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This is an important topic. I believe that the investment portfolio is an underutilized asset in the credit union industry. Too many credit unions kept a high percentage of assets in cash telling themselves and\or their boards they were "being conservative". They were not being conservative but were making a big bet on an increase in rates. Others use a ladder of bullet agencies generating poor returns. Too many buy callable agencies - a bond with a terrible risk \ return profile and don't take the time to investigate other investment alternatives.
The priority for investment management should be safety, liquidity and then yield. Traditionally the role and purpose of investments on a credit union's balance sheet is to provide a hedge to interest rate risk, liquidity and finally income. Our middle name is credit. The primary role of a credit union is to provide loans to members. A recent article pointed out that Langley FCU had viered from lending to such an extent that investments became the primary earning asset. If Congress intended Credit Unions to be an investment club they would have said so in the Credit Union Act. Your article begins with the discussion of yields. I do not see that as the proper focus for credit unions. The question should be have we done enough to make loans to members? Have we offset the interest rate risk of our balance sheet with how we invested and how we manage the rest of the balance sheet? Have we allowed enough liquidity to meet loan demand and potential share drawdowns? I would rather see the discussion focus on how well the credit union manages the balance sheet and then look at investment yields. You point out that those with the highest loan to share ratios have lowest investment returns. That is entirely due to how they manage the balance sheet--investments must be liquid when the loan to share ratio is high.
This is interesting data at first blush - can you cross reference the data above with two additonal factors? First - Average ratio of loans of the institutions included above to total assets? All else being equal, a CU that has a higher level of lending activity will park investments in shorter, more conservative investments with the expectation they will loan them out, with the converse generally being true. Second - ROA of institutions referenced above versus peer averages? If a CU is generating a great investment return, but earnings of the instituion overall are not benefitting, perhaps a change in strategy is in order?
I had very similar questions. I just ran a regression of Yield on Investments vs. ROA for our NCUA peers. That's my go to, down and dirty check to see if what is being discussed really matters. Nearly zero correlation, which is what I expected. Credit Unions that make ROA from investments aren't necessarily 'better', they just earn their money differently. I can gurantee that the corrlation between Callahan Financial Services and the credit union's who purhcase their investment portfolios which are being hocked in the 'article' below is very strong!
Thanks for the questions. You are correct that the credit unions with the lowest investment yields have the highest average ratio of loans to total assets and that it has an inverse relationship with their average investment yield. You are also correct that ROA is being driven by loan yields in the current environment, with the industry's average loan yield being nearly 4.5 times its current average investment yield. Although loans are the driver of earnings, we wanted to write this article to look at investment returns since credit unions' portfolios have grown significantly in the past few years.
Good Morning, What is the composition of other investments? Thank you CHarles
Hi Charles. Thanks for the question. Other investments is made up mainly of capital or other investments at corporate credit unions, CLF stock, FHLB stock, Federal Reserve stock, and common trust investments, among other things.
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