Credit unions may be able to derive considerable benefit from advance restructures. The National Credit Union Administration (NCUA)’s approach to their Net Economic Value (NEV) Supervisory Test assigns standardized values to non-maturity shares. This has the impact of applying a shorter duration to deposits, which implies more exposure to interest-rate risk. Extending liabilities through an advance restructure would aid in mitigating that risk, while also improving net interest margin without adding to liquidity.
Another benefit of an advance restructure is that it allows members to expand the universe of assets to consider as they seek to normalize cash levels. Many members prefer to concentrate investment purchases on the front-end of the curve, where right now there is not much yield to be had in excess of what is being earned on cash balances.
Let’s revisit the example of a member with an existing 2.05% advance with nine months to maturity. By restructuring the advance out to five years at a new rate of 1.20% and investing in a four-year asset at a 1% yield, the impact to margin and funding gap is noteworthy. Going from cash to the 4-year investment improves yield by 0.90%, but also lengthens assets by 4 years. However, the restructure counteracts that asset extension by increasing liability life by 4.25 years, while also lowering interest expense by 0.85%. Margin is improved through both more asset yield and lower liability costs, while net sensitivity to rising intermediate rates declines slightly.