GREENSBORO, N.C. -
Fred Eisel, senior vice president and chief investment officer for First Carolina Corporate, has 14 years of experience in the corporate CU network-including seven with Mid-Atlantic Corporate FCU as an investment analyst before seven years at his current post. He said approximately 85% of First Carolina's larger member credit unions invest in corporate certificates, while 46% also purchase structured certificates, such as callables.
Eisel told Credit Union Journal liquidity began making a strong comeback last fall, and a combination of economic and environmental factors has kept it higher than usual into the summer months.
CU Journal: What do you see in the current investment picture that is different from the norm?
Eisel: It is always very cyclical. For a corporate trying to budget for the year, it is a crapshoot because we don't know what the environment will be like-where the interest rate is going as well as other factors. Some years, the credit unions did not have liquidity; other years credit unions got involved in indirect lending programs or otherwise did a great job of loaning out their money. Our No. 1 job is being a liquidity provider for our member credit unions.
CUJ: When did things change?
Eisel: The last two years liquidity has been very tight for many of our members. They were borrowing money from us for all of 2005 and most of 06. Starting in September/October 2006, they saw a lot of liquidity come back. After two years of strong loan demand, they budgeted for a lot of loans. We talked to them about the rates rising and a need for an investment strategy. They didn't know what '07 would hold for them and wanted to keep money short. They didn't know how far rates would rise and didn't know what their loan demand would be. And, the yield curve was inverted. All of those factors meant they wanted to keep their money short.
CUJ: What other factors are keeping liquidity high?
Eisel: There are many reasons for the current environment. Rates are higher on mortgages and auto loans, the Fed is worried about inflation and people are seeing inflation at the gas pump, credit unions are being less aggressive on rates and underwriting-they won't take just any car loan. All those factors combined have added liquidity.
CUJ: When you say the natural person credit unions are keeping their money short, what kind of investments are they choosing?
Eisel: We have a 30- and a 90-day account. Our members were keeping money in overnight accounts or the two short accounts for the first quarter of 07 and into the second quarter. Lately, our members are seeing loan demand is still low and they need to invest. Interest rates for 2-, 3- and 4-year certificates have risen from the last two years, so credit unions are building their investment portfolios.
CUJ: Are credit unions open to advice if it means investing in something longer than a few months?
Eisel: With the combination of high liquidity and higher rates, we are telling credit unions that have cash on hand they are making half the money they could in overnight accounts. When they invest in structured products, they typically are in callables. Callables provide a little bit of risk but a little better yield. What we'll do is talk with a credit union about their overnight balances, their loan demand and their strategic direction to determine if they have too much cash on hand.
CUJ: Are there reasons credit unions should not invest in longer-term products?
Eisel: If they have a big mortgage loan promotion coming up in a month or two, or if they are putting up a building, they need to have cash. But if we see their loan demand hasn't panned out as expected, then they need to start investing those funds.
If they have $20 million in their overnight, we talk to the CEO or the chief investment officer about how much of that is investable-perhaps $5 million or whatever they are comfortable with.
CUJ: Liquidity usually is high in the first quarter, and many corporates have reported it has remained elevated in the second quarter. What are you seeing now that the calendar has changed and we have started the third quarter?
Eisel: In general, our members are still liquid. We have come off a little, which is expected in the summer, but it hasn't come off a lot. The cash has been here and has stayed here, even going into July. Indirect auto lending is active, but nowhere near as aggressive as in past years, which has freed up a lot of liquidity.
CUJ: What do you expect for the foreseeable future?
Eisel: We anticipate liquidity will remain high for the rest of 2007. Liquidity remains stable and as credit unions see the loan demand is not there, we anticipate they will continue to invest some of that excess cash.
