How Can you Optimize the Excess Liquidity on Your Balance Sheet?

How Can you Optimize the Excess Liquidity on Your Balance Sheet?

It’s a time like never before. Loan demand is off, as refinancing slows, CU non-interest income will suffer, consumer spending is constrained, and loan growth is stale. As a credit union, what can you do? Since credit unions are swimming in cash, have you thought about how you can use alternative investments to offset employee benefits costs and increase charitable giving? 

As a credit union, you have a ton of regulations you must follow when it comes to your investment portfolio. With those limited options, it is challenging to find compelling ways to put that money to work in today’s environment.

At Newcleus CU Advisors, we help our credit union clients look across the landscape to find alternative ways of generating income. Whether this means taking advantage of a new fintech capability or using a broader array of investments to generate extra yield, our team is uniquely positioned to offer alternatives outside the scope of those capabilities you’ve already seen.

As you continue to look at deploying your excess liquidity, you should consider two major areas of alternative investment options.

Excess Liquidity

Offset Employee Benefit Costs

Utilizing a 701.19 investment program allows you to help offset employee benefit costs by allowing you to invest outside traditionally permissible investment options. These plans can help offset employee benefit obligations, including:

  • Healthcare expenses (including post-retirement benefits)
  • 401(k) matching contributions
  • Long & short term disability premiums
  • Group life and AD&D insurance premiums
  • Dental and vision premiums
  • 457(f) non qualified deferred compensation
  • Health savings account contributions
  • Other employee benefits (education, daycare, scholarships, etc.)

By funding to offset these benefit expenses, your credit union can generate more income for your bottom-line and of course, the benefit of your members. NCUA code 701.19 specifically allows a federal credit union to purchase this type of investment, which would otherwise be impermissible, so long as it relates to the credit union’s obligation under an employee benefit plan expense. 

Some of the types of investments that have been used by credit unions under 701.19 include:

  • Mutual funds and ETFs 
  • Split-dollar, key person and COLI
  • Variable and fixed annuities
  • Equities and bonds.

As you evaluate these investment alternatives, you want to ensure you fully assess both the positive impact to your credit union any given approach may provide as well as the potential risk to your income statement. Finally, past history truly does not indicate future results, thus you want to make sure you “stress test” any options you consider as the future may be markedly different from history.  

Enhance Charitable Giving

Section 721 of the Federal CU Act allows credit unions to utilize investment strategies similar to those mentioned above to provide additional income in order to funding charitable giving. For credit unions, a CDA may be the perfect avenue to deploy excess liquidity. The primary purpose behind a CDA is to generate funds to donate to 501(c)3 tax-exempt charities chosen by your credit union. 

Under federal regulation, the credit union is permitted to retain up to 49% of the yield on the CDA. Because of this, CDAs could be both additive to your bottom line AND help you directly support your community through charitable giving. How Can you Optimize the Excess Liquidity on Your Balance Sheet?

At Newcleus CU Advisors, our goal is to help our clients find the right alternate investment solutions for their unique credit union’s risk tolerance and goals. Reach out to one of our experts today to see how you can begin optimizing your balance sheet while offsetting employee benefit costs and enhancing your charitable giving.