Episode lI: High Loan to Share Ratios and High Investment Yields

Two weeks ago, Credit Unions Concurrently Achieve High Loan to Share Ratios and High Investment Yields showed a list of the Top 10 Credit Unions over $50 million in assets with loan-to-share ratios greater than 80% in terms of highest investment yields. This list, which is reprinted below, tells the end of a story. Following is the setting and rising action of the story: how three of these credit unions structured their portfolios to achieve high investment yields without being imprudent with regard to liquidity risk.

 
 

Two weeks ago, Credit Unions Concurrently Achieve High Loan to Share Ratios and High Investment Yields showed a list of the Top 10 Credit Unions over $50 million in assets with loan-to-share ratios greater than 80% in terms of highest investment yields. This list, which is reprinted below, tells the end of a story. Following is the setting and rising action of the story: how three of these credit unions structured their portfolios to achieve high investment yields without being imprudent with regard to liquidity risk.

These credit unions recognize that the current yield curve is steep and one can gain 200 basis points by choosing investments with durations of three to five years instead of overnight investments. Likewise, rates on overnight borrowings are low at the moment, allowing credit unions to borrow to manage their day-to-day liquidity needs. For example, in order to fund his mortgage pipeline, Western Vista President John Balser establishes funding sources both externally and internally.

Rank
St
Credit Union
Yield on Inv
Loan/Share
Borrowings/
Total Liab
Cost of Funds

inv<1yr/
inv

ROA
Assets
1 MA Athol
5.45%
85.94%
5.99%
2.13%
0.92%
0.68%
$67,409,346
2 UT Transwest
4.79%
84.53%
1.76%
2.39%
28.81%
1.02%
$85,109,763
3 MA St. Joseph
4.78%
110.50%
27.47%
2.50%
12.79%
1.19%
$61,333,330
4 MI Consumers
4.49%
95.76%
2.04%
1.83%
68.60%
2.04%
$114,142,280
5 IA John Deere Community
4.47%
81.54%
0.61%
2.10%
33.60%
1.14%
$821,330,958
6 WY Western Vista
4.40%
90.26%
7.40%
2.00%
13.97%
1.30%
$70,314,485
7 ME​ Infinity
4.34%
106.74%
18.19%
2.04%
22.81%
1.48%
$127,715,729
8 UT Alliance
4.24%
85.12%
1.01%
2.35%
18.00%
0.58%
$73,431,399
9 CA Cali​fornia Coast
4.19%
82.07%
0.00%
2.08%
34.94%
1.14%
$719,785,831
10 WV People's
4.03%
90.43%
0.00%
2.07%
17.16%
1.20%
$57,672,408
Average for these 10
4.52%
91.29%
6.45%
2.15%
25.16%
1.18%
$219,824,552
Average for over 50m
2.77%
68.72%
1.73%
2.06%
51.08%
1.10%
$270,177,658

Although much of these credit unions' assets are loaned out, they are able to manage the risks embedded in their investment portfolios - such as interest rate risk, liquidity risk, and credit risk - through a variety of strategies. For example, investments with monthly cash flows such as well-structured mortgage-backed securities provide yield pickup in addition to monthly cash flows for reinvestment (loan origination). By sticking to a maturity ladder, credit unions are able to take advantage of the steepness in yields and ''roll down'' the curve, a fixed income strategy employed by many bond managers.

State-chartered credit unions that are able to purchase investment grade corporate bonds may introduce some credit spread into their portfolios, taking advantage of any widening that may exist in the corporate sector of the curve. This strategy does introduce credit risk along with the higher yield opportunity. (Trans West's return includes losses related to a couple of World Com bonds).

Credit Union
Duration
Invests in…
Notes
Trans West 3-5 years
High Grade Corporate Bonds
No callable productsCredit Spread
John Deere Community 1.5-2 years
High Grade Corporate Bonds
Block CDs
Agencies, Corporates, CDs
Blended / Maturity Ladder
Western Vista 3-5 years
Mortgage Backed Securities
CMOs5-7 year balloons
Spread Products
 

 

 

Oct. 27, 2003


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