C. Myblog

NEV And Net Worth Are Not The Same

June 3, 2011

Reminder: While net economic value (NEV) and net worth represent two completely different concepts, they are often used incorrectly as interchangeable terms.  Even NCUA sometimes adds to the confusion.  In the April 2011 NCUA Report¹, an article on rising interest rate risk gives an example of a credit union with $5.5M in long-term, fixed-rate mortgages funded with short-term CDs.  The article states, “If mortgage and CD rates reverted to November 2007 (pre-recession) levels, net worth would tumble by about $538,000 or nearly 18%.”  While net economic value may be reduced 18%, this is not the impact on net worth.

NCUA defines net worth as the retained earnings balance of the credit union².  Retained earnings change as a result of positive or negative net income.

Don’t you wonder if this credit union is making or losing money in the +300 rate environment?

Sources:
¹NCUA Report, April, 2011, Office of Capital Markets Report, page 7
²NCUA 702.2 (f) (net worth definition)

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