Repositioning The Balance Sheet

Known for its strong investment portfolio, Langley is now shifting its resources to loans. Here’s why.

Historically, the investment-savvy Langley Federal Credit Union ($1.7B, Newport News, VA) is known for pooling much of its resources in its strong investment portfolio. Starting last year, however, the credit union changed tact and partially dismantledits portfolio in order to focus more on lending activities.

In the past, we were more of an investment-oriented credit union, says CFO Greg Manweiler, who oversees Langley’s investment portfolio. And it worked fine several years ago when returns were five percent, but it doesn’t work so well now.

Since new CEO Tom Ryan came on last summer, the credit union has transitioned more of its resources from investments to loans, an area which Langley did not traditionally prioritize. The aim is not to further grow the balance sheet, but to repositionit. Ryan, Manweiler, and the Langley team have been making steady progress. With the new focus, Langley’s loan-to-share ratio has increased from 40% to 48%, which translates to more than $100 million.

Here, Manweiler speaks about the decision to focus on loans instead of investments, the adjustments this change causes, and future plans for the credit union.

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What are the changes at Langley for repositioning the balance sheet?

When our new CEO Tom Ryan came on, at that point, we just weren’t doing loans at all. We were selling everything from our mortgage portfolio to the secondary market, and our other loans were priced like the 1980s. They were high. We had second real estatesin the 9% level.

Tom is more of a lender. He’s come in and emphasized that we need to reposition our balance sheet here. Since he came on, we’ve increased our loan-to-share ratio from 40% to 48%, so that’s a pretty strong move, over $100 million. I’m very happy because,you know, our lending portfolio earns about 6%, and our investment portfolios are dealing at 0.78%.

That’s not the total story of the yield on investment portfolio because we do a lot of swapping, trading, that kind of thing. We probably double that weighted yield, so we’re doing like one and a half or something like that. But still, not 6%!

What’s the strategy in capturing more loans?

We have lowered a lot of our rates, and we’ve done a big recapture program where we’re asking people to trade their loan, not their car. That’s working out very well for us right now.

We’re also holding onto a real estate portfolio, which has been remarkably good, because we’re doing a lot of refinancing with 10-year, 15-year, and 20-year deals. We’ve had very little 30-year paper. Roughly speaking, we probably increased $20 or $30million in the mortgage portfolio, and we’ve only increased $2 million in the long-term.

A lot of financial institutions will sell off their 30-year loans to Fannie or Freddie, while keeping the 10-year or 15-year loans. Is that what Langley’s doing right now?

We’re keeping it all right now because we’re finding that the values we’re keeping the loan at are pretty good. Then again, we’re not doing that much in the 30-year range. We’re doing the majority of our stuff in the 15-year and the 5/1 ARMS. People inour area have been in their homes a long time, and the loan-to-value ratios are 50 or 60 percent. So they basically wanted to get a little more conservative. We’ve constantly got $30 million in the pipeline to do this, so we’re still running strong.

According to the Langley portfolio, your overnight position is 21%. Is that typical, or is that a shift to garner cash for more loans?

That’s about $200 million. My target is around $150 million. I lightened up at year-end, but I can be brought down to like $100 million. I used to have a tighter target, like $40 million, but because of the loan business, I’m trying to make sure I haveplenty of liquidity available. That’s why we’ve got a little bit more cash going in there right now.

The main thing is I want to make sure that we have money available for lending. We’ve also gone out and increased our credit. We’ve got a line of credit at Mid-Atlantic Corporate, and we’regoing through the application process for a line at Federal Home Loan Bank. In case we have other liquidity issues, we can go out and get some more money and match it up.

We may get some and match it up anyway. I don’t think we’ll ever broaden our investment portfolio completely out, but I’m expecting us to get between 60-70% loan-to-share ratio at some point.

Regarding the overall return on your investment portfolio, it looks like half is generated from interest income while the other half is generated from your trading acumen.

Absolutely. We’ve had some great years of doing that. A couple of years ago, we made $7 million with that. Last year, we made $3 million: $2.5 million of that came from with swapping agencies around, and we made another $500,000 trading. We do prettywell with that, but it’s still not enough to override what we can get in a loan, so a loan is more important.

What is Langley’s future plan for the balance sheet?

The focus for next year is to increase our lending by 15%. We increased close to 20% last year, so 15% seems very doable. It wasn’t a year ago. A year ago, we were lucky to hold onto our loans. Now, we’re watching our loans daily. We are having some success.We’re roughly doing about $40 million a month in gross, and it ends up being about a $20 million-a-month net increase.

We’re also trying to grow lower-cost, core stable products like our checking and regular prime shares on our liability side. We’d like to have low-cost accounts that stick around for a while. We’re trying to enhance those the checking accounts with mobilebanking and remote deposit capture and all these things that are sticky that might help us keep checking accounts.

We found that a relatively low amount of our members had more than just a savings account, so we’re working on that. We’re focusing on deepening our relationship with members, and we have a new way to add members. The checking accounts are also improving.

That’s our primary strategy for this year. The incentive is mostly based in those areas.

What does your investment portfolio look like now?

Our investment portfolio is mainly callable and bullet agencies from FHLB, FNMA, FHLMC, and FFC. About 25% from each agency. Our average investment portfolio duration is about 1 1/2 years today, but we’re shortening that duration by selling longer piecesto fund loan growth in 2013. We do not see much yield enhancement between two years out to 10, and we will eventually see rates rise. If rates rise, we will venture out on the yield curve again. As per usual, we will sell some of our portfolio intolower rate troughs and reposition that money into loans first and two-to-three year paper after loans. We will still keep a balance between the agencies.

You’ve been doing investments for awhile. What advice would you give to other credit unions looking to improve their yield and returns on their investment portfolio?

You know, anytime that the person overseeing the credit union portfolio starts getting caught up in sophisticated trading technique brought in by Wall Street or whatever, that’s when I see people being taken down. You’ve got to understand what you’redoing for yourself.

I’ve seen both large and small credit unions get caught up in the same kind of situation where they over-invest in something that they think is the greatest thing since peanut butter. But guess what things change. That greatest thing isn’t so hot anymore.

Over the years, we have found that we can get pretty good return with a simpler portfolio because we understand what we’ve got and how to buy and sell it. It does help when you understand your product. Sometimes, I don’t understand it at all and sometimesI make mistakes just like everybody else, but generally, we’re trying to find the truth of the matter even if that means we have to change.

June 3, 2014

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