How to become more profitable with the assets you currently have. You wouldn’t be talking merger if you were profitable, would you?
For the last few years, we’ve been told that rates are going to go up “soon” and we should stay short on our investments. Those that moved, or stayed shorter with their investment terms have paid dearly for this strategy. A review of two similar sized groups of credit unions in California show the results of different investment strategies (both groups have around 50 credit unions). Let’s examine the $20 Million to $50 Million group and the $50 Million to $100 Million group of credit unions as of year-end 2012:
The $20-$50 group had average investments of $19 Million, with an average yield of 1.30%
The $50-$100 group had average investments of $34 Million, with an average yield of 1.33%
Just like putting one foot in freezing water and the other in boiling water – the average yield does not describe the situation (or pain you would be in).
When you look at the term of the investments held by each group though, you will see vast differences in yields.
For those credit unions without any investments in the 3-year+ bucket, their yields were very much below the average: 0.66% for the $20-$50 group and .81% for the $50-$100 group. The average credit union realized $122,000 and $176,000 per year more investment income over the $0 in the 3-year+ group.
Would that have made the difference between having a profitable year and a year in the red to your credit union?
The nice part about increasing investment income is that it does not cost the members any fees or drive up your expenses. We all work hard on making loans because they yield higher than investments, but with the amount of excess funds we carry; it’s high time to make them work harder for you!
There were some high-performers in both groups that realized over 2% yield on investments for 2012. While the average investments in the 3-year+ bucket were 18% and 24% respectfully; those with over 2% yield had 41% and 42% of their investments with maturity terms in excess of 3 years. Their respective average yields were 2.45% and 3.07% for all of 2012!
Consider this: If you are currently earning 0.66% on investments; after three years you will have accumulated 1.98% return (with some additional compounding). The high-performers would have accumulated 7.35% and 9.21% of yield. Rates would have to increase by over 5% at the end of 3 years to even come close to breaking even in year 4. Moreover, it’s not like the high-performers would be sitting still during this time.
Winning the yield game takes time and it takes timing. Credit unions expanding their investment horizons now will not earn the highest yield like the high-performers have (those investments were purchased some time ago). However, it’s never too late to move out the curve and earn more than you currently are. This is especially true of those credit unions with $0 investments in the 3-year plus bucket.