Asset-Liability Management & Funding Strategies for the Current Environment

Afternoon, and thank you for joining us, and I say good afternoon because we’re at our one o’clock time slot here, which is different than our normal 11 a.m. spot. Just some scheduling things here on our end, and it’s not because we’re having lunch with all the Scottish soccer fans who have been so graciously joined us here in Boston for the World Cup these last few weeks here, which has been so very fun to see, but that’s not what we’re here to talk about. We have a great agenda here today to talk about some ALM liquidity and funding strategies that are relevant in today’s landscape. So here’s the plan for today.

We will first talk about some deposit pricing and strategy considerations.

Tyler will come in to talk about how we can optimize the things that we do with short-term wholesale funding.

Lastly, I will come back to talk about some mortgage strategies, whether we’re talking about new production, the retained portfolio, or even the investments, which I think we can consider part of overall mortgage strategy.

But before we do that, as many of you know, the Federal Home Loan Bank of Boston has a dual mission to provide liquidity to all of our members, but also to support housing and economic development here across New England.

And our HCI programs are super popular.

And there’s a lot of them and they cover a number of different things.

So Tyler, as we approached the midpoint of the year, thought it was good to give a one-page snapshot of where we’re at with some of the various programs to keep on your radar as we get to the second half of 2026.

Absolutely, thank you, Andrew.

And as mentioned, I’m Tyler Buckridge, Sales and Strategy Specialist at the bank.

So I want to start off on the top left corner.

Take a look at what’s going on with jobs for New England So that’s the subsidized small business.

Sorry subsidized advances to support small business loans. So we had a few funding drops have already happened, but we have one coming up July 8 and in addition to that Funding drop.

It’s also when the cap goes up to 250,000 of subsidy per member, something to watch out for if you’re in that program or if you’re not chat with your RM and find out more about it Going to the right, to the down payment assistance programs.

So we have three of those, Lift Up Home Ownership, the Equity Builder Program, and Housing Our Workforce.

So we have one more drop, it’s actually more ongoing, it was this past Monday, the 15th, we had a few that went down throughout the spring.

And in addition to that funding drop on the 15th, on June 2nd, all of the state-by-state funding went into the general pool.

So there’s still funding available and if you have any sort of residential activity going on, it’s great to align your borrowers with those really fantastic programs.

And then the permanent rate buy down, which is in conjunction with our mortgage partnership finance program.

This is where we’ll buy down the rate by up to 2% for any borrowers you have who are 80% AMI and below and where you sell that loan into the MPF program.

Those funds are exhausted for this year. It’s a really fantastic program.

We’ve had a lot of success with it.

So if there’s any interest there, please reach out to your RM or anyone on our MPF team, and we’ll to align for next year to take advantage of that program and then finally the affordable housing program.

It’s the 35th year of that program. It’s really fantastic program and upcoming is on the 16th sponsor applications are due.

The round for this year did open on the 1st of June but make sure to get those applications in by July 16th because on the 30th the applications are reviewed and then awards come out December 24th.

It’s another fantastic program.

And with any of those, if you have any questions, reach out to any of the RMs, any of us, and we will get you connected.

Absolutely, thank you, Tyler.

So let’s jump into talking about deposit pricing.

Before we do that, actually, yesterday we had the FOMC announcement, so I think it behooves us to make mention of that.

As expected, no rate change.

And as expected, but which was the key part of what we saw yesterday was the change in the communication strategy in terms of a shorter and simpler press release.

Chairman Warsh electing not to submit a dot plot, as one member noted earlier this week, all the not dot.

And so really a pivot away from a dovish stance more to a neutral posture, but really injecting a lot of uncertainty and potential volatility in terms of not providing the guidance about the expectations of the potential path of rates.

So as we’ve persisted in this higher rate environment, right, we started to see cuts and they have, we pause for a little bit now.

One of the byproducts of that for our depository members has been the growing reliance on CDs.

So here we’re looking at the relationship, something that is probably intuitive to many, but it’s always good to put some numbers to support that particular perspective.

So we’re looking at the relationship between the cost of interest-bearing deposits and the reliance on CDs as a percentage of total deposits.

And as you might expect, as we see increasing CD reliance, we see a rising cost of overall deposits.

And that cost of deposit number does include non-maturity deposits, but that’s the whole concept of correlation.

You can see the relationship is very strong, 76% for credit unions and green on left, 49% for the banks on the right-hand side.

So again, it’s intuitive.

It’s something that we probably all think and believe, but the fact of the matter is that as the reliance on term deposit grows, we’re going to see the pressure on cost of funds.

