If you can't trust corporate credit unions, who can you trust? That's a question percolating through the credit union universe as natural person credit unions face up to the reality that they probably will have large amounts of cash on hand that needs to be stuck someplace. And as good as CDs may be for some of it, the dismal returns offered are not likely to creep much higher in the next year. So, where to put the money?
"The corporate credit union model is changing quite a bit. More investing will be done by the credit unions on their own. But traditionally credit unions haven't done much investing on their own," said Jim Toliver, president of Balance Sheet Solutions, which recently launched a series of programs to help credit unions do their own investing. "The challenge credit unions will have is knowing how to determine which investments are safe. They will need to develop a sophisticated investment discipline," he added.
Know that the challenge just may be getting bigger, mainly because lending is stifled and credit unions that are making home mortgages in volume are preferring to sell off those loans, especially the long-term fixed-rate paper. "We don't want duration risks, so we sell off 30-year fixed-rate mortgages," said Joe Schroeder, CEO of Ventura County Credit Union in California.
One upshot is that Schroeder's credit union has around $190 million he needs to keep invested, and none of that is going into corporates.
"We never made heavy use of corporates anyway," said Schroeder. "For overnight investments yes, but now we don't use them for that, either." Added Schroeder: "As credit unions become cash rich, the need for investment income grows and finding it gets more challenging."
That is why Schroeder's credit union works closely with an investment adviser to pinpoint where the credit union should park its money.
Randy Thompson, president of Thompson Consulting and Training, said turning to a good adviser is at the top of the to-do list for credit union leadership. "The most important step in creating an investment program is choosing a good investment adviser," said Thompson. "Small credit union CEOs are spread thin. They can't do this without an advisor or two. Acknowledging your limitations."
Where to find an adviser? Thompson suggests asking fellow credit union executives. Who has produced results long term? Who understands the particular needs of the small and mid-sized credit union? That is how to identify advisers with a track record who also have credible references, Thompson said.
"But," warned Thompson, "don't just turn the investment portfolio over to the adviser. School yourself on investment vehicles. Take charge of your credit union's investment strategy."
Shaping a strategy that suits an individual credit union is at the heart of what Tom Hammond, executive vice president and chief financial officer at NMTW Community Credit Union in Massachusetts, said has let him get results with his credit union's $215 million investment portfolio. "We consciously look for singles and doubles, we are not swinging for home runs," said Hammond, who elaborated that key is knowing what risks you are comfortable with as well as what your strengths are. "We are not professional money managers. We are not Goldman Sachs bankers. We are not looking for exceptionally high returns. We want solid returns, but we stick to what we understand and are familiar with. We do not and never have invested in exotic tranches of crazy mortgage-backed securities. That is not who we are."
"We continuously monitor our portfolio and the results we are getting," said Hammond, who added that he does not hesitate to shift investments when results disappoint or he sees other reasons to worry. Don't get locked into positions, he stressed, but do check into how the investments are performing and what needs to be modified to stay in sync with the credit union's investment objectives.
"All this takes work," added Thompson. "It takes a lot of effort to sustain a successful investment program."