During the first quarter, we noted two main trends that significantly impacted credit union ALM metrics. First, smaller discounts on non-maturity deposits in the NEV model impacted nearly all credit unions in a similar manner. Second, increased credit pressures on loan portfolios from rising charge-offs and delinquencies reduced the market value of assets in NEV calculations. Overall, we largely saw NEV ratios decrease in the first quarter.
The uncertainty regarding the implementation of tariffs had mixed impacts between consumers and producers. Despite improving inflation metrics at the start of the year, the Federal Reserve has remained on the sideline in anticipation of the future economic impacts of pending trade and fiscal policy. Views amongst FOMC board members are divided, with some thinking cuts should come sooner, some later, and some not wanting any cuts at all; however, the average projection still shows two cuts before the end of 2025. Market participants were betting that cuts would come sooner and anticipated as many as four rate cuts in 2025 as implied by futures projections. As expectations for a slowing of economic activity and rising prices increased, we saw meaningful declines along the intermediate and long-term parts of the yield curve.
Household balance sheets started to feel pinched by continued elevation of prices and higher than normal interest rates. The resumption of student loan repayments at the end of 2023 added another layer of stress. Many household budgets were accustomed to an average of $500 a month windfall from the temporary payment suspension. Repayments have led to more borrowers struggling to pay back their loans as evidenced by delinquency and charge-off rates steadily rising over the course of 2024 and into 2025.
Interest rate curves saw notable decreases across the board over the course of Q1; however, the largest decreases were seen in the intermediate terms from 2- to 5-years with the 2-year dropping around 35bps, and the 3- and 5-year dropping by roughly 40bps. Since there were no Fed rate cuts during this period, the short end of the curve was only minimally impacted. Farther out on the curve, rates declined in anticipation of slowing economic growth.
As interest rates decrease, particularly in the belly of yield curves – the 2-to-5-year tenors, the valuation of non-maturity deposits generally rises, getting closer to par pricing. These deposits- regular shares, draft shares, money markets, etc.- are typically priced well below market rates and thus are valued at a discount in the NEV model. When market rates fall, the discounts that credit unions once enjoyed on their deposit portfolios are reduced. This results in a negative impact on base case NEV and NEV ratios, and we saw this across the board for Q1. The extent of the impact varies between credit unions based on model nuances such as discount rate assumptions, decay, rate sensitivity factors, and more. You can learn more about the impact of NMD model assumptions here.
Since the end of 2023, delinquencies and charge-offs at credit unions have been on the rise with delinquencies increasing by 15 basis points year over year and charge-offs increasing by nearly 20 basis points. Many of these credit issues were concentrated in auto loan portfolios but many credit unions saw troubles with other loan types such as mortgages and unsecured loans/credit cards.
*Source: NCUA
There are many factors that go into calculating NEV valuations of credit union loan portfolios: projecting cash flows, applying a discount rate, and then calculating a present weighted value, or NEV. One component of the discount rate is the credit spread which reflects the overall credit risk embedded in a loan portfolio. As a credit union’s loan delinquencies and charge-offs trend upwards, the calculated credit spread applied in an ALM model should increase to reflect the added credit risk. This leads to a higher discount rate in the present value calculation and results in a lower modeled NEV.
Individual credit unions saw mixed results here depending on the makeup of their loan portfolios, localized economic impacts on member segments, exposure to indirect lending, credit tier allocations, and other factors. The credit unions that saw the fewest issues with credit during Q1 generally saw their loan portfolios price up due to a combination of reduced moderate-term rates and the continued repricing of the loan portfolio into the current higher rate environment. Those credit unions that experienced a significant uptick in credit-related issues were more likely to see loan NEVs that either stayed similar to last quarter or fell slightly as the benefits of falling rates were offset by the increased credit spread.
With the books closed on the second quarter of 2025, here are a few trends that we expect to see in the next round of ALM reports:
Investment valuations in NEV calculations are expected to gradually rise as a result of the decrease in interest rates.