A Direct Line Blog

By Ian Trebilcock, AIM Financial Analyst

In 2025, credit unions are facing a tough balancing act: managing interest rate risk while striving to grow interest income. With FOMC Chairman Jerome Powell’s “wait and see” approach, the Fed has kept rates steady, resulting in loan, share, and investment rates holding higher than anticipated.

This prolonged rate environment is creating pressure on both sides of the balance sheet:

• Investments: Some credit unions are sitting on portfolios with unrealized losses, especially in fixed-rate securities purchased when yields were lower. However, as these securities mature, they’re being reinvested at higher yields, helping to improve income over time. We see a lot of credit unions sitting on high liquidity since overnight accounts are paying so well. This brings interest rate risk for your downward NII (Net Interest Income) shocks because if rates fall, liquidity in overnight accounts will be repriced immediately rather than at maturity if it were in an investment. Ultimately, you lose out on potential interest income if rates fall.

• Member Share Accounts: With rates being higher on the investments and loans side, credit unions have been able to pay higher rates on their share accounts. Higher rates on share accounts can keep members happy as well as deter them from taking their money elsewhere. Since loan and investment rates have been so high, credit unions can still maintain a positive spread between their interest income and their interest expense by paying more for shares.

• Loans: The loan portfolio is a mixed bag. Higher rates can slow loan originations, as borrowers hesitate to lock in long-term commitments. However, credit unions that successfully generate new loans in this environment can benefit from higher yields, often better than investment alternatives. These loans, while beneficial for income, also carry increased credit risk, especially if high rates persist and borrower delinquencies continue to rise.

In this “wait and see” environment, credit unions must stay proactive, balancing yield, risk, and member share rates. Smart decision-making, informed by robust ALM modeling, is key to managing interest rate risk while building sustainable growth.

AIM Solutions is a division of Millennium Corporate Credit Union. If you’d like to discuss these challenges or learn about their ALM services, please reach out to them at aimcusolutions.org or call (855) 882-8474.