Liquidity & Funding Strategies for the Current Environment June 2024

Well, hello, everyone.

Thank you for joining us today.

Happy to have you with us for our latest webinar.

We’re continuing our trend of special guest presenters here.

So happy to have Savvas with us today.

Many of you know him as he’s a relationship manager for a fair number of our members.

And despite what some of our colleagues have said, there’s no truth to the rumor that I asked him to be on this webinar just because he’s such a nice guy, and he laughs at my feeble attempts at trying to be funny and witty.

So he brings a lot more to the table than just that very admirable quality.

So happy to have him here with us.

Appreciate that, thanks.

So here’s the plan for today.

Savvas is going to talk about our housing and community investment programs. I think it’s great for our members to be aware of all the tools in the toolkit, which will help us fulfill our dual mission of liquidity and supporting affordable housing in New England.

And then, I’m going to take a crack at three different strategies that I think are front and center right now that will hopefully provide some assistance for three things that are very much on top of my brain right now. going to

And we’re talking about interest rate risk mitigation, support of liquidity, and then lastly, net income.

So, I think that those three things really cover a lot of the challenges and the opportunities out there right now so before we jump right in, just a little public service announcement.

So allow us to just reintroduce a couple topics that won’t be covered today, but I think are worth pointing out.

Certainly, in this liquidity environment, collateral is very much still front and center, so we’ve had many conversations with members about making sure that you’re pledging everything that’s not nailed down, the process about how that works, whether we’re talking about the different loan types or security types, moving collateral between the Fed and with us.

So you can see the bullet point there.

The moral of the story is reach out to your relationship manager.

They’ve had these conversations.

They can do it standing on their heads. Hopefully, we can help you get the most bang for your buck capacity-wise.

And then there are a couple of other strategies that we’re not going to touch upon today, but if you joined us in past webinars, you’re probably more than familiar with in terms of the type of robust activity that we’re seeing here with the bank.

So that’s very, very briefly the idea of efficient deposit pricing using the advance curve to support the marginal cost of funds approach.

The HLB Option, the puttable advance that allows some cost savings, and even the Forward Starting Advance to pre-replace maturing term funding, whether that’s CDs, which have grown considerably over the last year or so, or alternatively, BTFP funding.

So, let’s jump right into topic one here, talking about interest rate risk strategies.

The key word here, and we’ll get to it as we go through it, is flexibility because there are certainly trade-offs as we look to talk about interest rate risk.

So, let’s set the framework here and look at the path of rates and the shape of the yield curve as we talk about the Fed funds rate and using the proxy of the five-year part of the curve.

And we’ll do this a couple of times today and we’ll compare what the world looked like in 2019 versus what it looks like right now.

Because I think we are in comparable positions in terms of we’re probably, we think, at the end of the Fed hiking cycle.

And the big question is, where do we go from here?

So, the key takeaway and the key difference now versus before is that in 2019, the yield curve inverted once the Fed was done hiking rates.

And part of that is the benefit of hindsight.

You don’t know until you get out of that situation.

But you can see that we’re looking at the blue line there as the five-year Treasury rate.

That started to rally in the first part of 2019, and the Fed was holding tight.

As we got into the back half of 2019, the Fed cut rates three times, and they were very clear in their comments to say this is not a huge shift in monetary policy.

Remember, we were coming out of the 08-09 when rates plummeted to zero.

They’re saying there’s just a little pressure release valve.

Now, the belly of the curve started to stabilize a little bit in the back half of 2019, but as we all know, the first quarter of 2020 had probably the biggest black swan that we’ve all seen in our lifetimes here with COVID that really changed the landscape.

So we’ll never know if the Fed would have been able to execute a soft landing and not have had to continue lowering rates all the way down.

Fast forward to 22, 23, the belly of the curve, maybe looking back at the past history, got a little ahead of itself in terms of inverting the yield curve before the end of the hiking cycle.

And if you’ve joined us before, you’ve heard me say this plenty of times, and it was really one of the parts of the backbone of our hire for don’t discount the prospect of higher for longer was because we rewind to March, April, May of last year with the regional bank turmoil in both instances major 100 billion dollar plus banking institutions effectively failed and the fed hiked interest rates shortly thereafter So, you know, I think the threshold for things breaking in the markets and the economy necessitating a Fed cut, you know, I think that bar is much, much higher.

And what ultimately happened is the yield curve inverted and has stayed inverted at deeper levels of inversion for a really long time.

