The credit union investment portfolio topped $383 billion as of September. Although the portfolio’s growth has slowed over the past year as loan growth has accelerated, credit union liquidity has nearly doubled since 2007. Investments account for nearly 37% of the industry’s balance sheet today.

The increased liquidity comes at an unprecedented period of low interest rates. It has been more than four years since the Federal Reserve dropped the Fed Funds target rate to near zero and the Fed’s own expectation is that rates will stay in this range for at least another two years.

ASSET COMPOSITION
ALL U.S. CREDIT UNIONS AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates' Peer-to-Peer Software.

With credit unions’ net interest margin falling to 2.96%, every basis point matters. Yet the average investment yield has dropped 34 basis points over the past year to 1.32%. In an environment characterized by high liquidity and low rates, effective management of the investment portfolio has become an important part of the credit union business model.

A Wide Range of Investment Performance

Given the low rate environment, it would be understandable to expect a relatively narrow range of investment yields across credit unions. However, there is actually significant variance among institutions, reflecting different portfolio compositions. In fact, the top quartile of credit unions by average investment return generate an average return of 1.92%, over six times the 31 basis point average return generated by the bottom quartile.

THE TOP CREDIT UNION INVESTMENT PORTFOLIOS SIGNIFICANTLY OUTPERFORM THE BOTTOM
Return on Investments
ALL U.S. CREDIT UNIONS AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates' Peer-to-Peer Software.

Asset size is a factor but not a significant one in the performance difference. The average asset size of the credit unions in the top quartile is $215 million while the bottom quartile is $86 million. The asset range of each quartile is similar, so much so that each of the four largest credit unions fall into one of the four performance quartiles.

A more critical factor is the way the portfolios are managed. The bottom quartile of performers maintain a much shorter investment portfolio on average with 77% of investments maturing in less than one year. By contrast, only 31% of the portfolio in the top quartile is maturing in this range. The top quartile allocates 37% of their portfolio to investments maturing in more than 3 years, nearly five times the 8% allocation of the bottom quartile.

PORTFOLIO MATURITY VARIES SIGNIFICANTLY
ALL U.S. CREDIT UNIONS AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates' Peer-to-Peer Software.

In terms of type of investment vehicles, the top quartile of credit unions hold 14% of their portfolio in cash and equivalents while the bottom quartile holds 60% of their portfolio in these short-term investments. These percentages are flipped when looking at the proportion invested in Federal Agency securities. The top quartile directs 63% of their portfolio to Agencies while the bottom quartile allocates only 19% to this category. Certificate investments in banks and savings & loans are similar, 9% for the top quartile and 8% for the bottom quartile.

THERE ARE CLEAR PORTFOLIO COMPOSITION DIFFERENCES BETWEEN THE TOP AND BOTTOM QUARTILES
ALL U.S. CREDIT UNIONS AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates' Peer-to-Peer Software.

There are certainly more factors to consider when determining what is the “right” investment strategy for a credit union. Liquidity, balance sheet composition and risk tolerance each influence how an investment strategy is developed and executed. It is clear from this high level analysis though that portfolio strategies matter, perhaps today more than ever.