total investments & quarterly growth chart Source: Callahan & Associates

A third round of stimulus payments combined with the seasonal spike in share inflows translated to annual deposit growth of 22.7%. From year-end 2020, share balances rose 6.4%, compared to 4.3% quarterly growth a year ago. Given the scale and atypical growth drivers that transformed credit union balance sheets over the last 12 months, it is important to contextualize this growth and recognize how different segments of the balance sheet are changing in relation to one another given the base effect and the impact of COVID-19 a year ago.

Following the dramatic gains in the deposit portfolio, investment balances rose accordingly. On a quarterly basis, total investments surged 16.4% from December to March (up by $98.9 billion), totaling $700.8 billion at quarter-end. Continuing recent trends, the combination of a limited supply of short-term bonds, modest yields and a persistent uncertainty about deposit retention assumptions translated to quarterly cash balance growth of 23.4% from December, and 81.9% year-over-year. Investments in securities and certificates expanded at a slower, yet historically strong linked quarter pace of 11.7% as investment officers worked double-time to put money to work.

Loan demand again failed to match the scale of deposit growth in the first quarter, as low rates and government payments contributed to higher portfolio churn in the form of paydowns and refinancings. First mortgages powered balance sheet growth in the loan portfolio, up 0.8% from December while auto balances were flat on the quarter. After bouncing back in the third quarter of 2020, new challenges emerged in the early months of 2021, namely a global chip supply shortage, which continues to disrupt new vehicle supply chains and has accelerated competition and pricing in the used vehicle market.

Excess Cash and Reinvestment Weigh Heavy on Industry Yield

The average yield on investments declined 52 basis points in the first quarter of 2021, falling to 0.83% by the end of March, marking the lowest yield on record by a sizable margin (the prior low was 1.07% in March 2013). Despite modest portfolio extension, record low reinvestment rates and the 42.9% industry cash allocation offset the nominal gains resulting from the incremental duration addition. 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% year-over-year.

yield on investments chart Source: Callahan & Associates

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 shift in portfolio composition. Specifically, an increase in securities with longer maturities (five to 10 years and more than 10 years, up 60.1% and 36.1% quarterly, respectively) outweighed the 23.4% increase in cash and equivalents to extend the weighted average life of the industry investment portfolio.

weighted average life chart Source: Callahan & Associates

Investment Composition Shows Surge in Agencies, Robust Mutual Fund Growth

Cash and investment balances rose $98.9 billion to surpass $700 billion at the end of the first quarter, the largest quarterly gain on record, surpassing the $86.9 billion increase in the second quarter of 2020. Keeping with recent trends, overnight cash balances accounted for 61.7% of quarterly growth, though down from the 65.4% contribution in the fourth quarter. The remainder of new investment dollars were primarily deployed to Federal agency securities MBS (23.1%) and non-MBS (9.5%). In aggregate, credit unions reported $273.1 billion in overnight cash balances, including $205.9 billion at the Fed and $52.3 billion at corporate credit unions, expanding 33.3% and 17.6% over the quarter, respectively.

Despite best efforts, cash as a percentage of total investments increased again in the first quarter to 42.9% of total balances, the highest level on record, besting the prior high set in the second quarter of 2020 at 40.6%. With the exception of bank notes, every other major segment of the investment portfolio expanded on a linked quarter basis. Mutual fund investments again posted the largest percentage increase in the quarter, growing 26.1%, due to an uptick in adoption rates and ease-of-use for deploying cash at scale. The largest gain in dollars was Federal agency debt, with MBS investments expanding 13.4% ($22.9 billion) and non-MBS securities growing 15.6% ($9.4 billion).

investment portfolio data chart Source: Callahan & Associates

Cash Allocation Sets Record, Durations Lengthen

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

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

Once again, every segment except for securities maturing in one to three years expanded from the fourth quarter. Outside of cash, the largest growth in percentage terms and balances was seen in investments maturing in five to 10 years, rising $32.7 billion, or 60.1%, from December and accounted for two-thirds of quarterly investment balance growth. Similarly, investments maturing in three to five years grew 18.1% across the quarter, contributing 27.7% to portfolio growth.

investment composition by maturity chart Source: Callahan & Associates
Sam Taft

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