And if you had joined us for our Peer Analysis webinar last month, one of the troubling signs that we were seeing was that the repricing of the asset side, we were seeing some not-so-favorable trends there and slowing down.

So managing deposit costs efficiently is much more important if the pace of yield improvements on the left side of the balance sheet are slowing down or even worse, withering away.

So, let’s go back over the last six years, and we can connect the dots between why CD reliance is growing.

And this only goes back six years, but we did look at data going back 30 or 40 years, and we have seen a secular shift away, a multi-decade move away from CDs as a core part of the funding mix.

And there have been little periods of time, and 2022 to 2025 or 2024 is a prime example of that, that where that long-term multi-decade trend has been bucked is when there’s a sharp rise in rates.

And as many of all you know, customers come out of the woodworks and have showing a little more willingness to take on term deposits as part of their deposit portfolio.

So we saw about a 15% increase in the composition of the deposit portfolio from 2022.

And we did see that lag, that lovely, lovely lag that we like when rates start to rise, and we don’t have to be immediately reactive with our deposits.

But that 500-basis-point shock higher, or not that shock, but really fast ramp, if you will, really helped put the pedal to the metal in terms of CDs moving up.

So, because we’re looking at the six-month T-bill as a proxy for interest rates.

And as rates have started to come down, but again, not all the way down, not like the last two times rates before this came down in 2008 and in 2020, where they came all the way down to zero. We’re in this position now where there’s two-sided risk.

As we saw from Chairman Warsh’s comments yesterday, that there’s potential for rate hikes and rate cuts if it’s potentially called for.

Not always the same consideration when rates are at 0%. So we can see that the concentration has leveled off a little bit here.

So now it’s the point where the secular shift has a chance to manifest itself, right?

So all else equal, and we have in the Peer Analytics webinar seen some positive signs in terms of the increasing amount of non-maturity deposits, or even better, shared drafts or non-interest bearing accounts have been starting to come back into the fold, which is probably one of the top two or three trends that we’ve been able to suss out of call reports over the last few quarters.

But the fact of the matter is, at these levels, right around 30% of the deposit portfolio, to give you some context, those are levels that are comparable to where we were industry-wide in 1990.

And think of just about how much the world has changed in that time in terms of technology and how the banking industry works.

So I think even if we were to persist at these types of levels, I’d be hard pressed to see the concentration move meaningly to the upside.

But as balance sheet managers, we have to think about ways to optimize the cost, even if we’re staying in CDs or ideally having customer focus shift into other areas.

So when we think about funding the balance sheet, whether we’re talking about term deposits or non-maturity deposits or wholesale funding, the various flavors of wholesale funding that are available, what are the benefits that accrue from the particular decisions that we make?

And so first and foremost, we want our funding cost to provide margin benefits to us.

And there’s a couple parts of that. There’s the where on the curve or what product do I use?

But there’s also pricing aspect of it.

So when we think about the part of the curve or the shape of the yield curve, we’ve existed in an inverted yield curve for a while.

So on the margins, there had been some ability to extend out the funding and get cheaper rates.

That relationship has flipped right now, but we’ll come back to why it may be beneficial to test the waters, at least on the deposit side, not necessarily on the wholesale funding side, why there may be some value to try and nudge out the In terms of liquidity benefits, very simple, whether it’s whatever type of funding it is, it puts cash onto the balance sheet, that’s liquidity.

But ratio support is certainly going to be important, but also the cash flow coverage.

And one of the things that we’ve talked about, and we’ll get to it a little bit when we talk about specific pricing decisions, is when you think about something like a five-month CD that’s priced very sharply, it’s probably not contributing too too much in terms of the margin, no matter where or whatever the shape of the curve is.

But then from the liquidity metrics, from a cash flow coverage, it’s still a short-term instrument.

And speaking with members, they lament one of the byproducts of the increase in CD reliance is that your constantly on the hamster wheel and you have big buckets of chunky funding coming back that are rate-sensitive and you have to play that game on the pricing and worry about retention and flight. In the other byproduct of the short-term CDs is they don’t contribute too terribly much to interest-rate risk in terms of hedging some of the duration there, and it’s about the protection, not just of earnings today, but of earnings in the future, right?

We learned that lesson in 2021 and 2022 that we didn’t have the stickiness and the low beta in the deposit franchise that maybe we thought at the time in what the models told us.

So, you know, when we debate term deposits versus non-maturity deposits, I think it’s beneficial to look at what the value is.

