to total shares and deposits not greater than 5.00%
    •  Net long-term assets to total assets not greater than 25.00%.

At a minimum, ALCO will use the above ratios and the ratios contained in the Appendix, as applicable, to evaluate balance sheet performance, net worth adequacy, earnings performance, and liquidity.

 Document and determine the reasonableness of the assumptions used to measure interest rate risk in the balance sheet.

 Estimate the liquidity needs of the organization for the next six months, including contingent liabilities, such as unused lines of credit and available credit balances.

Identify alternative sources of funding outside of normal operations, such as CU-to-CU CDs, corporate credit unions, etc.

Identify the potential sources of funds to meet the estimated liquidity needs, including alternative sources of funding, if necessary.

 Establish recommended strategies for the investment portfolio consistent with the Investment Policy.             

 Evaluate the credit quality of investments not issued or fully guaranteed as to principal and interest by the U.S. government or its agencies, enterprises or corporations.

 Evaluate the credit quality of investments not fully insured by the National organization Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC).

 Establish a pricing strategy for shares/deposits, loans, and fees.

 At the next available board meeting following the quarterly meeting of the ALCO, the ALCO will present to the Board of Directors a written report outlining its evaluation of the organization’s balance sheet performance.  This quarterly report will also present the ALCO’s recommendations for asset and liability pricing, investment strategy, estimated liquidity needs, and potential sources of liquidity for the coming six months.  If applicable, significant changes in the liquidity position, both actual and projected, will be reported to board along with strategies designed to minimize the liquidity pressures.

Prior to implementing new strategies, client products, or significantly increasing the organization’s holdings of mortgage loans or other longer-term assets, the ALCO will conduct a balance sheet risk assessment. The assessment may include the estimated impact of the new programs on the organization’s liquidity, share structure, and interest rate risk position. The ALCO will make a written report to the Board of Directors detailing its findings and recommendations. Board acceptance or revisions to the report will be noted in the board minutes.

 The ALCO will review this and other written policies of the organization at least annually and recommend any changes to the Board of Directors.



ALCO is also responsible for keeping itself, as well as the Board of Directors, abreast of state-of-the-art technology, procedures and asset/liability management practices.  Formal or informal education/training should take place at least annually to assist the ALCO and board in carrying out their duties and responsibilities as managers of the organization’s balance sheet. 



As an internal control measure, the organization’s supervisory committee (or outside auditor retained by the supervisory committee) will conduct periodic reviews of the risk management process to insure:

  • Adequacy of policies and risk identification procedures.
  • Accuracy of risk measurement including the reasonableness of the assumptions    used in measuring interest rate risk.
  • Objective reporting.
  • Compliance with policy limits.





This Asset/Liability Management Policy is designed to maintain compliance with all credit union regulations.  Any subsequent opinions, policy statements, or regulations that may be issued by (ENTER NAME OF REGULATORY BODY) will preempt this policy in those areas where this document may be in conflict with such opinions, policy statements, or regulations.










Balance Sheet Performance Ratios






Total Loans/Total Assets


Total Loans/Total Shares + Deposits


Total Investments/Total Assets

Asset Growth

(Current Period-End Total Assets-Prior Period- End Total Assets)/Prior Period-End Total Assets

Loan Growth

(Current Period-End Total Loans-Prior Period-End Total Loans)/Prior Period-End Total Loans

Investment Growth

(Current Period-End Total Investments-Prior Period-End Total Investments)/Prior Period-End Total Investments

Market Growth

(Current Period-End Total Shares + Deposits-Prior Period-End Total Shares + Deposits)/Prior Period-End Total Shares + Deposits


Net Worth-to-Assets

Net Worth/Total Assets

Delinquent Loans-to-Net Worth

Total Delinquent Loans/Net Worth

Return on Assets

Net Income/Average Total Assets

Net Interest Margin

(Interest Income-Interest Expense)/Average Total Assets

Yield on Earning Assets

Interest Income/(Average Total Loans + Average Total Investments)

Yield on Loans

Interest Income on Loans/ Average Total Loans

Yield on Investments

Interest Income on Investments/Average Total Investments (at book value)

