Q1 Investment Trends: Patterns Flip in 2022

After three years of deposit growth outpacing loan growth, patterns flipped in the first quarter of 2022. As of March 31, credit union loan balances are up 11.7% annually, compared to 9.3% for shares. Major government relief packages seem to be in the rear-view mirror and loan demand patterns are pivoting towards the consumer lending space.

Long-awaited interest rate hikes came to fruition, with the Federal Reserve raising the federal funds rate 25 bps in March and another 50 bps in May. Soaring consumer price inflation forced a more hawkish response from the Fed than many anticipated just a few months ago. The Fed also stopped purchasing securities in March and is aiming to reduce its $9 trillion balance sheet, expecting to allow about $1 trillion to run off over the next year.

Total Industry Investments Post Minimal Increase in the First Quarter

Total investments held by credit unions increased just 0.3%, or $2.1 billion, over the past three months to total $723.4 billion outstanding at the end of the quarter. This was the fourth straight quarter of sub-2% quarterly growth. Cash balances, which decreased 2.6% since December, were used to fund renewed consumer loan demand as the economy continues to reopen and buyer confidence grows. Cash now makes up 34.8% of credit union investment portfolios – down 1.6 percentage points from three months ago – as rising yields made securities attractive relative to low-yielding cash. Government and agency securities were the preferred investment category, balances of which increased $10.7 billion, or 3.0%, from last quarter.

Shares at credit unions increased $64.3 billion since last quarter, causing net liquidity to increase $17.5 billion. A strong quarter of lending – and a slower pace of early consumer loan paydowns – pushed the loan-to-share ratio up to 70.2%. While this is a welcome sign for lending institutions, it remains far below the pre-pandemic industry high of 84.5% in December 2018. Even with heightened loan demand over the past year, this key liquidity ratio has increased only 1.5 percentage points since March 2021. Continued deceleration of share growth will be a key part of driving heightened balance sheet deployment, but new loans must also stick around on balance sheets for the long term. The average mortgage rate rising to 5% at quarter-end made it attractive for credit unions to keep more mortgages on their balance sheets. Quarterly first mortgages sold to secondary markets declined in the quarter to $17.9 billion, about half the amount sold in the third quarter of 2020 when attractive pricing incentivized institutions to sell mortgages at greater rates.

Credit Unions Favor Long-Term Securities

The Fed grew more hawkish in the first quarter of2022 than it had been in 2021. The front-end of the yield curve repriced following the Fed’s comments after its March meeting, with two- and three-year treasury yields increasing 93 and 91 basis points, respectively. As for spreads, the 5yr/30yr and 5yr/10yr both inverted for the first time in over a decade, while the 2yr/10yr spread ended the quarter slightly positive.

Credit union portfolio managers responded to these shifts in the curve by increasing their allocations to medium- and long-term investments. Securities maturing in five to 10 years reported the greatest increase, expanding 20.6% since December and 36.3% annually. This took the total funds invested in this segment to $119.3 billion. Consisting of 16.5% of the total investment composition, five- to 10-year terms are now neck-and-neck with three-to-five-year securities as the largest non-cash portion of industry portfolios. Cash remains the largest portion at $251.0 billion – comprising 34.8% of total investments – but its dominance is waning. Following record cash balance growth during the pandemic, cash funds decreased 2.6% from the previous quarter, and are down 14.4% compared to a year ago. Overall, credit unions have distanced themselves from low-yield investments, looking instead to invest more funds into mid- and long-term securities.

Industry Yield up Two Basis Points

The average yield on investments increased two basis points quarter-over-quarter, to 0.91%. This was the fourth straight increase on a quarterly basis. Year-over-year, investment yields are up eight basis points, gaining distance from the record low investment yield of 0.83%. Yields plummeted throughout 2020 and early 2021 as a credit union preference for liquid, low-interest cash combined with rate cuts by the Fed to drastically reduce overall portfolio returns. Looking ahead, the expectation is for average investment yields to continue their rebound as benchmark rates rise and cooperatives continue to favor long-term investment options.

Jay Johnson is President of Callahan Financial Services, Distributor of the Trust for Credit Unions, in Washington, D.C.