Q4 Credit Union Investment Trends: Investment Balances Surpass $600 Billion, Cash Rises 98.2%

Key trends that emerged in the aftermath of the onset of COVID-19 largely continued through the end of 2020, despite several notable shifts occurring in the late summer and early fall as noted in our last update. After moderating in the third quarter with an uptick in loan demand, investment balances at credit unions surged 8.7% from September to December (up by $48.3 billion), totaling $600.9 billion at year-end. Within the portfolio, despite mandates to deploy excess cash into traditional investments to combat shrinking margins, cash balances rose 14.9% from September and were up 98.2% year-over-year. Investments in securities and certificates expanded at a slower, yet historically strong linked quarter pace of 4.9%.

As noted above, loan demand again failed to match the sheer scale of deposit growth in the fourth quarter, compounded by the December stimulus package, which brought more share inflows in the final days of 2020. Fourth quarter member spending came in below expectations and consumer loan demand also struggled to find its footing. In total, share balances rose 3.7% from September and 20.1% over the last 12 months.

With interest rates holding at near-record lows in the final three months of the year, first mortgage gains once again accounted for the majority of loan portfolio growth as balances rose 1.4% from September, buoyed by sustained refinance demand. Used vehicle lending expanded modestly, rising 0.3% over the quarter and posting the second fastest growth of any segment in the portfolio on an annual basis outside of first mortgages at 4.4%. The most notable segments detracting from annual credit union balance sheet growth were revolving lines of credit – other real estate (-7.5%) and credit cards (-6.4%) – and new vehicles (-3.7%). In total, credit union loan balances increased 0.5% in the fourth quarter and 4.8% since December 2019.

Investment Composition: Excess Cash Deployed to Agencies, Mutual Funds Record Robust Growth

Cash and investment balances grew $48.3 billion in the fourth quarter to surpass $600 billion at year-end. Overnight cash balances accounted for 65.4% of quarterly growth with the remainder deployed primarily to Federal agency securities (32.6%). In total, credit unions reported $243.2 billion in cash balances at financial institutions, $154.4 billion of which was at the Fed and $44.3 billion at corporate credit unions, up 14.6% and 13.1%, respectively, since Sept. 30.

While many credit unions sought to put excess cash to work in the fourth quarter, persistent market factors made the task of finding appropriately priced and competitive yielding securities difficult. Continued monetary accommodation from the Federal Reserve and burgeoning cash positions at financial institutions has flooded the markets with liquidity, pushing short-term yields lower across the quarter.

Despite directives, cash as a percentage of total investments increased in the final three months of the year to 40.5% of total balances, the second highest level on record, which was set in the second quarter at 40.6%. Beyond cash, nearly every other segment of the investment portfolio expanded on a linked quarter basis. The largest gain was seen in Federal agency debt, with MBS investments expanding 7.6% ($11.9 billion) and non-MBS securities growing 6.7% ($3.8 billion). Mutual fund investments posted the largest percentage increase in the quarter, growing 18.1%, due to rising portfolio valuations throughout the fall and increased credit union participation.

Investment Maturity: CUs Target Longer Investments While Cash Allocations Rise

Maturities of investment portfolios at U.S. credit unions lengthened in the fourth quarter of 2020 despite a 14.9% quarterly increase in cash balances as investors increasingly looked to longer securities to lift slumping investment yields. Every segment except for securities maturing in one to three years expanded from the third quarter. Outside of cash, the largest growth in percentage terms and balances was seen in investments maturing in five to 10 years, rising $9.1 billion, or 20.3%, from September. On an annual basis, much of the lengthening of the industry portfolio came as credit unions allocated a relatively larger share of new investments to securities maturing in more than five years, collectively expanding 82.4% year-over-year.

Yield on Investments: Excess Cash and Portfolio Reinvestment Weighs on Earnings

The average yield on investments declined 9 basis points from the third quarter, falling to 1.35% at year-end, in line with levels not seen since December 2016. Although credit unions reported modest growth in non-cash investments and a slight lengthening in average life, the combination of declining reinvestment rates and the 40.5% industry cash allocation offset the marginal returns from the added duration, pushing yields lower. From a portfolio earnings perspective, investment income in the fourth quarter totaled $1.5 billion, up 0.3% from the third quarter, but down 24.7% year-over-year. Looking ahead, investors are increasingly looking to put excess cash to work in the new year. In early March, the prospect and discussion of another round of government stimulus shifted to not a question of if, but rather when and how large direct payments would be to consumers. In the short-term, given the mismatch in treasury issuance and liquidity supply, another influx of cash into member accounts – and the banking system more broadly – will likely further stress the supply and demand dynamic on the front-end of the curve, pushing yields and earnings lower.

Sam Taft is Assistant Vice President, Business Development for Callahan Financial Services, Distributor of the Trust for Credit Unions, in Washington, D.C.