Q3 Investment Trends: Total Growth of $6 Billion as Stocks Remain Above Historical Norms

Source: Callahan & Associates

Total credit union investments increased 0.9%, or $6.3 billion, in the three months since June 30, 2021 and ended the quarter at $707.4 billion. The small increase was a rebound from last quarter’s 0.3% decline, which ended a six-quarter streak of rising investment balances covering the pandemic. Cash balances have fallen 1.1% since June, the second consecutive quarter of declines after rising dramatically throughout 2020 and early 2021. Credit unions have put that cash to good use both by accelerating consumer lending channels and increasing investment in securities and certificates. These higher yielding investment balances increased 2.2% from the third quarter.

Net liquidity increased in the third quarter as equity balances increased more than dollar loan balances. Loans were up $30.3 billion since June, led by first mortgages and autos, which rose 3.1% and 2.4%, respectively, over the period. First mortgages have boosted loan growth over the past 18 months after record purchases and refinances, but falling loan-to-equity ratios are starting to pressure credit unions to hold more these home loans on the balance sheet rather than selling them in the secondary markets. Auto credit has been overshadowed by the success of first mortgages, but this business is booming, particularly in the used vehicle space. Yet credit unions have added more than $35 billion to total deposits since June, and that increase in liquidity has trickled down to investments.

Credit union stock balances increased 14.4% in the past 12 months to Sept. 30, 2021, as members continue to deposit funds into stock accounts at a rate well above standards historical. 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 amid Delta Variant case increases, but pandemic-era slowdowns Federal relief programs are reducing the total amount of funds available for filing. Although it looks like the latest surge in COVID cases peaked in late August and consumer spending is strong, the prospect of additional federal funds through Congressional infrastructure bills is clouding the outlook for government institutions. deposit.

While some expected the Federal Reserve to announce a decrease in asset purchases at the September FOMC meeting in order to combat inflationary pressures, the decision was never made. However, Fed Chairman Powell strongly hinted at an announcement to that effect soon, and sure enough, a phase-down plan was declared at the meeting in early November. Powell’s remarks that Treasuries and MBS purchases will end by mid-2022 imply the cut will be more aggressive than expected as consumer price index numbers continue to fall. higher than expected levels. Still, projections for the fed funds rate have shown diverging views — particularly for 2023 and 2024 — with the range between the expected high and low rate set at 150 basis points for 2023 and 200 basis points for 2024. can and will change quickly, because it hasn’t been long. that a rate hike was not expected until 2023. In summary, no one knows what things will look like from a macroeconomic perspective over the next few years, but inflationary pressures seem to be pushing towards a more hawkish monetary policy .

Government securities remain attractive

Cash and investments increased by $6.3 billion to end 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, which drove the net increase.

Cash balances fell $3 billion in 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 in the quarter to 37.5% of the total, although this is still well above the pre-pandemic standard. Cash balances held at the Federal Reserve have fallen by $2.5 billion (or 1.3%) since June, although the Fed still holds $181.9 billion in credit union cash, down from 55, $8 billion held by corporations or other financial institutions (down 3.1% quarterly). Cash, however, rose 7.3%, or $1.4 billion, and was the only segment of cash to increase since June.

Within the portfolio, credit unions reallocated most of this cash to federal agency mortgage-backed securities (up $5.4 billion in the quarter). Investments in US government bonds increased by $2.9 billion. Mutual fund balances increased by $37.7 million (0.5% quarterly growth) and represent 1% of industry investment balances.

In total, government and agency securities remain the dominant choice for credit union investment portfolios and account for 55.5% of total investments (including cash) at the end of the third quarter. That’s up from 54.6% last quarter and 52.9% a year ago. The surge in pandemic-era new deposits remained on the balance sheet and showed few signs of receding. As a result, credit unions are slowly reallocating these cash balances into higher yielding loans and securities. Although mutual funds make up just 1.04% of current portfolios, that’s 31 basis points higher than their share of 0.73% in September 2020.

investment return chart Source: Callahan & Associates

Industry performance up for second consecutive quarter

The average investment return rose 3 basis points to 0.88% in the third quarter. This was the second consecutive quarterly increase after a steady decline since the third quarter of 2019. The modest increase in yield can be attributed to credit unions swapping cash for higher-yielding investments. Credit unions generated $1.5 billion in income from interest on their investment balances between July and September, up 6.1% from second-quarter totals. Yet despite recent changes, credit unions have been more or less reluctant to reallocate their liquid cash balances, as longer-term securities have not been particularly attractive from a yield standpoint. This trend has combined with prolonged low interest rates to keep investment returns well below the historical norm.

investment portfolio data pie chart Source: Callahan & Associates

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

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Roman Ojala is an Industry Analyst I for Callahan & Associates.

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