Q3 Investment Trends: Total Growth of $6B as Shares Remain Above Historical Norms

Total credit union investments increased 0.9%, or $6.3 billion, over the three months since June 30, 2021 and finished the quarter at $707.4 billion. This small increase was a rebound from last quarter’s 0.3% drop, which snapped a six-quarter pandemic-spanning streak of increasing investment balances. Cash balances fell 1.1% since June, the second straight quarter of declines after increasing dramatically throughout 2020 and early 2021. Credit unions put this cash to work both through accelerating consumer lending channels and by increasing investments in securities and certificates. These higher-yielding investment balances increased 2.2% over the third quarter.

Net liquidity increased in the third quarter as share balances expanded more than loan balances in dollar terms. Loans grew by $30.3 billion since June, led by first mortgage and auto, which increased 3.1% and 2.4%, respectively, over the period. First mortgages have driven loan growth for the past 18 months following record purchase and refinance originations, but plummeting loan-to-share ratios are starting to pressure credit unions to hold more of these real estate loans on balance sheets over selling them to secondary markets. Auto lending has been overshadowed by the success of first mortgage loans, but this business is thriving, particularly in the used vehicle space. Still, credit unions added an even greater $35 billion to deposit totals since June, and this liquidity increase funneled into investments.

Credit union share balances increased 14.4% over the past 12 months through Sept. 30, 2021, as members continue to deposit funds in share accounts at a pace well above historical norms. Still, share growth has slowed somewhat from the record pace throughout the pandemic. Industry deposits grew 2% quarter-over-quarter, the second slowest rate since COVID-19 quarantines began in early 2020. Members were content to keep saving their money in the midst of Delta variant case surges, but slowdowns in pandemic era Federal relief programs reduced the total amount of funds available to deposit. While it appears that the latest wave of COVID cases peaked in late August and consumer spending is strong, the prospect of additional Federal money through congressional infrastructure bills clouds the outlook for depository institutions.

While some expected the Federal Reserve to announce a tapering of asset purchases at the September FOMC meeting in an effort to combat inflationary pressures, the decision never came. However, Fed Chair Powell hinted strongly at an announcement along these lines soon, and sure enough, a tapering plan was declared at the early November meeting. Powell’s remarks that Treasury and MBS purchases will end by mid-2022 implied the tapering will be more aggressive than previously anticipated, as Consumer Price Index numbers continue to be above expected levels. Still, Federal Funds rate projections showed differing opinions – especially for 2023 and 2024 – with the range between the high and low forecasted rate set at 150 bps for 2023 and 200 bps for 2024. Forecasts can and will change quickly, as it was not long ago that a rate hike wasn’t expected until 2023. To sum things up, no one is sure what things will look like from a macroeconomic standpoint over the next few years, but inflationary pressures seem to be pushing toward more hawkish monetary policy.

Government Securities Remain Attractive

Cash and investments increased $6.3 billion to finish the quarter at $707.4 billion. The 1.1% decrease in cash balances was more than offset by a 2.2% increase in securities and other investments, leading to the net increase.

Cash balances fell $3 billion over the quarter to a total of $265.1 billion. Credit unions are investing this excess cash at higher rates, causing cash as a percentage of total investments to fall 77 basis points during the quarter to 37.5% of the total, though this is still well above the pre-pandemic norm. Cash balances held at the Federal Reserve declined $2.5 billion (or 1.3%) since June, though the Fed still holds $181.9 billion of credit union cash compared to $55.8 billion held at corporates or other financial institutions (down 3.1% quarterly). Cash on hand, however, increased 7.3%, or $1.4 billion, and was the only cash segment to expand since June.

Within the portfolio, credit unions reallocated most of this cash into Federal agency mortgage-backed securities (up $5.4 billion over the quarter). U.S. government obligation investments increased $2.9 billion. Mutual fund balances expanded $37.7 million (0.5% quarterly growth) and represent 1% of industry investment balances.

All told, government and agency securities remain the dominant choice for credit union investment portfolios and comprise 55.5% of total investments (including cash) as of the end of the third quarter. This is up from 54.6% last quarter and 52.9% one year ago. The surge in new pandemic-era deposits have remained on balance sheets and have shown little sign of being withdrawn. As a result, credit unions are slowly repurposing these cash balances into loans and higher-yielding securities. Although mutual funds only comprise 1.04% of current portfolios, this is 31 basis points higher than their 0.73% share in September of 2020.

Industry Yield Up for Second Straight Quarter

The average yield on investments increased 3 basis points to 0.88% in the third quarter. This was the second straight quarterly increase after consistently falling since the third quarter of 2019. The modest rise in yield can be attributed to credit unions swapping cash for higher-yielding investments. Credit unions brought in $1.5 billion in revenue from interest on their investment balances between July and September, up 6.1% from totals through the second quarter. Still, despite recent changes, credit unions have been more or less unwilling to reallocate their liquid cash balances, as longer-term securities haven’t been particularly appealing from a yield perspective. This trend has combined with prolonged low interest rates to keep investment yields well below the historical norm.

Will Hunt is Manager, Industry Analyst III for Callahan & Associates in Washington, D.C.

Roman Ojala is Industry Analyst I for Callahan & Associates.