4 Steps to Make Your Credit Union Overnight Investments Work for You
David Savoie, CEO, LaCorp
Managing a credit union’s finances is an ongoing and complex job; your overnight investments might not always be top of mind. Leaving overnight funds on autopilot can be easy, but it’s not the best idea.
With overnight rates holding steady following the latest FOMC rate actions – although this is expected to change in a few weeks – and credit union liquidity remaining tight, now is the perfect time to take a closer look at your overnight investment strategy. You can potentially boost your income and enhance your credit union’s financial health with a few simple adjustments.
You might wonder why it’s necessary to maintain overnight invested funds at all when you could deploy all available funds into loans or longer-term investments. From an ALM standpoint, overnight funds allow a portion of the asset side of your balance sheet to adjust quickly when your cost of funds changes, maintaining a better interest rate risk position.
Moreover, overnight funds act as a cash reserve, enabling you to cover unexpected non-recurring expenses without borrowing. They also allow your credit union to seize attractive longer-term investment opportunities as they arise without needing to liquidate other assets.
Understanding Your Credit Union’s Overnight Funds Needs
First things first: How much liquidity should you maintain in an overnight position? As the expert, you’re the most familiar with your credit union’s settlement needs, but it’s crucial not to hold excess liquidity in low-yielding settlement accounts. If you require all available funds to cover your credit union’s daily settlements, you are overly loaned out. If you reach the point where you feel the need to stay nearly completely loaned out to maintain net income, it’s time to think about how you can increase liquidity. The danger is becoming dependent on a totally loaned out position and then finding that covering fixed costs is a problem following interest rate cuts or declining loan demand. In these cases, increasing liquidity should be your priority.
Consider raising deposit rates on money market accounts or short-term CDs to attract additional liquidity. Review rates in your market to see if you are competitive. If you are, promote your rate! You should also consider non-member CD issuance, like SimpliCD, or selling mortgages to remove loans from the balance sheet. These steps can provide the flexibility you need to maintain an optimal overnight position.
Finding the Right Rate for Your Overnight Investments
Once you’ve determined how much your credit union can invest overnight, the next step is ensuring your investments earn the best possible rate. Start by considering your cost of funds. Are your credit union overnight investments above your cost of funds? How does it compare to the Fed account rate or Interest on Reserve Balances (IORB)?
Evaluating whether other options offer a similar safety profile but with higher returns is essential. A slight improvement in your overnight rate can make a significant difference over time.
Avoiding Common Pitfalls
Even well-intentioned strategies can lead to missed opportunities in the world of overnight investments. First, stop the bleeding. If you’re automatically sweeping funds into a lower-yielding Federal Reserve account or a less-than-competitive money market account, you are leaving money on the table. Stop!
Find a better option. What rates are available from institutions you know have a relationship with? What other rates would you qualify for?
Consider these examples:
Credit Union A had a longstanding practice of wiring all excess funds from its LaCorp money market account to its Fed account daily. When the Fed rate fell below the LaCorp rate, the credit union continued wiring funds into the lower-rate account. Credit Union A’s staff member handling the wires was hesitant to raise the issue with management, resulting in lost earnings for the credit union.
Credit Union B hadn’t reviewed its settlement account balance in some time. Over the years, its daily cash needs had declined, allowing excess funds to accumulate in a low-interest settlement account. Upon realizing this, credit union leadership implemented an automatic sweep to move excess funds into a higher-rate LaCorp money market account, immediately improving their earnings.
Credit Union C maintained a significant balance in its LaCorp settlement account but hadn’t opened a money market account because the person managing the funds believed it required a capital shares investment. When we informed the credit union that it was no longer required for money market investments, the funds manager opened an account and transferred funds, materially improving its investment returns in a single day.
Take Action Today
As a credit union manager, you handle lending, share account structures, daily operations and members’ concerns. Deploying overnight funds can be a lower priority and get stuck on autopilot.
Take a few minutes today to review your overnight investment situation. A few easy changes can boost your income and serve you well into the future. Quick wins like these are not only possible—they’re essential. So, don’t let your overnight funds sit idle. Make them work for you.
