A Direct Line Blog

By Ian Trebilcock, AIM Financial Analyst

Earlier this month, the NCUA released its supervisory priorities for 2025. Balance sheet management and risk to earnings and net worth were included as some of their highest priorities. This guidance comes as rising rates have driven up deposit costs faster than loans and investments. This pressure on the net interest margin is expected to increase if higher-yielding loans and investments prepay while higher-costing funds stick on the balance sheet.

There are several strategies your credit union can implement to help relieve this pressure on the Net Interest Margin and prove to examiners that your credit union is actively monitoring the situation while considering strategy.

The best way to measure interest rate risk (IRR) on the books is by staying on top of your ALM results. ALM can help quantify the pressure from either rate direction so your credit union can take action to maximize profitability while offsetting risk.  Some of the key tools used to do this are NEV rate shocks and NII rate shocks. By shocking your balance sheet to see how it responds to changing interest rates, you can get a measure of how sensitive your balance sheet is to those rate changes and ensure your institution is not vulnerable to those repricing pressures. When NEV and NII rate shocks approach your credit union’s policy limits, then it is time to consider some balance sheet optimization strategies.

These strategies can include things like putting on variable rate investments or loans rather than fixed rates, trading longer-term loan products like real estate loans for shorter-term ones, and selling long-term investments to leave in cash. A well-managed balance sheet can improve net interest income and support sustainable growth while maintaining a strong capital base.

This way your credit union can be prepared no matter what the economy holds, or the direction interest rates move. A good understanding of the components that go into an ALM report will also help answer examiner questions come exam time and help you serve your members while protecting your net worth.

As always, reach out to an AIM representative if you have any questions or want to learn more about all ALM has to offer.

Since 1992, the Asset & Investment Management Service (AIM) has consulted with credit unions of all asset sizes, providing sound, practical, and impartial financial advice. With AIM, you can join a trusted partner who will help manage your assets and meet your targets. AIM offers a variety of products and services to assist credit unions with ALM, liquidity, investing, and other related issues.

Email: aim@millenniumcorporate.org  |  Phone: (855) 882-8474  |  AIM Asset & Investment Management