Q4 Investment Trends: Cash Balances Shrink as Loans Rebound

Source: Callahan peer-to-peer analysis

Credit union stock balances rose 12.7% in calendar year 2021, topping $1.8 trillion for the first time in the fourth quarter and more than double industry totals from to ten years ago. Still, deposit growth has slowed from pandemic peaks. Equity balances rose 2.4% quarter-over-quarter, which was above the historical norm, but well below quarterly rates achieved throughout the pandemic. It’s no surprise that equity growth is declining from 2020, when unprecedented fiscal and monetary stimulus pumped millions of dollars into members’ equity accounts, many of whom were awaiting economic reopening. These actions created an increase in liquidity in many credit unions, resulting in a compression of interest spreads in the industry. As 2022 dawns, the outlook for the industry is more optimistic. Lending is at record highs — especially in the consumer sector — as demand has allowed credit unions to repurpose some of this new equity into performing loans. However, while balance sheets may show signs of stabilizing, the huge inflow of funds in 2020 still poses lingering macroeconomic challenges at present, namely inflation.

In recent months, markets have focused on the Federal Reserve and its response to inflation. The December Federal Open Market Committee meeting confirmed the common expectation that tapering would end in March, and three rate hikes were expected in 2022. The January FOMC meeting was even more eventful, with the Fed signaling that five rate hikes are now the consensus expectation for 2022, and the door has been left open for even more. If they materialize, these increases would push the fed funds rate into the 1.25% to 1.50% range in a relatively short period of time.