June 24, 2010                                                                 

                                                                                        

Credit Unions Respond to $19 Billion

In Additional Liquidity

 

Cash May Dominate, But Agency Securities Are Seeing Vigorous Growth

 

 

Dallas--A flood of deposits has sparked record-setting investment activity through Southwest Corporate's advisory and investment services, as credit unions seek to find alternatives to cash for their investment dollars.

 

Nationally, credit union member deposits increased by more than $20 billion in the first quarter of 2010, according to NCUA 5300 Call Report data. Credit unions have only been able to lend about $1 billion of the “new money” to their members, leaving credit unions in a quandary about what to do with the remaining $19 billion.

 

This flood of cash into credit unions came despite many credit unions' continued efforts to tighten deposit pricing. Further challenging credit union management, investment yields continued to decline.

 

What impact has a flood of cash, weak loan demand and incredibly low investment yields had on portfolio decisions? Of the $19 billion in added liquidity, credit unions kept $11 billion in cash, increasing their cash positions to 8.79% of assets – the highest level in two years. The remaining $8 billion was placed predominantly in agency bonds.

 

U.S. credit unions increased agency bond holdings by 12 percent in the first quarter alone, according to NCUA statistics. Agency bonds totaled $120 billion, or 38 percent of all credit union investments.

 

The same trends played out at Southwest Corporate, according to Mike McGinnis, SCIS director of investment sales. Certificate balances remained constant through the first quarter, while overnight deposits increased by $1.5 billion, he said. Bond investments soared over the same period.

 

McGinnis also noted that many new credit unions have been adding securities to their policies and portfolios, both through the SCIS advisory service -- which has more than $10 billion in investments under advisement -- and through Southwest Corporate's brokerage department, which is on track to place more than $1 billion in bonds this year through its partnership with CU Investment Solutions, Inc. (ISI).

 

"We saw a significant increase in credit unions placing bond investments through our advisors and investment officers. In fact, total bond holdings purchased through our advisory service increased to $3.53 billion, the highest level in our 22-year history," said McGinnis.

 

In addition, Southwest Corporate has experienced an increase in holdings with optionality and with maturities of between one to five years, he said.

 

"When positioned properly, these securities can positively impact the portfolio and the overall balance sheet. It is critical, however, that credit unions monitor cash flows and interest rate risk, as we anticipate a rising rate environment in early 2011," McGinnis said. "Because many credit unions are focusing on yield, we are ardently counseling investment managers to closely evaluate the impact of callable instruments and the prepayment/extension risk of mortgage-backed securities." 

 

Many credit unions without the staff resources to manage credit union investments are turning to SCIS' advisory service to obtain low-cost, turnkey portfolio management and assistance with balance sheet strategy. Other credit unions that manage investment portfolios in-house often look to their corporate investment officer as a trusted source for competitive bond pricing and easy execution of transactions.

 

"As liquidity has increased over the last 18 months, Southwest Corporate members have added more than 120 investment services, ranging from advisory assistance to ALM analysis to the purchase of bonds and bank CDs through our investment officers," McGinnis said. "In these challenging times, Southwest Corporate is pleased to see credit unions expanding their relationships with us."

 

For more information, contact McGinnis at 800.301.6196 or by email at contactis@swcorp.org.

 

All securities are offered through CU Investment Solutions, Inc. (ISI). The home office of ISI is located at 9701 Renner Blvd., Suite 350, Lenexa, KS 66219.  ISI is registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934.  ISI also is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered by ISI are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.