Jan 28, 2026 3:17:27 PM
Recent performance trends from 2025 offer valuable lessons about what really drives institutional outcomes when market forces are limited and internal decisions take center stage.
When Balance Sheet Composition Becomes Destiny
The third quarter of 2025 revealed something important: your loan mix and funding structure matter far more than broad market trends when interest rate movements concentrate at the short end of the curve.
Mortgage loan spreads widened during Q3, pressuring valuations on real estate portfolios. At the same time, consumer loan spreads tightened, improving base-case metrics. The one major exception was unsecured loans, which saw considerable spread widening. This pattern continued through Q4 as short rates declined further while the middle and long end of the curve remained relatively stable.
The practical result? Credit unions with heavy auto loan concentrations saw net economic value (NEV) ratios improve and interest rate risk decline, while those weighted toward real estate didn't experience the same benefits.
Two institutions operating in the same market, facing the same rate environment, produced dramatically different results based solely on portfolio composition. The message is clear: when macro forces are muted, micro decisions dominate outcomes.
The Strategic Fork in the Deposit Road
Balance sheet contraction became common through the second half of 2025, driven by modest loan demand and deliberate funding decisions. But the more revealing story emerged in how credit unions approached share runoff. Some institutions allowed higher-cost certificates to mature without replacement, accepting near-term balance sheet shrinkage and the future challenge of rebuilding that funding base. Others retained members through high-yield money market products that offer competitive rates today but provide flexibility to gradually reprice downward as rates decline.
These weren't random choices. They were strategic bets on different futures. Credit unions that chose certificate runoff were implicitly betting on their ability to attract deposits later at lower costs. Those that retained through money markets were prioritizing flexibility and relationship continuity over immediate margin improvement.
Neither approach is inherently superior, but the choice carries significant consequences in different rate scenarios. And that brings us to the scenario that matters most right now.
Why the Bull Steepener Demands Attention
Current policy discussions around aggressive short-term rate cuts have moved the bull steepener scenario from theoretical exercise to practical planning necessity. This scenario assumes the Fed drives overnight rates down into the 2% range while long-term rates rise due to increased risk premiums further out the curve. It's not a prediction, but it aligns closely enough with current policy rhetoric that ignoring it would be imprudent.
Here's why this scenario creates unique tension: it rewards and punishes specific balance sheet characteristics in ways that magnify the strategic choices credit unions have already made.
The loan portfolio divide widens. In a bull steepener, the spread behavior we observed in Q3 becomes more pronounced. Longer-duration mortgage products face additional pressure as long rates rise, while shorter-duration consumer loans may benefit from the steeper curve. Credit unions heavily concentrated in real estate lending face a compounding challenge, while diversified portfolios gain a natural hedge. The Q3 experience offers a preview: portfolio composition drove results then, and it will drive them even more forcefully in this scenario.
Funding decisions made months ago show their true colors. Credit unions that allowed certificate runoff will need to replace funding in an environment where short rates have fallen but deposit competition may remain intense. Those that retained members through money market products can now reprice those deposits downward, recapturing margin without losing relationships. The strategic bet placed in Q3 and Q4 now pays off or doesn't.
Investment portfolios shift from recovery mode to strategic asset. Through 2025, investment portfolios provided quiet support as unrealized losses unwound. Securities purchased during the 2023-24 rate peak began trading at premiums, and portfolios gradually replaced lower-yielding holdings with higher-yield securities. In a bull steepener scenario, this process accelerates. With a steeper yield curve, responsible duration management becomes a key strategic decision in protecting investment income.
The Credit Performance Stabilization
One area that offers some relief: overall credit performance has stabilized rather than deteriorated. Through 2025, most loan categories showed fewer charge-offs and delinquencies. Even unsecured loans, which showed stress in Q3 with increased charge-offs and delinquencies across most institutions, appear to be leveling off rather than accelerating into broader consumer distress.
This stabilization matters because it removes one potential compounding factor. In previous rate cycles, aggressive cuts often came in response to credit deterioration. This time, if cuts occur for policy reasons while credit remains stable, credit unions avoid fighting battles on multiple fronts simultaneously. The bull steepener scenario becomes more manageable when credit costs aren't simultaneously rising.
However, the consistency of the unsecured loan stress across institutions in Q3 still warrants monitoring. Even small portfolio segments deserve attention when trends are uniform, as they can serve as early indicators of consumer financial pressure that might emerge under different economic conditions.
From Analysis to Strategy
The path forward requires connecting scenario analysis to current decisions. Credit unions that understand how their specific balance sheet composition responds to a bull steepener environment can make better choices today about loan mix, funding strategy, and investment positioning.
The institutions best positioned for 2026 are those that recognize three realities.
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Portfolio-specific sensitivities drive outcomes more than generic rate shocks when rate movements concentrate at one part of the curve.
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Deposit strategy decisions made during periods of share runoff create path dependencies that play out over years, not quarters.
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Scenario analysis is valuable not because it predicts the future but because it reveals which current characteristics create vulnerability or resilience under different conditions.
As policy discussions continue around rate cuts and the yield curve steepens, credit unions face a decision point. They can continue managing to the base case and hope their existing portfolio characteristics serve them well, or they can actively assess their exposure to this scenario and make adjustments where vulnerabilities exist.
The bull steepener isn't inevitable. But it's plausible enough that prudent risk management demands understanding what it would mean for your institution specifically.