By Ray Birch
DALLAS—When it comes to asset/liability management in 2024, credit unions will continue to be challenged by the very question they have faced in 2023—how to fund themselves, according to one expert who is urging CUs to be “opportunistic.”
“I think that's a continuing question that we've had over the last 15 months, and will probably be the leading theme going into next year,” said Travis Goodman, principal at ALM First. “I think there are a lot of questions right now about where money is moving to, how it's moving, whether it's leaving to pay down debt or is it hot money? Those are unanswered questions and will continue to be a real challenge for most institutions.”
If there is a positive, Goodman told CUToday.info that ALM First sees signs the liquidity crunch may not be as bad next year as it was in 2023.
“We see evidence that the liquidity crunch is abating. Some liquidity is coming back to the system, primarily in the form of lower loan business,” he said. “So, that is not really a positive, but we do have improvements in the liquidity profile right now.”
Familiar Themes
Other ALM/pricing themes heading into 2024 are not unfamiliar, Goodman said.
“They are not too dissimilar from 2023, however, there has been a shift with credit unions focusing more on the liabilities side of the balance sheet,” he said.
Goodman said that an increasing cost of funds makes disciplined asset pricing even more important to ensure the institution isn't giving its liquidity away.
“Again, it’s vital to understand where your liquidity is coming from and where it is going,” Goodman said. “There is a lack of clarity on that for many institutions. For example, is the money leaving your credit union right now because people are getting higher rates elsewhere or because they are simply spending more because of higher costs driven by inflation?”
A Return to Average
With the “abnormal years of COVID” behind credit unions now, Goodman said he is seeing a shift back to more average numbers.
“Delinquency rates are drifting back to a more normal range and the deposit levels—measured by average balances—are also drifting back to where they were pre-COVID,” he said.
In 2024, Goodman said it will be important for CU leaders and ALCOs to have a true understanding of their funding sources, as there will be continuing liquidity pressures as savings rates fall, said Goodman.
Travis Goodman
“If typically sticky checking account balances are down, it may be time to weather the storm or borrow vs. offering very high-rate specials, as lower checking balances are more likely to be the result of savings changes,” he said. “Attracting new money by raising rates is not easy and does not always attract truly new funds. This also can lead to a behavioral shift in the depositor base, which can increase overall interest expense sensitivity to changing rate environments.”
New Scrutiny
Meanwhile, Goodman cautioned that next year credit unions should also prepare for more regulatory scrutiny.
“So, having your modeling shored up and understanding model limitations will be important as you may have to explain your results,” he said.
It's also beneficial for CFOs to understand that posting reduced levels of income doesn't necessarily mean the institution is at risk, said Goodman.
“Prior years’ solid loan growth and a low cost of funds provided a good recipe for profitability. But there are ups and downs in every business—including financial institutions. Sometimes it's hard to remember that, but having a no-income year or a loss doesn't mean an organization is mismanaged,” he said. “For example, a lot of our clients had strong gains on loan sales prior to 2022 and got used to the idea of being able to sell at three- to four-point premiums. When that goes away, your first reaction may be to think it's terrible. But it's important to understand that you simply front-loaded and booked income at the beginning of a lumpy timeframe. There is always ebb and flow, and ultimately a reversion to the mean. To get all of the benefit, you have to be a long-run player.”
Time to be Opportunistic
Goodman said ALM First is encouraging credit unions to be opportunistic next year.
“There are still ways to make money. Profit is at a premium and likely will be for the next couple of years,” he said. “Understand how to navigate the current environment and take advantage of what opportunities you see locally.”
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