Your New Year’s Resolution: Generate More Income for your Credit Union

It’s almost 2021! This past year has been challenging for everyone, especially credit unions. With that being said, it’s important to find new ways to generate income for your credit union in the next year. As we are unsure what the future may hold, it’s good to have a few different means of income. One form of generating income for your credit union is 701.19 investments. Let’s dive a little deeper into these investments and how they can help your credit union.

What is it and what does it do?

NCUA acknowledges the yield on “normal” investments held under Part 703 of the Federal Credit Union Act cannot keep pace with increases in employee benefit costs.  As a result, NCUA allows a federally chartered credit union to invest outside their Part 703 permissible restrictions under Part 701.19 (c) in an effort to generate higher returns.  State-chartered credit unions may have similar authority depending on the state in which the credit union is chartered.

Exploring these options is essential to your credit union’s success. According to Callahan & Associates, the COVID-related closures have caused credit unions to see an increase in deposit balances of 16.5%, the fastest annual rate since 2003. In addition, loan balances have risen 6.6%, which, in turn, have driven the industry’s loan-to-share ratio down to 76.2%, the lowest since 2016. 

These numbers along with the shutdown-related challenges with generating non-interest income earnings can be worrisome for some credit unions. With such a volatile market, it’s important to explore all options available to help your credit union stay afloat. 

What types of investments are non-703?

These types of investments include institutional life insurance (BOLI, CUOLI), separately managed accounts, mutual funds, ETF’s, preferred stocks, and deferred annuities.

What range of 1st-year potential yields are available

Depending on the investment and deposit amount, a typical 1st-year yield can be expected to range from 2.50% to 6.25%. Non-maturing stock, mutual fund, or ETF investments may vary and will depend on the return of that specific asset.

Changes in accounting standards (ASU 2016-01) negatively impacted some of these types of investments.

Historically, credit unions benefited from a bonafide investment strategy to generate the desired excess yield until changes in accounting standards caused the volatility embedded in equity and mutual fund-based investments to flow directly through the credit union’s income statement.  The March 2020 market correction bore this out as credit unions with investment portfolios comprised of mutual funds, ETFs and equities realized a significant impact on their income statement.  The timing of this disruption exacerbated the massive stress brought on by the COVID-pandemic crisis. 

What are credit unions doing to mitigate this issue?

Most credit unions do not like the idea of market volatility wiping out net income.  Credit unions have generally adopted one of the following paths forward if they are using or considering the use of 701.19 authority:

• Invest as if accounting rules don’t matter – tolerating volatile net income due to the market.
• Reallocating to less volatile (more accounting friendly) investments, which also may limit your return potential.
• Shift to a general account life insurance product for safety moderate yields, but highly predictable.
• Deciding not to use the strategy to generate added income.
• Use a customized approach that allows for the achievement of higher returns while insulating the income statement from the volatility described above.

How should my credit union move forward?

You need to do everything in your power to prudently generate income to support the organization and help your members. 701.19 investments can help with that goal by offsetting the cost of your benefits program – which is key to keeping your most valuable asset – your people.

Consult with a member of our team to see how we can help you realize the goal of prudently generating additional income while maintaining stability and predictability on your income statement.  Our principal team members have been working with credit unions using this strategy since the authority was granted. We strive to bring best-in-class capabilities to our clients and innovate new solutions when a need is not being met by available alternatives.  We welcome the opportunity to share our insight to help you find your best path forward.