Not necessarily the price in terms of defining price by saying the rate, right, 3% or 4%, but convert it almost as if it’s an asset into a bond or a loan, which is, I think, the way most everyone’s brain works, right? Par is neutral.

And then in the case of liabilities, below par is a good thing, right? Whereas for an asset, it’s the opposite.

We’re rooting for things to go above par.

So up top, just a simple calculation.

If you take the advance curve and change the rate on a deposit, down by 100 basis points, down by 50 or 25, or flat to advances, or advances plus 25, you can see that even in the case of advances less 50, because of the short-term nature, because of the defined of maturity of the CDs, whether it’s at six month in green or 18 month in blue, you’re not getting too much of a discount there. Just slightly below par in terms of the six month and then 99.6 in terms of the 18 month.

We move to the bottom, and this is where the potential value is in the non-maturity deposit bucket, and it’s part art and part science because we know with non-maturities that there is an average life assumption.

And maybe we don’t have the average life assumptions that we believe to be true, not three years, but call it five years and 10 years prior, whereas we could write it in pen that we have a seven-year average life on a certain section of our non-maturities.

But what we see, whether we have it at a six, anywhere from a six-month average life out to 60 months, we can see the value accrues to you as the balance sheet manager, the longer and the stickiness of the average life, even discounting it versus now a positively slow yield curve.

And we won’t get too much into the look at this number versus that number, but the key takeaway here is even with some modest assumptions of a two-year average life, the value as an average life, even when you may have a slimmer spread versus advances, right, which should be the benchmark for how we price things.

Marginal cost of funds is something that is always a topic that’s on the radar.

But it’s more impactful in some environments versus others.

And the good news is, right now, it’s less of a threat and concern than I think it was a couple of years back.

And the reason for that is the spread has contracted between what the existing deposit cost is in most portfolios right now versus what the marginal rate is. So, we just grab some round numbers here. So in green you can see scenario one, which is where we were a couple years back. Where if you had a 1% deposit base the clearing rate would to bring in new CDs. Maybe was at 5% then we’re really worried about switching costs right there

We’re awake. We’re worried about waking up those sleeping depositors who are in 1% or even lower, and moving into the new products because the true cost of that that 5% CD is actually much higher but so now that we’ve already absorbed a lot of the pain, and we’ve seen a repricing of the deposit book higher and the deposit and short-term interest rates are lower than where they were 18 24 months ago.

That means that we have more of a margin to experience cannibalization.

We see that on the right-hand side, where the marginal cost relative to the advance rate. It’s at about the 12% cannibalization ratio, where it starts to be uneconomic.

And that’s not including the dividend, something Tyler will talk about in a little bit.

As we sit here today in closer to a scenario two situation, that breakeven point is right at the 25% mark. So a little bit more capacity.

And certainly when you are early on. So now, at a certain point, it’s almost like prepaid burnout when we think about mortgages.

So let’s wrap things up on the deposit-pricing side using the advance curve.

I think the advance curve can serve as a great starting point to price a deposit book.

And we can push and pull on the metrics as we think about what’s happening at the rest of the balance sheet.

And one thing I didn’t talk about between CD reliance and total deposit cost, there may be reasons, depending on the mix of your balance sheet, to be aggressive on short-term CDs.

And there’s a number of members who their lending activity is producing exceptionally high yields and with shorter durations that you can still be a very, very profitable and well-managed risk institution by paying up for CDs, because that’s that you can quickly bring funds in the door.

But I wouldn’t say on the whole that is the case, right?

So I think it behooves us to think about using the advance curve and then backing off the rates that we pose, depending on all the unique considerations to you.

So here we have the advance curve in black and then less 25, 50, and 100 basis points.

And so to think about a construct of how we might price money market accounts, short CDs, and longer CDs.

I’d be inclined to think about being most aggressive on the front end of the curve in that money market account.

And as we showed you before, there’s going to be, there’s potentially some stickiness even if there’s not seven- and eight-year average lives where the arithmetic is going to be in favor.

From your perspective, the positively sloped yield curve means it’s the shortest point on the it’s the lowest point on the curve so just from a pure nominal cost basis today then you have some advantages, and obviously you don’t need to explicitly tie it to SOFR or Fed funds but you retain the ability to reprice it that much quicker that if we do see a shift in interest rates or even a shift in your loan demand right. Pipeline slows down, you know you don’t need deposits to the same extent you can back off those rates without having to for CDs to mature.

When we look at shorter CDs, and here I’d characterize it six to 12 months, and this is the eternal struggle.

That’s where the demand typically is, right, versus longer out the curve.

