Oct 1, 2025 3:21:38 PM
As the second quarter of 2025 closed, credit unions faced a financial landscape marked by familiar yield curve dynamics and evolving credit spreads. While the quarter did not bring dramatic surprises, smaller changes across interest rates, credit spreads, and deposit behavior highlighted the importance of careful asset and liability management (ALM). Here’s a recap of the key developments and what they may mean for credit union strategy moving forward.
Yield Curve Developments: A Quieter Quarter of Movement
The changes to the shape of the U.S. Treasury yield curve in Q2 largely mirrored what we observed in the first quarter, but the scale of movement was about half as pronounced.
- Short-term rates—including the three- and six-month Treasuries—barely moved.
- Intermediate rates—such as the two-, three-, and five-year maturities—declined modestly, by 15 to 20 basis points.
- The long end of the curve, including 10-year and 30-year Treasuries, was steady and in some cases ticked slightly upward.
For credit unions, this is significant because most of our assets and liabilities live in that intermediate-term space where we saw the majority of rate movement again this quarter.
NEV Ratios and Volatility: Lower Ratios and Increased Risk
Net Economic Value (NEV) ratios edged lower for most institutions this quarter. About 70% of credit unions surveyed experienced decreases, though generally to a lesser extent than in the first quarter. The primary driver was the valuation of non-maturity deposits, which continue to pressure NEV results in the current rate environment.
NEV volatility to rising rate environments increased for many credit unions this quarter. Roughly three-quarters of these credit unions saw higher +300bps NEV volatility, in some cases tied directly to growth in mortgage lending but also exacerbated by the declining NEV ratios. Longer loan maturities naturally extend interest rate exposure while lower base-case NEV ratios give credit unions less room to absorb the additional duration, and many credit unions are seeing this reflected in their long-term volatility metrics.
Credit Spreads: A Mixed Picture
Credit spreads told a split story in Q2. Spreads on mortgage-related loans tightened industry-wide, providing modest relief to housing lenders and improving the valuation of these types of loans. By contrast, credit spreads widened for consumer loan categories such as auto loans, credit cards, and unsecured loans as delinquencies and charge-offs rose.
Fixed unsecured products were particularly challenged. Rising charge-off rates suggest that borrowers are finding it more difficult to repay debt and typically unsecured loans are the first place that we see these signs of struggle. Credit unions with high concentrations in these segments will need to diligently monitor underwriting standards and portfolio performance as well as ensure that they are pricing these loan types accordingly.
Net Interest Income and ROA: Broad Improvement
Despite pressures elsewhere, most credit unions posted stronger earnings performance this quarter. Roughly 80% reported higher net interest income (NII) and net interest margin (NIM), while about 60% saw improved return on assets (ROA).
The primary driver of the increase in net interest margins was a reduction in overall cost of funds. Many credit unions found success in reducing costs from deposit certificates. Average certificate rates largely declined across most credit unions, and many experienced a migration of funds out of certificates and into lower-cost deposit types such as checking and savings accounts. Credit unions with outstanding higher-cost borrowings were able to pay down some of these balances as deposit balances generally increased and liquidity rose.
At the same time, some institutions experienced higher operating expenses, which tempered gains to ROAs and explains the difference in the percentage of credit unions who experienced increased NIMs versus those who also saw ROAs improve. Balancing income growth against expense management will remain a key theme in the second half of the year.
Down-Rate Scenarios: Preparing for What’s Next
The quarter also reinforced the need to prepare for further rate declines. We have begun to place more emphasis on the -100bps shock scenario; while it’s not an exact replication of how we expect rates to move over the next year, it gives us a good idea of the direction we are headed in if interest rates continue to decline. Credit unions are rightly focused on lowering funding costs in a down-rate environment while protecting asset yields to maintain margins.
Large cash and overnight fund balances and short-term investments introduce reinvestment and opportunity risk if short-term rates fall further. This emphasizes the importance of scenario testing and proactive planning in ALM models as well as having robust liquidity management as a key facet of credit union strategy.
Broader Observations: The Mortgage Tilt and Consumer Trends
Mortgage lending has remained a key element of loan production for some credit unions, but this focus is not without consequences. Mortgage loans tend to be some of the highest duration assets on a credit union’s balance sheet, leading to increased NEV volatility. Credit unions that find themselves approaching or surpassing their ALM policy limits may need to consider limiting new mortgage lending or selling loans to agencies or through participations.
Meanwhile, the broader economy continues to influence lending strategies. Consumer spending shifts, ongoing concerns about housing affordability, and evolving credit risk all shape how credit unions will deploy capital in the coming quarters. Auto lending and unsecured credit will require careful management, while mortgage demand may remain strong despite affordability challenges and depending on your credit union’s local economic conditions.
Final Thoughts
The second quarter of 2025 did not bring nearly the same dramatic curve shifts or credit shocks as the first quarter, but these factors still played a heavy-handed role in interest rate risk metrics. For credit unions, the focus should be on fine-tuning ALM strategies to manage gradually declining rate scenarios, addressing credit risk in loan portfolios, managing liquidity positions, and monitoring cost of funds as well as operating expenses.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.