What Do Credit Unions Do with Their Money?

Remi Lukosiunas

A couple of days ago, someone came up to me and asked a really interesting question: “What do credit unions do with their money? They’re not-for-profit organizations, so what happens with the money they take in and make after they’ve issued all the loans?”

I gave a short explanation … but then realized that there are probably a lot of people out there with the same question in mind. So today, I’m going to share my answer with you.

The main mission of a credit union is to reinvest any profits back into the institution. They can do so by lowering interest rates on loans and increasing interest paid on deposits. Basically, this is intended to provide better and cheaper services to members.

But let’s take a closer look at the latest credit union numbers to see what additional details they can provide us.

First, just like many other businesses, credit unions invest cash to generate investment income. The latest figures from regulatory reports show that in Q1 2017, credit unions achieved the highest investment levels of the last three years, with $392 billion in overall investments.

The graph below shows the overall trend higher. Keep in mind that we typically see a spike in investments in the first quarter of every year because new investment positions are added to the books.

Out of the $392 billion invested, 58.8% was held in securities. That includes investment vehicles such as stocks, bonds, mutual funds, etc. The second-largest portion (27.4%) of the cash went to other financial institutions in the form of deposits, generally earning a low interest rate but offering high liquidity.

Many standard credit unions utilize so-called “corporate” credit unions for such deposits. A corporate credit union is a credit union’s credit union. They service credit unions by providing short- and long-term investments, and can also provide other financial services like check clearing, electronic funds transfers, and ATM transaction services.

The next-largest portion of the cash (11.5%) was invested in maturing securities – a type of investment that is held for a set period of time, sometimes up to ten years. The remaining 2.4% went toward other types of investments.

Q1 2017 Credit Union Investment Breakdown

So this gives you a better understating of where credit unions put their investment dollars. But what do they do with their profits if they’re not-for-profit organizations?

Well, according to the credit union philosophy, there are two main ways a profit should be treated:

1) It should be reinvested in the credit union and the community. That can include improving branch operations by hiring more staff, updating software programs, or making repairs and improvements to the buildings. The second part of this is helping and supporting the community by volunteering time and funds.

2) It should allow for lower borrowing costs. The idea is that if a credit union has extra cash, it can make interest rates on its loans lower and interest paid on deposits higher.

As of Q1 2017, the credit union industry had issued $895 billion in loans and received $1.17 trillion in deposits. The graph below indicates a steady increase in lending since the beginning of 2014.

So the bottom line is that credit unions, just like banks, invest a portion of their money and lend out the rest. Lending increases total assets, takes cash off the institution’s hands, and creates income from interest charged. And hopefully, the generated income is used to further improve operations and services.

Think Safety,

Remi Lukosiunas

 


Remi Lukosiunas

Money and Banking Edition, By Remi Lukosiunas, Financial Analyst

Remi Lukosiunas, a Financial Analyst, joined Weiss Ratings in 2014 with a financial services background in internal audit and the credit union industry. Remi conducts banking, credit union, insurance and investment research. He has also written extensively on stocks and investing using ratings as a guide. Remi is a graduate of Florida State University with a degree in multinational business.

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