On-Site Coverage: Leveraged Borrowing Could Pay for NCUA Assessments
New Orleans -- If a $1 billion credit union borrowed $100 million in strategically laddered advances from the Federal Home Loan Bank, and invested those funds in low-risk mortgage pools, it could add as much as $600,000 to interest income in the first year.
CNBS CEO Brian Hague shared that duration mismatch strategy and others during his breakout session this morning at the CUNA CFO Council's annual conference. The New Orleans event runs through Wednesday.
Hague said his clients are increasingly asking for ways to pay for short-term needs like impending NCUA assessments and whole loan losses. Thanks to low loan demand, many have transferred excess overnight funds into term securities, he said.
Credit unions may have to borrow to cover SEG payrolls as a result, he said, but when yield curves are steep and borrowing costs are low, "you can do that and still pick up net yield."
Each strategy was modeled to measure NEV risk changes using NCUA's metrics. While using excess deposits to fund investments increased NEV risk, leveraged borrowing decreased NCUA's risk categories, some even significantly.
None of the strategies would significantly decrease net worth either, he said.