Source: Callahan's Peer-to-Peer Analytics
Share balances at credit unions increased 12.7% over the 2021 calendar year, topping $1.8 trillion for the first time ever in the fourth quarter and more than double industry totals from a decade ago. Still, deposit growth has slowed from pandemic peaks. Share balances increased 2.4% quarter-over-quarter, which was above the historical norm but well below the quarterly rates realized throughout the pandemic. It's not a surprise that share growth is waning compared to 2020, when unprecedented fiscal and monetary stimulus drove millions of dollars into member share accounts, many of which sat waiting for economic reopening. These shares created a surge in liquidity at many credit unions, leading to compressed industry interest spreads. Entering 2022, the industry's outlook is more optimistic. Lending is at record highs – especially in the consumer space – as demand has allowed credit unions to repurpose some of these new shares into productive loans. However, while balance sheets may be showing signs of stabilization, the huge influx of funds in 2020 still poses ongoing macroeconomic challenges in the present day – namely, inflation.
In recent months, markets have been 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 forecast in 2022. The January FOMC meeting was even more eventful, with the Fed signaling that five rate hikes is now the consensus expectation for 2022, and the door was left open for even more. If realized, these increases would push the Federal Funds rate to the 1.25%-1.50% range in a relatively short period of time.
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After being late to admit that high Consumer Price Index inflation data was, in fact, not transitory, the Federal Reserve finds itself behind in the inflation management battle. CPI reports have confirmed rising prices with each passing month, placing strain on cost-of-living expenses for consumers. Raising rates and restricting the growth of the money supply are the monetary tools available to the Federal Reserve to fight these inflationary pressures. However, limiting the flow of "easy" money risks asset price crashes – particularly in the equity and real estate markets – and the possibility of a full-blown recession. The economic shocks of the COVID-19 pandemic and prior short-term monetary and fiscal responses have left policymakers stuck between a proverbial rock and a hard place. Markets and the public at large eagerly await further signals as to what the Fed will do regarding rate changes, as well as any plans for its nearly $9 trillion balance sheet. The bond market will be watching intently for any indication of when and how it plans to normalize, as tightening quicker than anticipated would be bad news for many investment portfolios.
Money Flows to Government Obligations
Cash and security balances at U.S. credit unions increased $8.7 billion since September to finish the year at $718.6 billion. A robust 3.4% increase in securities and investments was partially offset by a 1.1% decline in cash balances, as cooperatives repurposed liquidity into higher yielding assets.
In dollar terms, credit union cash balances declined $2.8 billion to total $263.2 billion at year-end. They utilized the cash to meet rebounding loan demand and to invest in securities and investments; balances of the latter expanded $15.1 billion across the quarter. Cash now comprises just 36.4% of total investments, a 1.0 percentage point drop since the end of September. Broken out into subcategories and holding locations, nearly all cash holdings declined on a quarterly basis. Cash equivalents and cash on hand were the largest culprits, declining 18.9% and 8.4%, respectively. Cash balances held at the Federal Reserve were the only cash holding category to expand since September, up just 0.3% to $183.8 billion.
Nearly all growth in industry investment portfolios came in the securities space. U.S. government obligations and Federal agency non-mortgage-backed security investments received the bulk of the cash from credit unions. Government obligation balances gained $6.6 billion, good for a 16.7% quarterly increase. The multi-year streak of Federal agency MBS being the choice investment for credit unions ended in the fourth quarter. Agency MBS balances eked out a modest 0.2% increase but haven't had a significant increase since the second quarter of 2021.
The flood of investment into government and agency securities pushed this category to 56.7% of the total credit union investment portfolio, up from 55.5% last quarter. Mutual funds make up 1.0% of the portfolio, unchanged from September.
Source: Callahan's Peer-to-Peer Analytics
Belly of the Curve Sees Inflows
Fixed income yields responded to the Fed's commitment to raise rates by flattening across the fourth quarter and are now back to levels similar to the start of the year. The spread between the two-year and 10-year Treasury notes declined to 78 basis points after reaching 129 basis points as recently as October during the Delta variant scare. The five-year note increased 10 basis points in the month of December to reach 1.26%.
Credit union investment managers took advantage of these shifts in the yield curve in the fourth quarter, by and large shifting portfolios from cash into medium- and long-term securities. Specifically, the three-to-five-year maturity category increased at the greatest rate of any term group in the industry's investment portfolio since September, up 6.9% – or $8.2 billion over the three months. For the full year of 2021, $53.3 billion piled into this maturity segment, an annual growth rate of 70.9%. Comprising 17.9% of investment portfolios, three-to-five-year terms are now the second largest portion of investments after cash. The five-to-10-year maturity group expanded 3.9% quarterly – and 81.3% annually – and now makes up 13.7% of portfolios versus 9.0% a year ago. In all, credit unions pulled away from low-yield, short-term securities over the past few quarters in favor of these three-to-10-year terms.
Source: Callahan's Peer-to-Peer Analytics
Jay Johnson Jay Johnson is President of Callahan Financial Services, Distributor of the Trust for Credit Unions, in Washington, D.C.
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