Credit Union Q1 Investment Trends: Loan Portfolios Challenged to Keep Pace, Investments Surpass $700 Billion

Source: Callahan & Associates

A third round of stimulus payments combined with the seasonal surge in equity inflows resulted in annual deposit growth of 22.7%. Since the end of 2020, equity balances have increased by 6.4%, compared to quarterly growth of 4.3% a year ago. Given the magnitude and atypical growth drivers that have transformed credit union balance sheets over the past 12 months, it is important to contextualize this growth and recognize how different segments of the balance sheet are performing against each other. others given the base effect and impact of COVID-19 a year ago.

Following the dramatic gains in the deposit portfolio, investment balances increased accordingly. On a quarterly basis, total investment jumped 16.4% from December to March (up $98.9 billion), totaling $700.8 billion at the end of the quarter. The continuation of recent trends, the combination of a limited supply of short-term bonds, modest yields and continued uncertainty in deposit retention assumptions resulted in quarterly cash balance growth of 23. 4% compared to December and 81.9% year-on-year. Investments in securities and certificates rose at a slower, but historically strong, quarterly pace of 11.7% as investment officers worked twice to make the money work.

Loan demand again failed to match the magnitude of deposit growth in the first quarter as weak rates and government payments contributed to higher portfolio turnover in the form of repayments and refinancings. First mortgages fueled growth in the loan portfolio’s balance sheet, up 0.8% from December, while auto balances were flat in the quarter. After rebounding in the third quarter of 2020, new challenges have emerged in the first months of 2021, namely a global chip supply shortage, which continues to disrupt new vehicle supply chains and has accelerated competition and market prices for used vehicles.

Excess cash and reinvestments weigh heavily on sector performance

The average return on investments fell by 52 basis points in the first quarter of 2021, falling to 0.83% at the end of March, marking the lowest return on record by a considerable margin (the previous low was 1.07% in March 2013). Despite modest portfolio expansion, historically low reinvestment rates and the industry’s 42.9% cash allocation offset nominal gains from the gradual addition of duration. From a portfolio earnings perspective, investment income in the first quarter totaled nearly $1.3 billion, down 14.7% from the fourth quarter and down 15.4% from a year to year.

investment return graph Source: Callahan & Associates

The average life profile continues to lengthen

As of March 31, the weighted average life of all credit union investments was 2.07 years, up from December (1.86) due to a change in portfolio composition. Specifically, an increase in securities with longer maturities (5 to 10 years and over 10 years, up 60.1% and 36.1% quarterly, respectively) offset the 23.4% increase cash and cash equivalents to extend the weighted average life of the industry’s investment portfolio. .

weighted average life chart Source: Callahan & Associates

The mix of investments shows an increase in the number of agencies and robust growth in mutual funds

Cash and investment balances rose $98.9 billion to top $700 billion at the end of the first quarter, the largest quarterly gain on record, outpacing the $86.9 billion increase in the second quarter of 2020. Consistent with recent trends, overnight cash balances accounted for 61.7% quarterly growth, although down from the 65.4% contribution in the fourth quarter. The rest of the new investments were mainly deployed in the securities of federal agencies MBS (23.1%) and non-MBS (9.5%). In total, credit unions reported $273.1 billion in day-to-day cash balances, including $205.9 billion at the Fed and $52.3 billion at corporate credit unions, up 33.3% and 17.6% in the quarter, respectively.

Despite all efforts, cash as a percentage of total investments rose again in the first quarter to 42.9% of total balances, the highest level on record, surpassing the previous high set in the second quarter of 2020 at 40, 6%. With the exception of banknotes, all other major segments of the investment portfolio increased on a linked quarterly basis. Investments in mutual funds again posted the largest percentage increase in the quarter, with growth of 26.1%, due to an increase in adoption rates and ease of use to deploy liquidity at scale. The biggest dollar gain was in federal agency debt, with MBS investments growing 13.4% ($22.9 billion) and non-MBS securities growing 15.6% ($9.4 billion). billions of dollars).

investment portfolio data table Source: Callahan & Associates

Cash allocation sets record, durations lengthen

The third round of stimulus payments contributed to a persistent mismatch between supply and demand in the short-term fixed income sector, as more financial institutions and dollars competed for securities in the pursuit of balanced liquidity deployment strategies. As a result, yields on two-and-under treasury bills tightened despite the sharp steepening of intermediate and long yields throughout the quarter.

In general, US credit union investment portfolio maturities lengthened in the first quarter of 2021 despite the 23.4% quarterly increase in cash balances. With short-term investments offering marginal returns, credit unions sought to deliberately take advantage of the steepening of the yield curve, targeting investments in the belly of the curve (three to seven years) where yield spreads were the widest.

Once again, all segments, with the exception of securities with maturities of one to three years, developed from the fourth quarter. Outside of cash, the strongest percentage and balance growth was seen in investments maturing in five to 10 years, up $32.7 billion, or 60.1%, from December. and accounted for two-thirds of the quarterly growth in the investment balance. Similarly, investments maturing in three to five years increased by 18.1% during the quarter, contributing 27.7% to the portfolio’s growth.

table of composition of investments by maturity Source: Callahan & Associates
Sam Taft

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