And it’s tough to get into a staring contest with the Fed and expect to win.

And that’s really what we’ve seen happen in the belly of the curve, and that’s played out in a number of different ways, so what does that mean for earnings profiles of community banks and credit units and so here we’re just looking at the distribution of changes in net interest margin in certain time periods, and we’re looking at starting at the bottom is that first portion of rising rates from March or 22, right before hikes began, to June of 23 when the Fed had done their last hike up until now.

And what we saw is that the asset sensitivity that many folks thought that they had when looking at their ALM inputs and assumptions, it really didn’t play out like that.

We saw a plus 500 on the front ends of the curve, a little bit less of that further out, and the majority of banks saw a contraction in NIM with that rise in rates.

Now, credit unions are a little bit better.

You know, the thing that we can attribute that to is that there are a considerable number of smaller credit unions who hold exceptionally high levels of cash, and that is the ultimate asset-sensitive asset.

So, they have been fortunate to benefit from the rise in rates.

The middle section really tells us how the higher for longer environment is a considerable pain point because that is that period of that pause at the top.

And it’s kind of startling when you look at 91% of bags have seen NIM contraction over the last few quarters. So any way you slice it, that is painful.

And then when we look at the full cycle, we can see it’s three-quarters of banks who have experienced lower NIMS and just a little more than a third of credit units, so you know what can we attribute that to, well, I think it’s pretty straightforward we have a number of different things at play here is that as rates have risen we benefited from the lag in deposit rates and so not just from a cost perspective but the stickiness of those deposits. But I think that window has firmly closed itself
.
And we now have more term deposits on the books that have changed our asset sensitivity because instead of a non-maturity deposit that we can model out to being three, five, seven years long when you’re running a five-month CD special, it’s right there in the maturity that your liabilities aren’t further out as you thought they were. We also have the reduced cash flow from loans.

Many of us know that we’re not getting the prepayments and the ability to remix the balance sheet by seeing prepayments from loans or investments.

Those underwater securities are in a similar vein; many are hesitant to take losses, and we’ll get to that just in a second.

You have these assets where the investment portfolios are producing liquidity in the sense, traditionally, that it has because we’re kind of trapped there.

When you add all that together, the inability to remix the balance sheet and the challenging deposit landscape have led to more wholesale funding as a component of the funding mix.

So that’s all fantastic. This unpleasant trip down memory lane is here.

But let’s get back down to brass tacks. What can and what should we do going forward?

So if we think about rate risk reduction strategies and, you know, if we had a dollar for every time someone has told us we used to be asset sensitive and now we’re liability sensitive, Sav and I would have a fantastic post-webinar lunch on our hands.

But you know that’s you know that may or may not be in the cards.

So there’s a couple levers that you know we can think about poll if we want to rein in some of that interest rate exposure.

So let’s go through it from the perspective of what is the impact on the income statement, but then what is the impact on the EVE economic value of equity or the NEV, the net economic value, which is the credit union one EVE for banks, as many of you know. So, selling underwater assets is at a loss.

That is just, you know, for lack of a better way to describe it, ripping the band-aid off taking the pain through the do the current period income statement To improve our prospects going forward now that has capital implications certainly because, you know, you’re pulling forward all that That difference between book value and depreciation but look on the bottom row there and I think that’s a key point here is that especially as we get to the end of the cycle, potentially getting into a shift in the environment, is that by selling those underwater assets, those longer duration assets, you lose the potential price appreciation and the upside that you would see if we were going into a down rain environment.

In fact, over the last few months, excuse me, weeks rather, we have seen a bit of a; I don’t want to call it a rally, but maybe just a mini rally or stabilization in that part of the curve and some improvement in investment valuations.

The other tool we can use is for those of you who are set up and using derivatives, you can use that to transform some of that fixed rate asset exposure to a floating rate exposure or flip it around if we’re talking about the liability side.

So it has the benefit of not having the same ripping the band aid off income statement impact as selling those underwater assets.

It’s going to move your positioning to more of a neutral posture and it’s going to help the EVE impact.

But again, that last piece on the bottom, you’re losing the upside if we do start to see a shift lower.

And then the last two, where it’s more of the slow drip where we could incrementally as time goes over, time goes on, and when we think about new investment choices or loan decisions or where we can go shorter on the curve, we could simply just keep elevated levels of cash.

