Credit Unions: Strategies for Managing the Net Economic Value Test

Hi, my name is Tyler Buckridge, sales and strategy specialist here at the Federal Home Loan Bank of Boston.

Today, we are going to explore actionable strategies credit unions can use to manage the net economic value or NEV test.

This topic is particularly pertinent.

With treasury yields rising again and uncertainty over long-term rates and inflation, it’s clear we’re not out of the woods yet.

Understanding how to navigate this terrain is crucial, particularly as the NEV test becomes more relevant to institutional performance, exam scrutiny, and long-term balance sheet health.

Here is what we will cover today.

First, we will review asset growth and capital trends that set the stage for current challenges.

Next, we’ll dive into the mechanics of the NEV test, what it measures, and why it matters.

Finally, we’ll walk through funding strategies that can help improve NEV outcomes, with a focus on practical solutions for credit unions still feeling the pinch.

Starting in 2020, credit unions experienced a flood of deposits.

This growth, while welcome, was largely passive, driven by stimulus and suppressed consumer spending.

The result?

Reluctant leverage.

Balance sheets expanded far faster than capital, pushing capital ratios lower.

As you can see in the chart, asset growth peaked in early 2021, and capital ratios for many institutions, especially those in the 10th percentile of members, dropped steeply.

As we covered in our May 20th peer analysis webinar, we are now approaching the five-year anniversary of that growth wave, which means a large volume of assets are coming up for repricing.

That’s a critical turning point, but it’s still a year away.

So, the question now becomes, how do we bridge the gap?

As interest rates surged through 2022 and beyond, the market value of fixed-rate assets declined sharply.

That includes investments and also residential mortgage portfolios that many institutions held onto to manage liquidity.

At the same time, capital in the NEV base case simulation, already weakened by balance expansion, wasn’t sufficient to absorb these market value losses.

Combine these two effects, and many credit unions that had once been in the low or moderate NEV risk buckets found themselves jumping into the high or even extreme risk categories.

Even with the NCUA’s updated guidance in 2022, which removed the extreme designation and gave examiners more discretion, the structural issues haven’t gone away.

Let’s talk about the lingering pressures still shaping NEV test results—persistent higher rates.

Many hope that this cycle would be short, but here we are in 2025 with longer-term rates still elevated and uncertainty higher than ever.

This prolongs unrealized losses on fixed assets and keeps NEV results under stress. Another factor has been rising deposit costs.

Non-maturity deposits continue to be as expensive as members seek higher yields.

Some funds are being cannibalized by higher-cost products internally, which my last case study covered in detail, or they are migrating elsewhere.

Many credit unions have become more reliant on short-term CDs or wholesale funding, which raises deposit betas and erodes NEV further.

Also, liquidity pressures.

Some institutions are tight on liquidity due to loan growth deposit runoff.

That’s led to tough choices like selling investments at a loss, which has a direct negative impact on NEV. And finally, repricing mismatches.

Assets locked in at low fixed rates are slow to reprice, while liabilities, especially deposits, are adjusting quickly.

That mismatch continues to be a core issue in poor NEV outcomes.

In short, the pressures on NEV haven’t gone away; they’ve evolved.

And for many institutions, the test has become more painful over time, not less. Let’s look at how the NEV test actually works.

In the base case, the NCUA applies a 1% premium to non-maturity deposits.

In a plus 300-basis-point shock, that premium rises to 4%.

3% change in value implies a very short duration being applied to these deposits.

At the same time, a five-year Classic Advance carries a duration closer to the stated final maturity and would show a much larger change in post-shock value than the deposit.

The example on this slide shows a scenario where the differential is nearly nine points, keeping in mind that, as a liability, a lower number is a better result for the credit union.

The key takeaway here is that extending liability duration through advances, especially in a steep curve, is often the most efficient way to improve NEV results. Let’s talk about tactics.

There are several ways to improve NEV test results on both sides of the balance sheet.

On the asset side, you can go shorter on new loans or try to sell longer-term assets, but both of these take time, and the latter could mean realizing losses, effectively making your paper losses real.

On the liability side, the fastest and cleanest move is to add longer-duration funding.

You avoid operational headaches and get a direct, quantifiable impact on your NEV test.

In short, adding long-term liabilities like advances is efficient, impactful, and doesn’t require touching your existing assets or deposit base.

So, how do we decide which solution is best?

Ask yourself, how long do we need relief?

This could include considerations like the duration of existing assets and the expected future path of rates. How much do we need?

NEV test results and running relief simulations can provide guidance here. What’s the cost?

Adding funding isn’t free, so weighing the added costs against the need for relief is crucial to finding the most appropriate funding solution.

We can help you quantify your NEV exposure and then tailor a funding strategy to match the magnitude, time frame, and cost tolerance of your institution.

This is about building a strategic bridge to the future, not just putting out fires.

Let’s put some numbers to this.

In the chart on this slide, we compare the cost and market value benefits of a one-year Classic Advance, a five-year, one-year Member Option Advance, and a 10-year, one-year Member Option.

As you can see, the longer structures cost more in rate, but their impact on the NEV test is significantly greater.

For example, a $10 million 10-year one-year Member Option Advance at 5.99% might be giving you some sticker shock, but it creates $1.7 million in market value benefit in a plus 300-basis-point shock compared to just $280,000 from the one-year classic.

That’s a 34-basis point improvement in NEV as a percentage of assets versus just six from the Classic Advance.

For institutions that need near-term relief, the value is clear.

So, you’re still here listening, and I assume you’re thinking about how wonderful and efficient the strategy sounds in theory, but you’re probably asking yourself: “how would it work in practice?”

Great question.

Let’s say you take down a 10-year, one-year Member-Option Advance today.

One year from now, you’ll face a decision when that one-year call comes up.

So, what to do?

If rates fall, NEV pressure likely improves, and your need for relief is reduced.

So, you call the Advance and reduce your funding costs.

Let’s say rates are flat.

You may choose to keep the advance if you still need the support, or call and refinance the structure at a lower rate if the yield curve is favorable and pricing is improved.

Or let’s say rates rise moderately or significantly.

Keeping the advance will likely make sense, especially as that 5.99% rate may now be below market.

You might even layer in more Member-Option funding to bolster NEV.

This flexibility is why Member-Option structures are so powerful.

They give you the tools to adapt as the rate environment evolves.

In this new era of interest rate persistence, credit unions should consider nimble strategies that offer flexibility without forcing asset sales or liquidity strain.

Advances, particularly Member-Option structures, offer exactly that.

So to recap, continue assessing your NEV test exposure quarterly.

Look at extending liability duration as a first-line defense.

Use funding structures that offer flexibility and optimize your results.

And always weigh the cost against the market value benefit and NEV improvement.

Our Member Strategies group is here to help.

We’ll work with you to quantify your NEV relief needs and tailor funding solutions that support your balance sheet strategy.

Reach out to me directly or connect with your relationship manager to get started.

Thank you.