But as we mentioned before, in terms of margin, in terms of liquidity, in terms of interest rate risk, the seven-month CD, you know, it’s helping with the metrics, but the risk management map maybe not so much.

So I’d be inclined to be closer to less 100 basis points to advances here and you can see that the rise in rates affords your ability to have you know maybe not you know high threes on the rates but you can get right around that three percent level as a starting point rather than having maybe the highlighted focus where you got one high rate at 375 and then you have 10 basis points across the board.

So I think I think many folks can still work with less 100 basis points if there was a place in the curve where you’re inclined to be aggressive I might consider the longer CDs the 18 to 24 months where again there’s not the natural demand there, but think about it as that type of funding gives you the capacity to take asset duration right and one of the big things that we talked about before we talked about it last month is repricing the asset side of the balance sheet. And just in the last couple of weeks or so, I’ve had three or four conversations with members who said that they’ve dusted off the bond buying button and are starting to reinvest into the investment portfolio, which I think is, especially for those in specific institutions and knowing them, a wise move, right, and you’re able to get the yield.

So, but in terms of staying interest rate risk neutral-ish, that’ll be fun in the transcript to see how that one spits out.

I think if you’re able to make some progress with that two-year range of CDs, then it gives you the capacity to continue lending fixed rates, continue going at the curve in investments.

And from your customer perspective, the change in rates and the slope of the yield curve means that they’re getting a pretty competitive rate here, right?

So even at less 50-basis points, you’re in the high threes, this was posted as a couple a couple days ago before the shock in rates yesterday that has tapered a little bit. But again, depending on the unique circumstances of your balance sheet, you could probably get to a 4% rate. you know somewhere between 24 and 36 months, and when you get down to looking at it from an ALM perspective. The math may work for you to be a creative to margin Thank you, Andrew.

That’s my move.

I think I went the wrong way on the clicker.

And as Andrew mentioned, there has been some changes in the shape of the yield curve, and it has changed emphasis as far as where opportunities lie, both the retail funding, but also the wholesale funding side of the balance sheet.

So we’re going to take a look at some floating rate options and kind of how those are performing pricing-wise compared to some fixed rate options.

So to level set, we’re going to take a look at SOFR, which is the Secured Overnight Financing rate and what that is it measures the cost of financing treasury securities overnight.

So if you remember LIBOR that used to be the standard rate but from which interest rates derivatives were priced now SOFR has taken over and plays that role. So how is it calculated?

The New York Fed administers the rate based on transaction-level treasury repo data, and why it does matter.

So SOFR floats day to day, sometimes it spikes, but it moves within the bands of the effective federal funds rate.

And despite any intraday movement, the average rate over any given period of time matters more than the rate on any one single day. And so what does push SOFR around?

There’s a number of different things that can influence where SOFR lies on any given day or over a period of time.

So at the front end, policy and front-end rates, so the effective federal funds target rate, which the Fed maintains via the interest on reserve balance rate at the bottom end, and then they anchor it on the top end with the overnight reverse repurchase agreement rate.

And then within actual market dynamics, we have you know when there’s more demand for collateralizing treasury securities, we see that rate go up when there’s more cash in the market go down and things like dealer balance sheets can really influence where that rate lies day to day. And speaking of which, if we go down to the bottom left, technical dates, which then influence where the balance sheets are for dealers, can have a lot of influence on the rate.

So at the end of quarter, those window dressing trades where some institutions will put on a little bit of extra liquidity going into reporting, that increase in demand can drive up rates a little bit.

And even at the end of week, when there’s a little bit less activity going on, less volume can drive it.

But the biggest spikes we do tend to see around these changes are at the end of year, that fourth-quarter-liquidity spike can drive up rates, so just something to keep in mind.

But as mentioned, it’s the overall rate over a period of time that matters more than any one spike.

And then, of course, it can spike due to market stress.

So when there’s a liquidity crunch or something like a Silicon Valley of 2023, kind of rushed for liquidity that pushed up SOFR over a period, but even more of a short-term stress, it can spike.

So in September 17th of 2019, SOFR jumped from 2.3% to about 5.5%.

Maybe that was a premonition of the future rate hiking cycle that was to come, but that only lasted a couple of days.

And SOFR did end up coming back down.

And as we’ll look at in a little bit more detail in a few slides, that doesn’t really matter as much if it spikes as long as over a period of time that that rate is where you want it to be.

And so what we’re looking at here is what that movement of SOFR looks like in practice.

Looking back over the last year, so we had a few cuts over that time and when cuts happened, it tends to have SOFR sit a little bit towards the top of that range.