But that has very minimal impact today if we’re looking to really rein in; we have a policy limit that we have hit and are bumping up against in terms of interest rate risk so that really is not going to move the needle too terribly much.

On the liability side, we can do very similar things.

We can extend out, but there’s always the potential that, well, I’m going to extend liability at the worst possible time, lock in high-rate, fixed-rate funding.

Well, that can be true, but as I’m doing a poor job of teasing it, that’s going to segway us into the product and the discussion that we’ll get to in the following pages, because that doesn’t necessarily have to be the case, because we can protect against rate shocks up in terms of interest rate risk exposure, but we can also maintain flexibility to perform favorably in a rate down scenario.

So the product that we’re talking about here is called the Member Option Advance, very simply straightforward advance.

So essentially, it gives you, the member, the ability to have long-term funding, but you retain the option to pay down the advance at no prepayment fee so you’re not subject to the market forces and the market valuation where you’d have a prepayment fee at hand.

So let’s look at this example here.

So in green, we’re looking at the classic advance rate curve all the way out to 10 years.

And then we’re looking at the member option events.

So, in this example, it’s a 10-year maturity advance with a one-year lockout period.

And then at the end of that lockout period, you the member had the option to pay back the advance with no fee.

So because you have the option and it is a 10-year maturity, it has about a seven and one and a half-year duration, which we’ll see in a little bit, can provide an awful lot of value, and you have that at the one-year mark, the ability to prepay it.

And when we pulled this the other day, the rates were 599 for that advance relative to where you can see the one-year and 10-year classic advances are at.

So, what’s the value of having that long, long-duration liability?

So the credit unions on the call right now are certainly well aware of this in terms of how the NEV test is structured and the standardized premiums that are assigned to deposits that are very, let’s call it modest.

But so when we look at the base case scenario, but more importantly, the plus 300 rate shock scenario, liability duration is your friend.

And you can see that the member option advance in that instance, it’s going to be priced at about 80 cents on a dollar.

And as a liability, that’s a good thing.

Contrast that even to the five-year classic events, a point in the curve where many members who have some liability sensitivity will tend to gravitate to.

The benefits in terms of the post-rate shock value are that much more prevalent for the member option and certainly a considerable amount more than what you see for the standardized premium on the non-maturity deposit.

Now, let’s dig in a level or two deeper here.

And you know, you’re probably saying, okay, this is fantastic, Andrew, you know, here’s all the benefits, but I can’t get over that cost right, the 599, and in fact, that has come down a little bit It had the 6% handle we’re all human, and 6% jumps off the page a little bit. So, you know, I certainly understand that, but let’s unravel this a little bit. So if we take this cash down, we take this funding down with the expectation that, you know, We want to really use that option. We’ll get to that on the next slide and say well, you know, It’s only been there for one year. So, we take it out at 599.

We can do a couple of things. We can use it to fund our loans or investments that are probably coming on north of that rate. So there is a positive spread, but let’s just say we want to be super conservative. We can park it at IRBI today at 540, but that’s subject to change. Other than that, you know that spread may work against you, but let’s be the most conservative. Let’s put it into a treasury at 517 So we can distill that cost for the value of the risk mitigation benefits that this advance is giving you down to 59 to 82 basis points, depending on if you’re going to park it at the Fed, or you’re going to You know match it out for a one-year Treasury. So, in that context, for the benefits that you’re getting that we’ll see in a second, it really blows away the idea of selling underwater assets when you look at not just the NEV benefits but also the income statement impact.

So we’ll look at the, in the table, two different approaches, selling bonds at a loss or taking out the Member Option Advance. And in both cases, we’ll assume that it’s going to be 5% of assets. You can see the duration. We talked about the seven and a half years in the liability. And for simplicity, we’ll say five years, you know on the investments, the NEV benefit is going to be a hundred basis points.

That’s for the total balance sheet for the life of the Member Option, which is a pretty significant number. Depending on your metrics, it may get you over a threshold into one of the high-risk into the moderate-risk area. The NEV benefit for the investments is going to be pretty good as well.

It’s going to help in the base but it’s also you know; the other component is we’re taking that immediate hit the capital which we can see when we look at the income statement impact if we assume a 15% loss on 5% of the balance sheet.

That’s 75-basis points hit to ROA on an annualized basis. We put it into one quarter, and it’s going to jump off the page that much more. So that’s you know, there’s some serious sticker shock there.

You may not you may or may not have the capacity or the bandwidth or the inclination to do that.

