All Investments Are Not Created Equal

Data shows how some credit unions are able to obtain a better investment return than others.
Andrew Bolton

Investment rates are at a record low, and credit unions across the country are deploying different ways to make the most of excess funds; however, it is difficult to find a solid return these days. Currently, the industry averages a 1.14% return on investments. That’s less than a quarter of what the industry average was in 2007. So what makes some strategies outperform others? A dive into data from the 5300 Call Report offers some guidance.

In the comparisons below, credit unions are divided into quartiles based on their investment return. The average asset size in the quartiles ranges from $88.1 million for the bottom quartile to $245.8 million for the largest quartile. The top quartile posted an average return of 1.63% as of Dec. 31, 2013. That’s 49 basis points above the credit union industry average and is more than four times the return of the bottom quartile.

INVESTMENT RETURN BY QUARTILE
Data as of December 31, 2013

Invest_Return

Callahan Associates |
Source: Callahan Associates’ Peer-to-Peer Analytics

The mix of the investment portfolio is a key driver of yields. As of Dec. 31, 2013, bottom quartile credit unions held 60.4% of their investments in cash compared to only 12.3% for top quartile credit unions. Credit unions in the top quartile have invested nearly the same proportion of their portfolio, 64%, in agency securities. Credit unions in the middle quartiles, meanwhile, have a higher proportion of their holdings parked at banks or savings loans approximately 16% for both quartiles compared to 8-9% for the extreme quartiles.

INVESTMENT COMPOSITION BY QUARTILE
Data as of December 31, 2013

Invest_Portfolio

Callahan Associates |
Source: Callahan Associates’ Peer-to-Peer Analytics

Maturities also impacted yields, with the credit unions that reached out further on the yield curve achieving the highest yields. The top quartile credit unions held 56.7% of their portfolio in three-year investment terms while the bottom quartile held just 11.8% of their portfolio in three-year durations. Overall, there has been a slight extension in the maturity profile of the entire credit union industry. Investments with durations of three years or longer now comprise 34% of the portfolio versus 25% in 2012. This is in part the result of the slowdown in mortgage prepayments and agency bonds no longer being called.

INVESTMENT MATURITIES BY QUARTILE
Data as of December 31, 2013

Callahan Associates |
Source: Callahan Associates’ Peer-to-Peer Analytics

Liquidity needs also play a role in the performance of credit unions in the different quartiles. With loan-to-share ratios of approximately 69% as of year-end 2013, credit unions in the top two quartiles are more liquid than credit unions in the bottom two quartiles. Credit unions in the third quartile posted a loan-to-share ratio of 72.2% while credit unions in the bottom quartile posted a LTS ratio of 75.5%. More liquidity among the higher performers gave them a larger portion of assets to invest compared to the lower performers.

If lending growth continues to outpace deposit growth, as it did in 2013 for the first time since 2007, credit unions will have fewer dollars to invest in the years to come. However, if rates start to rise in 2015 as the Federal Reserve anticipates then credit unions will enjoy greater returns on the investments they are able to make. Regardless, credit unions must remain vigilant when it comes to changing interest rates and balancing internal liquidity needs, as data shows members are looking to credit unions for loans more now than they have in recent years.

March 10, 2014

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