And so those two dotted lines the Fed funds upper and the Fed funds lower, which aforementioned, are anchored by the IORB and then the overnight repo rate.

But we’ve seen as we’ve gotten a little bit, as cuts have gotten a little bit further into the rear view, we’ve seen SOFR settle down not only in the bottom, sorry, not only in the middle of that EFFR range, but actually towards the bottom, which can have some implications for day-one rate as well as the rate over a period of time for SOFR.

And so as I mentioned, we’re going to look at what happens when rates spike within SOFR.

So we’re looking at a couple of examples here, and actually we’ll start on the bottom just to look at how we’re calculating this.

So the approximate impact is equivalent to that rate shock in basis points multiplied by the days affected and then divided by the days in the term that you’re looking at so we’re looking at in this example a 31-day. So for advance and then the example on the left is if right at the end of the term Maybe we saw like 50 basis point hike, you know now hikes are back on the table more likely than cuts So this is a little bit more pertinent than it was irrelevant than it was a few weeks ago three months ago We see even if we got a 50 basis point surprise hike in day 26 of that 31 day so for advance It’s only going to drive up the cost over all of that term by less than 10 basis points.

And then if we saw an extreme example, like a 300-basis point jump, similar to what happened in 2019, that happened for a day within the 90-day term, we’re only going to see a 3.3 basis point overall cost increase.

So really, while it might be a little bit jarring in the moment or intraday, as long as things settle back down, which they historically always have, there’s not as much to worry about.

And so we’ve kind of set the stage, but now let’s look at a few products, both floating and fixed, that the Federal Home Loan Bank of Boston offers that can let you kind of take advantage of some of these pricing dynamics that we’re going to discuss.

So first on top, we have the Daily Cash Manager Advance better known as the DCM.

So that’s the overnight rate that we are overnight product that we offer that offers maximum flexibility, you know, you don’t need it gone the next day, but the tradeoff you don’t have any term certainty, and it does tend to price a little bit higher than some other short-term rates that we do have.

Then the SOFR-Index Advances.

So these are from one week going out to even further down the curve in terms of duration, but it floats with SOFR, there’s plus a basis-point spread.

So, for the one- to three-month, it’s about 19- or 20-basis points right now above SOFR.

So the value is that you’re constantly floating with the standard secured overnight financing rates.

But the trade-off is that the rate adjusts constantly, as we looked at, and then finally the classic advanced that’s the standard fixed rate advanced that we offer from one week out to as far as 30 years, and the value, it’s fixed.

So you have that certainty, but there is the trade-off. Current market expectations for the future path of rates already priced in. So that can be advantageous. Say like spring of 2024 when there was seven 25-bit cuts priced in. Going one year made a lot more sense in hindsight. You know, at the time, then maybe then the rolling SOFR, but now with more, with almost no chance currently of cuts on, you know, being expected and then chance of one or maybe even more than one hikes over the next year, it can make a lot of sense to consider something that doesn’t have that forward pricing in.

And so what we’re looking at here is what changed? What drove that change? Where, you know, at different points over the past few years, it made sense to go fixed.

Whereas now there’s maybe some more advantage in staying floating. And so looking at the shape of the yield curve. We’re using the advanced yield curve.

So, overnight the DCM all the way up to the 10-year Classic from left to right, and looking at a few different points over the last few years, and what that shape looks like, and what we see that the thicker line, the turquoise are like blue line is finally, it’s actually it’s no longer inverted.

You know, you’re not getting cost savings by going say out to a year or two years versus you were going back to, like I said, spring of 2024, certain points over last year.

So because of that change, there’s now not as much relative value in terming out potentially some more value in staying short and staying floating.

And so what does that look like day one?

So we see that SOFR, and this goes back to last Thursday, so June 10th rates.

SOFR was at 360 and we had the 19-basis points spread onto that.

You see, the one-to-three-month SOFR product was at 3.79% as compared to the one-month Classic at 3.87.

So there is that day-one savings in rolling SOFR versus going with the Classic.

And then the same thing with the three-month or sorry, three-month and six-month Classic, we’re seeing it continue to go up.

So there’s not as much, not value in terming out like there had been previously, and even comparing DCM overnight versus going one-to-three-month SOFR, you’re paying more to go overnight.

So even if there’s a chance that you need that funding for more than overnight can make a lot of sense to take advantage of that day one savings.

And so in light of that, so now we’ve kind of established that it can make some sense day one, and that there are some potential reasons to go floating, and we’re looking even further out.

