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The investment portfolio for U.S. credit unions decreased 2.1% year-over- year to $372.8 billion as of third quarter 2017.
Quarter-over-quarter, credit union investments shrank 3.0% as credit unions diverted assets from the investment portfolio to the loan portfolio. Those efforts to fuel increasing loan demand helped the industry originate $125.4 billion in the third quarter alone. The industry loan-to-share ratio rose 2.8 percentage points quarter-over-quarter to reach 81.3%. Given seasonal member loan demand, the third quarter of the year is typically a time to focus on lending operations.
Credit unions reported quarter-over- quarter declines in almost every investment category. Notably, credit unions held $19.6 billion in cash at corporate credit unions as of third quarter, down from $21.4 billion in the second quarter of 2017. This is representative of a popular liquidity management strategy by which credit unions invest and hold cash in corporate credit unions with strong first quarter deposits and then draw against that to fund loan demand in subsequent quarters.
Mutual funds were the only investment category that significantly increased. Those jumped $220.7 million from the second quarter to the third; however, at $2.3 billion, they represented only 0.3% of the industry’s investments. As the economy continues to feel the effects of the Federal Reserve’s interest rate increases, credit union investment in mutual funds might continue to rise.
Although total investments were down, yield on investments was up 7 basis points over last quarter to 1.61%. This bump translated to an annual increase of 29 basis points. Yield is now the highest it has been since Dec. 31, 2011.
Click the graphs below to enlarge and then continue reading to see why Shoreline Credit Union is going a bit longer in duration and lighter on cash in its investments portfolio.
Although total investments have declined at U.S. credit unions, yield on investments have climbed across the industry. The bottom 20th, median, and top 20th were all up — 7,6, and 5 basis points, respectively — since second quarter 2017.
SHORELINE CREDIT UNION
Shoreline Credit Union is going a bit longer in duration and lighter on cash in its investments portfolio to make up for $1 million a month it used to do in indirect lending.
Shoreline’s investment portfolio dipped in 2014 as it bought loan participations to make up for plummeting loan income as it began exiting indirect lending and shedding expenses.
Now, there’s a new emphasis on traditional lending and an investment portfolio that’s a laddered mix of traditional certificates and municipal and agency bonds — many of them with longer maturities than average — to provide an income flow that is providing a better than average yield.
“We can take more risk because we understand our liquidity position and cash flow so well, and our regulators have been happy with it,” says president and CEO Nathan Grossenbach.
Shoreline’s investments strategy gives it a different investment maturity profile than the credit union industry as a whole. For example, the industry total for cash and cash equivalents is 27.3%, compared with a relatively light 8.6% for Shoreline. For maturities in the one- to three-year range, the industry is at 24.2% and Shoreline is at 40%.
This has occurred as the credit union’s investment in government and agency securities soared 722% in one year, from third quarter 2016 to third quarter 2017, while simultaneously new and used auto loans plummeted 30.35% and 16.60%, respectively.
Opportunistic investing buttressed by savvy in-house ALM has helped Shoreline keep in the black while it pivots its lending strategy backs to its roots as a community credit union with deeper member relationships than typically afforded by an indirect loan.
Read The Whole Story
Credit unions have made significant gains since the Great Recession started 10 years ago. Third quarter credit union growth trends surged past that of community banks and the overall banking industry. Measures such as loans, shares, capital, and membership have all reached new levels. These gains are all notable and meaningful; however, they are backward-looking. The important question to ask is: Where will credit unions be in the next 10 years? In this issue of Strategy & Performance, learn why now is the time for credit unions to challenge themselves.
The data in this article was pulled using Callahan's Peer-to-Peer software. Learn more about Peer-to-Peer.
RETURN TO INDUSTRY PERFORMANCE BY THE NUMBERS 3Q 2017