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By ProfitStars, a division of Jack Henry & Associates, Inc.
The credit union industry is experiencing a double dose of pressure on their net interest margins from a bedeviling source. Shares and deposits in credit unions are growing more rapidly than loans outstanding. Combined with a historically low rate environment, credit unions are struggling to deploy excess funds profitably. It is not surprising, given the severity of the financial crisis of 2008 and 2009, that loan growth declined rapidly.
Recently, loan growth has improved. Yet the industry is awash in liquidity and laboring to find alternative sources of investments earning acceptable yields. Investments have grown as a percentage of total assets even though investment yields have substantially declined.
The industry has turned to alternative investments to a greater extent than years past. For example, investment in mortgage-backed securities and CMO’s (collectively, “MBS”) has risen dramatically. They now represent almost 15% of total assets compared to roughly 9% five years ago.
What alternatives are there for credit unions reaching their MBS policy thresholds? With the assistance of an investment adviser, the completion of a thorough investment policy and portfolio review is an excellent starting point. With additional risk controls, it may be appropriate to increase limits for MBS. A investment policy and portfolio review can address the following questions:
An upward adjustment of the institution’s MBS policy limit should be accompanied by increased risk controls, including controls like those mentioned above. Additionally, any adjustment in the approved composition of the investment portfolio should be evaluated against the requirements of liquidity policy and plans, and projected lending activities.
Lastly, it is critical that an investment adviser provide a comprehensive set of investment data, including estimated cash flows in multiple rate scenarios. A key component of any policy adjustment is the ability to forecast potential behaviors within the institution’s asset/liability model. Being well armed with an improved policy containing upgraded risk controls and effective financial forecasts will significantly improve the effectiveness of investment activities, and perhaps investment yields.
ProfitStars® provides an Asset Liability Management solution that provides a strategic approach to managing risk, offers forecasting capabilities, enables creation and comparison of multiple scenarios, and much more.
William A. Kirsten, a former community bank CFO, is a Client Services Analyst, Advisory with ProfitStars, a division of Jack Henry & Associates, Inc.®
This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.
If you are interested in contributing an article on CreditUnions.com, please contact our Callahan Media team at firstname.lastname@example.org or 1-800-446-7453.
February 4, 2013
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