This is an excerpt from the Investments & Borrowings section of Callahan's 2010 Credit Union Directory. To view a 'sneak peek' at this year's Directory, please visit the Directory homepage.
The credit union investment portfolio has been a source of balance sheet growth in 2009, up 18.5 percent over the past year to $261.2 billion. Through June, credit unions saw record annual share growth, but slowing loan growth, leading to an increase in liquidity and investable funds.
Government and agency securities remain the largest component of the investment portfolio at $104.6 billion, followed by investments in corporate credit unions, which totaled $76.8 billion in June. Investments in banks and S&Ls are the fastest growing category, up nearly 40 percent from June 2008 to $35.5 billion.
With the Federal Funds target rate remaining between 0-25 basis points through the first half of 2009, the investment portfolio yield has fallen, down to 2.19 percent from the 2.91 percent reported the previous June. The income generated from these investments declined 20.5 percent annually due to the historically low rate environment.
Due to this shift in the yield curve, credit unions have moved out of long-term investments over the past twelve months and into shorter maturities. The percentage of the portfolio maturing in less than one year now accounts for a majority of the investment portfolio, currently standing at 55.5 percent, up from 46.9 percent a year ago. Investments maturing in more than three years have declined as credit unions adjusted their investment strategies. They now comprise 16.6 percent of the portfolio as of June, down three percentage points over the past year.
First Person with Jeff Greenert, Senior Portfolio Manager, Vystar Credit Union
"Balancing the structure of assets and liabilities is a juggling act. For example, when rates are low, members prefer 30-year fixed-rate mortgages rather than ARMs, the opposite of what we'd want from an asset-liability perspective. Like that of other credit unions, Vystar's balance sheet is made up mainly of its variety of lending and deposit options such as those mortgages, so it's the investment portfolio we use to balance our overall assets/liabilities structure. We make Investment decisions based on how the security fits within the portfolio and the balance sheet.
As a portfolio manager, I may find an exciting opportunity in a certain mortgage security or position on the yield curve. Most of the time I have the flexibility to execute these strategies but occasionally, after discussions with the Finance Manager or CFO, we agree that despite the upside, the security does not fit within NEV risk or NII needs of the credit union. At some point, particularly in this rate environment, we may find ourselves forced into an investment dilemma. Faced with limited loan growth and high charge offs, the investment portfolio is likely to be a principal driver to earnings over the next 12 – 18 months. Having managed balance sheet investments most of my career, I have found two keys to long-term success:
- Identifying upfront the risks in an investment and portfolio, and
- Understanding an organization's business model and risk tolerance, then keeping these two in perspective.
Bear in mind that simple investment strategies of the past are unlikely to produce the required investment returns needed to retain and attract members in the future. So investment managers need to keep abreast of new securities and techniques. And they need to have the resources to successful Simple investment strategies of the past are unlikely to produce the required investment returns needed to attract and retain members in the future."
Learn more about the credit union industry's investments & borrowings performance in Callahan's 2010 Credit Union Directory:
- Find those top-performing credit unions in leading investment measures including Investments-to-Assets, Average Investment Yield, and Borrowings-to-Assets
- Read Mr. Greenert's full perspective on credit union investment opportunity in 2010
- View a complete profile on credit union investments including 5-year trends in Total Investments, Total Borrowings Outstanding, and Average Investment Yield.