Credit Unions Are Redirecting Investments To Fund Loans

Cash and investments at credit unions was down at year-end 2018 as credit unions reallocated funds to fulfill loan demand.

 
 

Credit unions held $350.6 billion in cash and investments at year-end 2018. Largely because of declining Fed balances and cash at corporate credit unions, that’s down 4.1% from $365.6 billion in 2017.

As of year-end 2018, credit unions held 61.0% of all investments in federal agency securities, which includes available for sale securities, government obligations, and agency debt instruments, among others. At $213.8 billion, credit unions decreased the amount they invested in this segment 1.7% year-over-year.

Cash at the Federal Reserve rose 0.4% quarterly, from $60.9 billion to $61.2 billion, and accounted for 17.5% of the portfolio. On an annual basis, this segment contracted 7.5 percentage points as credit unions reallocated cash to fulfill loan demand. Additionally, cash at corporate credit unions fell 5.4% from one year ago and 1.8% from the third quarter.

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Credit unions reported the largest decrease of any investment category in bank notes, which was down 14.2% year-over-year and 5.6% from the third quarter. However, at $29.4 billion, the segment still comprised 8.4% of the credit union investment portfolio, making it the third-largest segment.

Maturities of investment portfolios at U.S. credit unions also shifted in the fourth quarter of 2018. Investments maturing in fewer than three years fell 23 basis points quarter-over-quarter; those maturing in more than three years decreased 2.6 percentage points. As such, the percentage of the portfolio allocated to investments of fewer than three years increased 57 basis points to 72.6%. Looking ahead, institutions are well-positioned to benefit from future rate increases.

Despite declining investment balances, income from investments grew 19.2% year-over-year to $7.1 billion. The average yield on investments increased 38 basis points annually to 2.04% as of Dec. 31, 2018.

Finally, borrowings increased $3.6 billion, or 6.4%, annually to $59.4 billion. Draws against lines of credit made up the majority of the borrowing portfolio at 60.4% with other notes, promissory notes, and interest payable collectively accounting for the remaining 37.9%. Borrowings maturing in fewer than one year made up the majority, at 47.7%.

LEADERS IN AVERAGE INVESTMENT YIELD

FOR U.S. CREDIT UNIONS >$100 MILLION IN ASSETS | DATA AS OF 12.31.18
© Callahan & Associates | CreditUnions.com
Rank Credit Union State Yield On Total Investments* Investments
>1 Year
Total Investments/
Total Assets
Total Investments Total Assets
1 BCU IL 9.63% 29.45% 6.80% $236,827,677 $3,483,865,083
2 Baton Rouge Telco LA 7.83% 23.85% 4.16% $12,359,944 $296,885,820
3 State Employees Credit Union Of Maryland MD 7.43% 42.98% 5.56% $202,677,093 $3,642,602,360
4 KeyPoint CA 7.06% 71.05% 13.46% $173,302,001 $1,287,096,151
5 Centris NE 6.45% 45.38% 3.34% $23,901,704 $714,892,362
6 InTouch TX 5.64% 72.34% 9.13% $82,889,404 $907,799,272
7 State Employees NM 5.22% 78.64% 5.98% $34,080,131 $569,598,930
8 GTE Financial FL 5.19% 9.14% 4.33% $90,466,920 $2,087,847,517
9 CME OH 5.04% 54.95% 7.83% $21,698,416 $277,202,727
10 New Dimensions ME 5.00% 10.01% 10.03% $16,050,109 $160,090,993
* Excludes non-operating gains/losses.

Case Study: Short-Term Assets Grow In Allure

CU QUICK FACTS

United Methodist Financial Credit Union
Data as of 12.31.18

HQ: North Canton, OH
ASSETS: $83.2M
MEMBERS: 4,212
BRANCHES: 3
12-MO SHARE GROWTH: -1.86%
12-MO LOAN GROWTH: 10.42%
ROA: 0.48%

Rising rates have flattened the yield curve, giving credit unions more bang for their buck in short-term investments and pushing many away from long-term investments.

“When you look at the yield curve, there’s not that much difference between the short term and the long term,” says Russ Abbott, CEO of United Methodist Financial Credit Union.

But rates won’t stay down forever. In 2018, the Federal Reserve increased its federal funds rate four times to a range of 2.25 – 2.50%. In light of these rate changes — and other regulatory and economic factors — some credit unions are re-examining their investment portfolios for the first time in years.

United Methodist Financial ($83.2M, North Canton, OH), for example, has worked to re-allocate the maturities in its investment portfolio. Bucking the industry trend, at its peak in 2015, the credit union held nearly 70%, or $46 million, of its investment portfolio in assets with durations greater than five years and 5%, or $3.3 million, in assets with durations less than one year. After all, longer — i.e., riskier — investments yielded better returns. 

“We’re compensated based on the risk we take,” Abbott says.  As of the fourth quarter of 2018, however, the credit union was more aligned with the industry. The Ohio cooperative held 2% of its assets in durations greater than five years and 31% in durations of less than one year.

Regulatory factors played a role in the portfolio change, too. Effective Jan. 1, 2017, the NCUA adopted a standardized measurement of interest rate risk that includes updated tolerance thresholds in the Net Economic Value (NEV) Supervisory Test. NEV is a capital-at-risk measure designed to identify potential longer-term threats that could adversely impact net worth and is used widely by credit unions for risk management and ALM modeling.

“We were trying to get our NEV in check,” Abbott says.

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May 27, 2019


Comments

 
 
 
  • "Looking ahead, institutions are well-positioned to benefit from future rate increases." Classic example of credit unions leaving income and capital on the table to protect against "rising rates" when there is no expectation in the market for rate increases this cycle. Managing to the NEV Supervisory Test exacerbates this issue. Too bad, cycle after cycle, most never learn.
    Anonymous