So let’s take a look at now what that would be in practice.

Say if things stay static, so going over the next month, rates stay flat, no cuts or hikes, and SOFR stays where it is, which it’s been doing over the last 30 days.

And so we see that DCM, so to go a little bit more into detail, what this scenario is looking at, if we’re rolling either of these three products, so the DCM, the one-month SOFR, or doing a one-month Classic for one month, what would that cost be?

In light of the dividend, which Andrew mentioned earlier, is a discount beyond our sticker rate.

And so we see the sticker rate is 3.7% for DCM, 352 for SOFR.

I’m sorry, the all-in rate after the dividend is 3.7 for DCM, 3.52 for SOFR for a one-month SOFR Advance, and 360 for one-month Classic.

You’re seeing over the term that you would save eight basis points all in by going with the one-month SOFR versus the Classic advance.

And that savings is even greater versus the GCM because not only because of the day one rate but also because of the increased dividend discount.

So, for overnight advances require a 3% purchase of activity stock, and for non-overnight it’s a 4% purchase of activity stock.

In our stock, it has a 6.71% dividend that’s SOFR plus 300-basis points.

So that brings down the all-in cost of borrowing from Federal Home Bank of Boston.

So as we see in this example, there is not only day one savings. But over the next month, if things stayed static, you would be saving by going SOFR versus DCM or one-month Classic. You know common question we get from members how, jokingly, can we buy more stock?

Because of the impact and the benefit of the dividend.

So, you know, I think that’s a great example of not quite directly answering that question.

No, you can’t just buy it in your in your brokerage portfolio, but there’s a way to get more dividend yeah risk-free SOFR plus 300 isn’t too bad. So now we’ve established the day-one savings, we’ve established that over the next month that this would be advantageous now. Let’s look over the next year, based on current market expectations, does this make sense? Does going say in this example one month, sorry one year, SOFR versus a one-year Classic and how would that play out so, starting from the left, we’re going with a two cuts evenly spread out so two 25 basis point cuts right out evenly over the next 12 months, and then one cut, no cuts, and then one or two hikes, and comparing that cost.

And so what we see is that we need to have a full two hikes for it to make sense for you to go with a fixed one-year Classic versus going SOFR.

There’s just that much savings day one and over the term that we really needed to see some aggressive cutting even beyond what’s currently being expected. For it to make sense to go out for one year and then one of the thing that I didn’t get into in the last slide but that was on there is that say you and within any iteration SOFR product, you realize at some point during the term that you don’t need that funding anymore.

Well, these SOFR products right now below because the IORB so you could lay that off and suddenly it’s a painless extra funding. So, it’s something to consider on that end as well. So, let’s kind of get into a more in-depth scenario, you know, how this could play out on your balance sheet.

So, if you have a funding need that came on, you know, above your kind of recurring, maybe you’re already rolling, you know, one-year Classics or something like that for a portion of your balance sheet, but you have a new funding need that came on. So what we suggest potentially is to fund the more durable portions of that with longer SOFR.

The more durable, the longer tenor you’d go with that SOFR-Indexed Advance.

And then for the stuff that’s a little bit shorter that you think that needs to go away quicker, shorter SOFR.

And as you mentioned, worst case, if you have extra, you can always lay it off with our IORB.

But what this allows you to do is to have that flexibility to replace that funding with retail deposits, with other funding sources, lower cost funding.

But you see you have that really good flexibility that SOFR allows you.

And then all those pricing advantages that we’ve already mentioned.

So finally, to kind of sum things up in how maybe we’d suggest that you’d approach if you’re thinking about employing some SOFR or some floating rate advances on your balance sheet, it’s first to define the need.

Is the funding that you’re, or is the funding you overnight?

Is it a little bit longer weekly, monthly?

Is it seasonable or is it more durable?

And then separate that base of really stable funding from the more volatile funding need and so use some longer term funding for that really durable stuff and then DCM for the that most yeah the most intermittent and kind of a spiky funding need and comparing the all-in costs so it’s not only the sticker rate but looking at the rate cost after the dividend the all-in cost and also your average cost. So if it’s not just a one-day rate, it’s what matters is that rate over the period. So like I just said, yeah, run the path out, look at the path of SOFR, where you might expect SOFR to be, where the market expects it, and see what makes the most sense.

So finally, match the structure, like I’ve been saying, for that really volatile stuff.

Yeah, it makes sense to use DCM, so much flexibility.

You don’t need it tomorrow, it’s gone.

