First Tech Federal Credit Union ($6.5B; Mountain View, CA) brought investment expertise to its executive team in 2013 when it hired Marangal “Marito” Domingo to serve as its chief investment officer. For First Tech, Domingo manages $2.1 billion in securities out of a $5 billion balance sheet. Here, the CIO talks about investment responsibilities and the distinct responsibilities that come with managing a credit union portfolio.
How much cash does the credit union keep on hand to meet liquidity needs? How is this different compared to the non-credit union financial institutions you worked with before joining First Tech Federal?
Marito Domingo: Credit unions are here to meet the needs of their members and a lot of that is dealing with consumer needs, meaning withdrawals and deposits. Even the loans we make are a lot smaller than a typical commercial bank, so the amount of liquidity we need every day is a lot smaller. We plan cash-out, so we’ll look at it a month to six months out and we’ll plan our cash needs accordingly.
We plan our level of cash based on the forecasted needs of our membership. At any point in time it could be one percentage point on the balance sheet, it could be a lot higher depending on several factors. Is it tax season and we’re expecting withdrawals to come in? Or is it payday and we’re expecting a lot of deposits to come in? In some cases, we don’t keep a lot of cash when we’re expecting big deposits. We’re SEG-based, so payroll is important to us and we plan our cash needs accordingly. Planning becomes a lot easier in that sense.
But more important than cash is the amount of liquid securities you keep and making sure you have securities readily available for sale. It’s the mixture of cash and the amount of liquid securities you have, that’s really what we use to plan over the next six months.
Do you run a laddered approach to managing the portfolio?
[Writer’s note: Fixed-income securities in a bond ladder have maturity dates that are spaced across several months or years. This allows the institution to reninvest the proceeds of matured bonds at regular intervals.]
MD: We do more than the laddered approach. If the portfolio is just one of your many jobs at the credit union than the laddered approach always makes sense. The laddered approach has a simple elegance to it; a lot of credit unions should be following that. It really depends on your ability to focus on the portfolio itself, but If you can be a little more sophisticated and invest in other instruments, perhaps increase your term — that’s what we do — then you’re going beyond the laddered approach. When you’re doing that, you have to make sure you’re forecasting the cash outflow and the cash inflow from the securities in different scenarios. You’re always testing to make sure you know the minimum cash and the maximum cash you can expect. Then you plan accordingly.
Do you manage municipals, corporates, or any type of securities where there is credit risk on your own?
MD: When you are doing securities that are not government guaranteed, you have to understand the credit risk, whether it’s you doing the work or an advisor doing the work. If it’s an advisor, you still need to review the work and make sure you’re comfortable with that decision.
The reality is, credit unions make credit decisions every day with their members. They have to evaluate the ability of the borrower, in this case the issuer of the security, to pay you back. Those same principals apply. Many credit unions might say they don’t have the skill set to do that, but it is the same basic knowledge they have with a loan where you’re either looking at collateral or cash or character, all these things are important and apply to securities as well.
NCUA is currently concerned with making sure large credit unions are prepared for eventual higher rate. What steps is First Tech taking to prepare for higher rates?
MD: You can certainly structure the investment portfolio so that as rates rise the yield on the portfolio rises, protecting your members from some of the interest rate risk. From a loan standpoint, many credit unions do a lot of short-term loans like auto loans, which helps interest rate risk. Many credit unions understand how to avoid risk.
Credit unions support their communities by investing locally, for example, buying municipal bonds in their geographical area. How do you balance supporting your community with buying assets that might have a higher yield?
MD: Municipal bonds actually carry slightly higher yields than, for example, an agency bond. So there is that credit component to it that gives it a higher return. Like everything, if you buy something local, it’s easier to make a credit decision. For example, it might be a school bond that is based on the collection of real estate taxes within the community. So if you’re operating in that community, you know the community is strong. If real estate taxes and collections are expected to stay the same or grow because property prices are going up, then it’s easy to make a credit decision to support your local school.
Like everything else, you don’t want to put all your eggs in one basket. So you might allocate a certain percentage of your investment portfolio in this manner for supporting the local community. That’s what we do. We only allocate a small percentage of our total investment portfolio in municipal bonds, but we certainly support a lot of the educational efforts of a lot of these communities.
Hear more from “Marito” Domingo and read about First Tech's approach to investments.