And when we think about the extending our liabilities, well, that’s just going to be the incrementally higher cost spread across four periods.

And it works out to about three to four basis points, which, compared to a 75-basis point hit, I’m not that great at math, but that’s better, right? Yeah.

Four basis points are better than 75 when we’re talking about a negative number.

So, you know, we get to the end of the one year, what do we do from here? Okay, so let’s think about if rates are up or rates are down.

Well, in most cases, unless rates shoot to eight, nine, 10%, you’re probably going to want to be looking to pay down the advance, leveraging that option and paying it off. Why?

If rates are up, you have the benefit of time. It may not feel like it, but you get the assets slowly. But the time, that’s the beautiful thing about fixed income that every day they get a little bit shorter, and we’ve probably already experienced most of the extension risk right on those fixed-rate mortgages or those investments so far. They get a little bit shorter; you pay down the advance, and you get the benefit to reassess, you’ve also had the benefit of the longer liability right you’ve addressed those NEV/EVE issues for that period. But most importantly, most impactfully, is if rates go down.

So, a couple of things are going to happen.

You’re absolutely going to want to prepay the advance, because we’re going to be in a lower-rate environment. And you’ll gladly trade back the 599 and find something else in its place. Ideally, it could be deposits at 0, 1%, 2%, 3%. And if you’re in a position to need wholesale funding, In the rate down assumption, you’re going to have some savings there as well.

You also may see an acceleration in cash flow in terms of prepayments or amortization of the asset side of the balance sheet.

And again, we touched upon the deposit gathering environment It can’t be any worse than it is right now, or it has been over the last couple of months. So, if we do see the beginning of a cutting cycle, I know many of us here on the call are probably rooting for something to that end. So this is a way where and, and here’s the key point to take away, we’re liability sensitive today. We can mitigate that to get asset sensitive or neutral, but after the fact, we can convert ourselves back to liability sensitive right and get all the benefits of having long assets and short liabilities because if rates go down, it’s not a 10-year advance anymore. It’s a one-year advance that will happily prepay back to the home loan bank. Awesome.

Well, thanks for that, Andrew. I’m just going to be very quick here. I’m going to go over our housing and community investment programs and see how you can use these products and programs in tandem with what Andrew is talking about to help your liquidity needs. Just a little overview of what I’m going to go through.

So we have a few down payment assistant assistance grants, some small business lending programs, Jobs for New England Advance, Community Development Advances or our CDA as we call it, Affordable Housing project grants, and last but certainly not least, one of our newest products available to members is our Permanent Rate Buydown for participating financial institutions in our MPF program.

So, first off, we have our down payment assistance programs. You can see here that your borrowers will be into one of three different buckets. Our down payment assistance programs are all income-based qualifications. So the Equity Builder Program, your borrowers will fall into that that make at or below 80% of the area median income. Housing Our Workforce expands on that and goes up to, but not exceeding 120% of the area median income. And our Lift Up Homeownership is our newest down payment assistant program. It’s a special-purpose credit program, but it also goes up to 120% of the area median income. And it’s also our largest down payment assistance program at $50,000, $25 ,000 up to $25,000 for our Housing Our Workforce and $30,000 for our Equity Builder Program. So these are great tools to have in your tool chest, even if it is to not to expand on your bottom line necessarily, but engage with your borrowers and build on those relationships in your communities.

Talking about expanding relationships, our Jobs for New England or JNE Advance is basically a free advance shown on your end. So the rate on the advance is a 0% advance. And that’s probably the biggest thing I want you guys to take away from this slide is that we completely eliminate the cost of funds on this project or loan that you’re going to be funding. The funding is pretty competitive. It is allocated on a first-come, first-served basis, and it goes by funding release dates; two have already passed, but we have the next two on July 10th and September 11th. I think any member who has a small business lending program should have JNE applications at the ready. One thing about our down payment assistant programs that I didn’t say is that every institution has to apply for them every February with the JNE Advance. You don’t need to apply; you can just apply per project. So I think it’s a great tool to have and use for your small business borrowers who could also be some of your largest depositors as well.

So what are the benefits?