For that stuff that’s kind of in the middle, not sure how long you need it, but you do need it for at least a week maybe, some of that midterm SOFR, and then for the longer-term stuff, makes a lot of sense to be doing some long term SOFR right now.

Well, thank you, Tyler.

And as we get into the home stretch here, I should have in the beginning called for questions, but you know, if there’s anything that you want to be addressed here, you know, feel free to ask it.

And just about an hour or so ago, you should have all received a video, you know, talking back to yesterday’s FOMC meeting. We put together a video, an instant reaction there. Unfortunately, it was me filling in for Caroline, who’s done a great job with that.

Caroline just welcomed the newest member of her family, so we’re happy for her.

But the bad news for you all is you get to hear me talk about the Fed meeting, not her.

So let’s pivot from talking about the liability side to the asset side.

And one of the common things that we’ve heard from our conversations with members of late is that as we’ve seen long-term interest rates take a little bit of a leg up over the last few months or closer to a few weeks into two months.

More retention of residential mortgages because the rate’s a little higher, right? A very brief leading moment in 2026.

It broke through to a 5% handle, but now we’re comfortably back in the mid sixes.

But as I am an ardent believer in balance sheet managers, we’re spread managers. So it’s not just about the nominal rate.

It’s the relative rate.

And so what we’ve seen in terms of mortgages is that from the end of 23, beginning of 24 range, when we peaked in rates, not only have the nominal rate come down, but the spread relative to the 10-year treasury, which is most important, has come down.

And it’s come down in terms of the 30-year mortgage rate by over 100 basis points from north of 300 to just 190 basis points right now.

So I think narrower spreads when we’re thinking about the asset side always creates an element of added risk.

And as we alluded to earlier and last month again, I’ll keep repeating it because it’s very important to see the repricing of the asset side slow down and we’ll show you a visual in just a second to confirm that really stands out.

Not just looking at conventional mortgages, let’s look at the spreads on jumbo mortgages as well as 15-year pass-throughs.

And there’s a couple things that we can see here.

In terms of the conventional minus jumbo spread, that’s a negative territory right now.

So that provides a little incremental yield opportunity in jumbo.

So if that’s something that a business line that you have developed, it’s a market that’s conducive to that, there should be some yield there.

But as we know, with higher balances, there’s added prepayment risk.

And I think as we saw over the last few quarters, that prepayment, the quick trigger on the refinancings has been very impactful.

So I would proceed with caution there.

On the 30 year to 15 year, and we don’t have, especially in this part of the country where home values are high, we don’t have a lot of organic 15-year demand.

It’s more of a refi product and it’s a tough market for refis.

So that spread is not in favor of one way or another, looking at the historical ranges of where we’re at.

So when that is the case, when it’s not jumping off the page in terms of being in favor of the 30 years, that tends to mean that there’s a little more opportunity to express or put money to work in investments where the natural structure that most banks and credit unions gravitate towards is going to be pass-throughs that are 15-year or 20-year type of collateral as opposed to the 30-year, which is the loan collateral.

So this is the chart on asset yield that we’ve been referencing or dancing around.

And I think it puts it into a really interesting perspective in terms of when we’re looking at a quarter-over-quarter basis, the percentage of members.

And we did this with banks because as we’ve alluded to, the call reports aren’t always in sync, and there’s a little more granularity in terms of loan yield data for banks versus credit unions, but I would have to imagine that the experience is going to be pretty similar if we did have access to that type of data.

In the first quarter of 2026, for the first time since March of 25, I said that in such a grand way, but it was only a year, but the majority of banks saw declines in their mortgage loan yield portfolio versus increases.

And that was a little bit of a head-scratcher, right, considering the marginal rate is comfortably above what the portfolio is yielding, right, if we were to try to explain this to a novice and say, that doesn’t make sense.

But as we know, the mortgage loan gives an awful lot of control and prepayability to the customer.

And so, while if we were to scroll back and look at that when mortgage rates hit high sevens, well, it’s great.

Maybe we put some on the books there, but I think given the economics of what high mortgage rates do to payments for customers, that the ability to shave off 100 basis points from mid-sevenths to mid-sixes after a period of time is pretty attractive. Every little bit helps, right?

Maybe it’s not the 3% that a lot of people did in 21 and 22, but it’s still something to be keenly aware of.

So when we think about what do we do going forward, I think we put all those things together, and it means that when we talk about new production, that as we consider the keep-sell decision, that I think it’s very heavily skewed right now that if it is saleable, that we should probably be selling it.

Even if we have a lot of liquidity, there’s other ways to put liquidity to work, right?

