Langley FCU's New Focus Helps Shore Up The Balance Sheet

How the Virginia credit union re-arranged its investments to accommodate 34% loan growth.

 
 

During the recent economic downturn, many financial institutions tightened lending standards in an effort to hedge against potential risky business. Langley Federal Credit Union ($1.8B; Newport News, VA), for example, downsized its lending portfolio in the middle of the recession at the behest of CEO Jean Yokum.

“She got worried about lending,” says Greg Manweiler, chief financial officer at Langley. “We priced things up and weren’t making many loans.”

But as the downturn continued, all institutions had to consider alterative ways to drive balance sheet growth. Langley turned to investments to feed its balance sheet during lean times.

CU QUICK FACTS

LANGLEY FCU
data as of 12.31.13

  • HQ: Newport News, VA
  • ASSETS: $1.8B
  • MEMBERS: 186,136
  • 12-MO SHARE GROWTH: 0.95%
  • 12-MO LOAN GROWTH: 34.15%
  • ROA: 0.32%

“There was a time when investments paid about the same as loans,” says Greg Manweiler, chief financial officer at Langley. “Four to five years ago you could get 4-5% on an investment and you would get 4-5% on a loan. As far as income and the credit union member is concerned, it was more or less a wash.”

So as the credit union pulled back on lending, it ramped up on investing. Langley held an all-time high of $1.05 billion in investments as of March 31, 2012, according to Callahan & Associates’ Peer-to-Peer analytics. At the end of 2012, Langley’s investment-to-asset ratio was 52% while its loan-to-asset ratio was 41%. The average for its asset-based peers is 32% and 63%, respectively, in those areas.

INVESTMENTS-TO-ASSETS RATIO
Data as of December 31, 2013
for Langley versus credit unions $1B+ in assets
© Callahan & Associates | creditunions.com

Investments-to-Assets-Ratio-Comparisons

LOANS-TO-ASSETS RATIO
Data as of December 31, 2013
for Langley versus credit unions $1B+ in assets
© Callahan & Associates | creditunions.com

Loans-to-Assets-Ratio-Comparisons

Source for both graphs: Callahan & Associates’ Peer-to-Peer Analytics

When Yokum retired in July of 2012, Tom Ryan, executive vice president and chief operating officer of Digital Federal Credit Union, took the helm and made lending a top priority. While at Digital, from 2009 through 2011 the credit union's loan-to-asset ratio never dipped below 85%. Langley was in for a change.

“He immediately steered the credit union toward [lending],” Manweiler says. “The whole credit union was pretty eager to go that way because we had built up a nice capital, over 12%, and we wanted to give some money back to our members.”

Yokum’s retirement presented the opportunity for Langley to address its balance sheet priorities. In addition to the shift in leadership, a shift in investment performance bolstered the decision to move away from less-profitable investments toward more profitable loans. In 2009, the credit union made more than $20 million in interest from investments according to Search & Analyze data on CreditUnions.com. In 2011, that figure barely topped $9 million. In 2012, it was closer to $6.5 million.

“Right now, lending is more attractive and investing is not as attractive, but there have been times where it’s been the other way,” Manweiler says. “That’s not saying it was right or wrong to [invest instead of lend], but if you are sitting there, like we were, with $1.5 billion and only had lent out $500,000, you have to do something with your money.”

Changing The Sheets

Lending to members has long been a key tenet of the credit union mission, and early returns on Langley’s lending focus have been positive. As of Dec. 31, 2013, the credit union holds more than $960 million in total loans, a 34% increase year-over-year. More than half of its total loans reside in shorter-term autos, a 45% increase year-over-year and the predominant driving factor of loan growth.

TOTAL LOANS VS. TOTAL INVESTMENTS
Data as of December 31, 2013
© Callahan & Associates | creditunions.com

Langleys-Total-Loans-vs--Total-Investments
Source: Callahan & Associates’ Peer-to-Peer Analytics

At the same time, the credit union has steadily liquidated much of its investment portfolio. Langley now holds $792 million in investments, including $330 million in cash  —  a $120 million increase year-over-year — and $430 million in government and agency bonds — a 40% decrease year-over-year.

INVESTMENT PORFOLIO COMPOSITION FOR LANGLEY FCU
Data as of December 31, 2013
© Callahan & Associates | creditunions.com

Langleys-Historical-Investment-Portfolio-Composition
Source: Callahan & Associates’ Peer-to-Peer Analytics

Whereas Langley previously relied on seven- to 10-year investments in search of yield, according to Manweiler, the credit union has liquidated much of its long-term portfolio. It has reinvested some of that at terms of three years or less or is holding it in cash. As a result, the credit union’s risk based net worth has dropped — from 6.82% in December 2012 to 5.87% in September 2013, the last data cycle for which that information is available.

Before, Langley never held as much as $300 million in cash on its balance sheet at one time. Now, the credit union plans to use some of its $330 million cash balance to support its forecast of another 15-20% growth in the lending portfolio this year. That cash also remains an important  source of reserves should something unexpected occur.

“We are comfortable with our cash,” Manweiler says. “We’ve done a lot of liquidity analysis, and we’ve got to have that much money with our growth in loans. And if rates start going up, we might start to lose some of our deposits. We need to be mindful of that too.”

Although the credit union is happy with its new focus and performance, the transition from a so-called “investment club,” according to Manweiler, to one that primarily deals with loans was not without its challenges. While the credit union was in the middle of liquidating investments, the bond market shifted up, driving the 10-year yield from 1.8% to 3%, which “basically put all of our securities underwater,” he says. But instead of liquidating them at a loss, Langley borrowed $100 million from the Federal Home Loan Bank of Atlanta, using the investments as collateral, to ensure its balance sheet remained liquid enough to make loans. The FHLB funds allowed the credit union to wait until yields came back down, at which point the credit union liquidated some investments at a minor loss and even some gains.

What was the net result of the strategy?

“We’ve not lost anything,” Manweiler says.

Langley’s workplace culture has changed along with the flip of its loan-to-asset and investment-to-asset ratios — which are now 52% and 42%, respectively.

“People on the front line weren’t doing a lot of lending [before], so they’ve had to step up,” Manweiler says. “They’re processing loans. They’re collecting loans. It’s hit every part of the credit union and the culture has changed 180 degrees.”

 

 

 

March 10, 2014


Comments

 
 
 
  • I met Tom Ryan at a VISA meeting and I was impressed. I'm glad to see the credit union is back lending to members. Even if investment yields are attractive, the first call on liquidity is to make loans to members.
    Henry Wirz
     
     
     
  • Nice article! As a member of the Marketing team at Langley, I can say it is very exciting to see our impressive gains in loans - and membership as well. It's even more gratifing to know for every loan made there's a Langley member enjoying a new car, a new or remodeled home, a new or revitalized business, a college education, a credit card - in short, enjoying a more abundant life.
    Gary Hudgins