Cost of Funds

Interest Expense on Shares + Deposits/ Average Total Shares + Deposits

Operating Expenses-to-Asset



(Total Operating Expenses-Loan Loss Provision)/Average Total Assets



Regular Shares-to-Shares

Regular Shares /Total Shares + Deposits

Rate-Sensitive Shares-to-Shares

(Share Certificates + Money Market Shares + Other Rate Sensitive Shares)/Total Shares + Deposits

Borrowings-to-Shares and Net Worth

Total Borrowings/Shares + Net Worth


Non-Client Deposits-to Shares and Deposits

Non-Client Deposits/Total Shares + Deposits

Fixed Assets-to-Asset

Fixed Assets + OREO/ Total Assets

Short-Term Assets-to-Assets

(Cash + Investments Maturing (or repricing) <1 Year)/ Total Assets

Net Long-Term Assets-to-Assets

(Long-term investments {remaining average life or maturity and repricing greater than 3 years} + Fixed Rate Real Estate Loans {any real estate loans that will not reprice, refinance, or mature in the next 5 years} + Adjustable Rate Real Estate Loans {any real estate loans that will not reprice, refinance, or mature in the next 5 years} +Commercial Loans + Agricultural Loans + Fixed Assets + NCUSIF Deposit)/Total Assets

Loan Turnover

Total Loans Prior Period-End/(Total Loans Prior Period-End + Loans Originated Current Period-Loans Outstanding Current Period-End)

Long-Term Investments-to-Assets

Long-Term Investments (Investments with maturities (or repricing) > 1-year)/Total Assets


Securities Classified AFS/Total Investments


(Cash + Cash Equivalents +Investments Maturing (or repricing) <1 Year+12 Months Projected Cash Flow on Loans & Amortizing Investments)/(Shares + Deposits +Borrowings Maturing <1 Year)







Real Estate Loans-to-Assets


Total Real Estate Loans/Total Assets


Fixed Rate First Mortgage Real Estate Loans

(>15 years)- to-Assets

Fixed Rate First Mortgage Real Estate Loans

 (>15 years)/Total Assets


Fixed Rate First Mortgage Real Estate Loans

(15 years or less)-to-Assets

Fixed Rate First Mortgage Real Estate Loans

 (15 years or less)/Total Assets


Fixed Rate Balloon First Mortgage Loans (>5 years)-to-Assets

Fixed Rate Balloon First Mortgage Loans (>5 years)/ Total Assets


Fixed Rate Balloon First Mortgage Loans (<5 years)-to-Assets

Fixed Rate Balloon First Mortgage Loans (<5 years)/ Total Assets


Other Fixed Rate First Mortgage Real Estate Loans-to-Assets

Other Fixed Rate First Mortgage Real Estate Loans/ Total Assets


Adjustable Rate First Mortgage Real Estate Loans (1-Year or less to next reset date) -to- Assets

Adjustable Rate First Mortgage Real Estate Loans (1-Year or less to next reset date)/Total Assets


Adjustable Rate First Mortgage Real Estate Loans (1-Year or more to next reset date) -to- Assets

Adjustable Rate First Mortgage Real Estate Loans (1-Year or more to next reset date)/ Total Assets


Closed-End Fixed Rate Second Mortgage Loans-to-Assets

Closed-End Fixed Rate Second Mortgage Loans/Total Assets


Closed-End Adjustable Rate Second Mortgage Loans-to-Assets

Closed-End Adjustable Rate Second Mortgage Loans/Total Assets


Open-End Adjustable Rate/Home Equity-to-Assets

Open-End Adjustable Rate Home Equity/Total Assets


Open-End Fixed Rate -to-Assets

Open-End Fixed Rate / Total Assets


Other Real Estate Loans-to-Assets

Other Real Estate Loans/Total Assets




¨ The level of the interest rate shocks for NII and NEV may be varied depending on prevailing interest rate and economic conditions.  For example, a rate shock of +300/-200 basis points may be applied when the 2-Year Treasury note is trading at levels below 3.00%, or there is a consensus among leading economists that the economy is at or near the bottom of a major interest rate cycle.