What is YOAI? It’s not something that many Credit Unions have given much attention to throughout the years. This is understandable, primarily because they’re in the business of lending to their members. Historically, Credit Unions have placed the majority of their business focus on lending-related ratios, such as Loan-To-Share, Delinquencies, Yield on Average Loans. Thanks to COVID, Credit Unions have had an enormous increase in deposits and liquidity. This boost in liquidity has far exceeded the demand for loans. Which leads to the answer to my initial question: What is YOAI? Yield On Average Investments, and over the past year, it’s become a much more significant metric for Credit Unions. The liquidity that’s been ballooning Credit Union balance sheets would normally be looked at as a good thing. Certainly, we all want to see our Credit Unions grow. But in the current interest-rate environment, rapid growth comes with a caveat; Net Worth declines. There are three main ways to support the bottom line and combat the impact from massive deposit growth:
Fee Income – Ouch. No one wants to fee their members to death and rely on that type of income to support growth
Loan Income – Generally speaking, Loan volumes nationwide have been pretty anemic since COVID began. As stated earlier, most Credit Unions have a strong focus on lending. As a matter of fact, most have everything they need in place to originate loans, manage loans, manage participations, and just, generally, make money from loans. In some cases, entire buildings are dedicated to lending operations.
Investment Income – THIS is where most Credit Unions need to focus additional resources. Even in this historic rate environment, it is possible to generate higher yield than your peer group and enhance overall performance. It takes some education, some expertise, and, as I said, some focus.
How do we improve performance in YOAI? There is no ‘secret sauce’ or ‘one size fits all’ answer. If we all had a crystal ball and knew the direction of rates before they moved, none of us would be working right now! But the reality is . . . rates change. The low-rate environment we’ve been experiencing over the past year has created downward pressure on overall margins. The investment portfolio needs extra work and extra care, putting in overtime to SUPPORT the lending and deposit functions. To do that requires a critical review of the investment policy first and foremost. From there, analyzing portfolio structure and securities selection will play a critical role in improving YOAI.
Tom Campbell is the Co-Founder and Managing Director at Glasgow Partners – an SEC-registered investment adviser specializing in Credit Union investments. He leads the firm’s portfolio management function and provides guidance for Credit Union clients in the structuring of effective portfolio strategies. He’s been active in the Credit Union movement for over 15 years, and has given presentations to the NCUA Board, numerous CU Boards of Directors, CUSOs, and several CU associations across the country. He can be reached in his office at (610)494-1322 or email t.campbell@glasgowpartners.com