Apr 30, 2025 4:02:12 PM
From December 31, 2024, to March 31, 2025, the discount curve shifted meaningfully — and it’s having an impact on asset-liability management (ALM) results across the credit union space.
Short-term rates (such as 3-month OIS) were only a few basis points lower. But farther out the curve, the declines were much more substantial:
- 1-year rates fell roughly 22 basis points,
- 3-year rates over 40 basis points,
- 5-year rates nearly 40 basis points, and
- 10-year rates about 30 basis points lower.
For most credit unions — where liabilities are typically short- to intermediate-term — these curve movements have a direct impact on mark-to-market valuations in ALM reporting.
Non-Maturity Deposits (NMDs) Still Drive the Story
The majority of funding for credit unions comes from non-maturity deposits like checking and savings accounts. While these deposits have no contractual maturity, ALM models typically assign them final maturities of around four years and effective durations closer to 2 years (depending on the “decay” model). Because of that, their valuation is sensitive mainly to changes in the belly of the curve (2 - 5 years), where the largest basis point declines occurred this quarter.
However, the mark-to-market uplift on NMDs isn't always straightforward. It depends heavily on two key factors:
- Discount Rate Assumptions: Each ALM model uses its own approach to discounting NMDs, typically blending short- and intermediate-term curve points.
- Effective Duration Calculations: Small changes in modeled deposit lives — especially at longer assumed durations — can create noticeable differences in valuation.
For example, if a credit union uses longer maturities in its deposit modeling (closer to 6 years), it would experience a larger valuation increase than if it assumes a more conservative 2 - 3 year maturity.
Member CDs and Other Short-Term Funding
Beyond core deposits, many credit unions also carry member certificates — which, in today’s environment, tend to be heavily weighted toward shorter terms (under one year). While the 1-year point did decline by 22 basis points, the impact on these shorter-tenor liabilities is relatively modest compared to what’s happening with modeled NMDs or longer-term borrowings.
Importantly, most credit unions don’t rely on term funding beyond three or four years — meaning exposure to the deeper declines at the 5- and 10-year points is minimal on the liability side. Institutions holding longer-dated wholesale borrowings would see larger MTM movements, but for the average credit union balance sheet, those effects are limited.
Why It Matters
With smaller discounts on NMDs as of Q1 end, we anticipate smaller Net Economic Value ratios unless offset by recent loan growth. Assuming that recent loans were appropriately priced, these new loans priced at or near par could more than offset the lower discount on NMDs when calculating Net Economic value ratios.
As we head into mid-2025, understanding how rate movements filter through your ALM results is essential. Although liquidity has recovered at most credit unions, deposit competition remains a focus, so we encourage credit union leaders to think about:
- How their NMD assumptions affect ALM metrics and offset asset durations,
- Whether their beta and decay factors are capturing realistic member behavior, and
- How future rate moves could further impact MTM results — both on assets and liabilities.
Since quarter end, we’ve seen even more rate volatility, with additional rate cuts priced into the front end of the curve and steepening at longer tenors. Staying proactive now will keep you better positioned for the next rate cycle turn.