So I think that certainly is, you know, what the spreads and the rates tell us is the case.

The legacy portfolio, we’ll talk about in a second.

Is there any opportunities to accelerate the asset repricing?

And investments is the least important piece of the puzzle.

Let me think about the four parts of the balance sheet.

Loan securities, deposits, and advantages.

So it needs to work for the whole portfolio and get outside the cocktail hour discussion about like what do we think rates are going to do? It’s what does the balance sheet need?

So in terms of that second one, how do we reposition the asset portfolio?

Can we reposition the asset portfolio?

So through the MPF program, not only will the bank buy new production loans, but we can do bulk transactions and looking at loans from 2020-21 with 3% handles now certainly going to be at discounts, but maybe the economics are such that by selling it, absorbing the loss, that there’s potential to either improve our go-forward earnings or to recalibrate interest rate risk and liquidity risk or to moderate balance sheet growth.

So we have some analytics, happy to help any of you out in this regard.

And as you can see on the table on the right-hand side, it’s a function about the assumptions that we have at play.

So we’re loan rate, excuse me, and we have whatever our replacement yield may be, and whatever we have our sale price may be.

So we’re probably somewhere around that 85 cents on the dollar range in terms of, you know, it’s going to be dependent on the certain set of assumptions and the particular loan tape.

But I think where the opportunity is, is that if you do have sufficient loan demand outside of the residential portfolio, right, whether it’s the commercial loan side, certainly as the five-year continues to move higher, as that’s the pricing benchmark, that’s an opportunity there, or credit unions on the auto lending side.

So our replacement yield is becoming more and more attractive, and the timeframe, the number of months that it takes to earn back that yield, maybe if it’s shorter than what the loan that you’re giving up, then the economics are in your favor.

So if you’re talking about an asset, that the mortgage loan, that’s a 30, excuse me, 10- or 11- year asset at certain assumptions.

And I think that’s pretty accurate, considering how rock-bottom prepayment speeds are going to be right now on 3% mortgages.

Then, you can get to a place where you’re earning back the loss about three or four years earlier than holding the loan to maturity.

Now, if it comes down to a lower sales price, then it gets tougher and tougher to clear that hurdle.

And certainly, if you’re paying off wholesale funding to shrink the balance sheet and align the appropriate amount of growth, then you’re in the same boat there.

So, if it’s something that have a discussion, run some numbers, and see if it may work.

So the last thing that we’ll point out on the investment side, going from top to bottom is, I think, I could have done the we, I could have done the graphic in a reverse pyramid here, because I think as we go from top to bottom, it’s applicable to the most, and then smaller subset it’s going to be appropriate for. Oh, excuse me, it’s actually the other direction, a regular pyramid.

So we’ll go bottom to top here.

So I think pre-replacing maturing investments has a lot of appeal right now, taking advantage of the high level of rates, the positively slow field curve, and to the extent that you may need some incremental liquidity, then laddering the advances, not necessarily laddering, but tailoring the advances to some of the runoff in the portfolio has some advantages.

So you’re not just waiting for your liquidity to come back in order to deploy rates when the funds when maybe it’s not as attractive. If we know it’s attractive now, there’s ways to do it.

We’ve talked about this before.

I think for many, not just asset-sensitive institutions, liability-sensitive as well, especially. We saw how high mortgage rates can giveth and taketh.

That the big risk for many is that a sustained period of low long-term interest rates.

So, putting some duration, putting some prepayment protection into the investment portfolio. And again, it’s here in the bullet point.

Hindsight 2020. I’m not saying that we’re going down, hopefully to the level of long-term rates that we have been previously, but what we wish we could have done if we had a time machine was go back and reduce the cash flow coming off that portfolio and have it stickier at higher yields.

And the last thing is, I’d have the discussions and prepare now for opportunities later.

Certainly, as tying a bow onto the concept of greater uncertainty and volatility and short-term rates and what the Fed is talking about and what they may or may not do, something may break.

We don’t know what will break.

We don’t know when it’ll break.

But I’d be having discussions right now about do we want to be opportunistic if and when certain sectors become significantly more attractive, right?

If we come in tomorrow and spreads are 100-basis points wider than they are today, what’s our battle plan?

Are we running into the doomsday bunker or are we going out there and trying to take advantage of opportunities?

There’s no right answer, but I think the time to talk about it is before it happens.

So with that, it brings us to the end.

Appreciate everyone for joining us today.

It’s always great to put these things together and talk about which way the wind is blowing, and we will talk to everyone hopefully sooner rather than later.

Absolutely.

Thank you all.