What happens when you take down a JNE Advance? Well, one of the benefits is its uncomplicated eligibility requirements, which means it’s not based on income qualifications. It’s more based off of job creation, retention, preservation, or if you can prove that this loan will improve, diversify, and stabilize the economy. So what we’re looking at is if this small business loan will stabilize and improve your community and have that effect rather than income qualifications. And so if you can imagine when we eliminate your cost of funds, you can still add your normal nominal spread to the advance and pass those savings onto your borrower, and so your small business borrower can realistically get a loan 200, maybe 300 basis points below market rate in a pretty inflationary environment. So, needless to say, I think your borrowers would be ecstatic if you could secure funding for one of their projects.

So next we have the Community Development Advance, or CDA as we call it. And here, I just want to go over what is CDA? CDA is basically an advance, but it’s just highly discounted, and it’s available all year. So, how do you take down a discounted advance?Well, it’s based on eligibility based on what the advance will be used for and which project. And if it is attributed to helping house our communities, right, so it’s flexible in its use. It’s not only the qualifications are not only income-based, it’s geographically based, and it serves an independent purpose or helps people who have a greater need than others in the community for this project to get done. The flexibility also goes further when you know that it can be paired with our other HCI programs and products like our AHP grants that I’ll get into on the next slide. But below in the graphic, I just wanted to highlight our CDA extra rates next to our classic advanced rates in the Treasury rate. So, two points here that I wanted to make is that I just kind of wanted to show how closely you are borrowing to Treasuries, along the one-year, two-year, and three-year. And so you can see it’s very tight spread to Treasuries if you can get the CDA extra rate, and the second point I wanted to make, and probably a more important point here, is the difference between the CDA/CDA extra rate to our classic rate because I am sure that a lot of our members are currently lending on projects that could leverage the CDA and CDA extra rate, but you’re just using the classic rate. So you can see at three years, you’re saving 10 basis points between our classic rate and our CDA extra rate. That just, you know, you can extrapolate that if you think, you know, millions of dollars, 10 basis points on millions of dollars over three years is a pretty material impact to your bottom line, especially when I’m sure there are projects out there, like I said, that could leverage these rates, but instead our members are leveraging our classic advance rates.

And then we have our affordable housing program. The affordable housing program on the left here, you can see what you can use this for as well.

You may ask, what’s the difference between CDA and AHP?

The main difference is a CDA is just an advance that’s discounted.

The AHP could, depending on the scoring, could work as capital. If you look at the middle bullet point there, it’s long-term subsidized permanent debt for larger rental initiatives.

So when you pair AHP with a CDA advance to fund a whole project, the savings could be exponential, and one of our colleagues in our HCI department, the way he puts it is he calls AHP a bottom line. So, it’s credit for CRA because you can get CRA credit for leveraging this product. Capital, which these are direct subsidies in the form of capital. And community, which basically just means you’re helping the communities that you serve and helping them grow, especially in times like this where, like we said, it’s very inflationary, rates are high, home prices aren’t down, and it’s getting harder and harder for people to afford housing in our footprint. The application process for an AHP grant is more rigorous than it is for the CDA advance. Every member should have an application in for our CDA and at the ready, just in case a project comes by; I don’t think it’s a bad idea to be familiar with the process. It’s pretty easy as long as the funding could qualify for one of the many boxes that are available, you can take down at a lower rate. The AHP is more rigorous, but it’s worth. And the more you get familiar with the program and the qualifications, the easier it gets. I don’t want to get into too much detail because we can spend the whole hour talking about just these grants and subsidies, but please don’t hesitate to reach out if you guys want more information about the application process or any one of our products that we spoke about so far.

And last but not least, we have our newest product, the permanent rate buy-down product for our MPF program. So, it is limited to members that are participating in financial institutions right now. And I say that because it’s already been dropped. It’s been a week now, last Friday, so almost a week. It’s available on a first-come, first-served basis like a lot of our subsidized products and grants, and it’s available until the subsidy is exhausted. I put these bullets there for you because I know you’re going to get the slides after this, and I wanted you to have some of the most important pieces of the permanent rate buydown. But basically what you can be doing is as you can originate a loan up to 200 basis points lower than the market rate for one of your borrowers that meets income qualifications and sell it back to the NPF program at market rate and realize a price of 102 when you do. The price of 102, it’s subject to market fluctuations and everything, but basically the bottom line here is that we are buying loans below market level and paying market price for that loan. And this is just another way that we are trying to figure out how to meet our 1B mission, which is to help house New England. And we think this is a good step. For those members that are interested in it but are not PFIs right now, just like a lot of our products, if they’re met with great success, we’ll probably continue it next year.

So, if you are interested in applying into the MPF program, please, again, don’t hesitate to pick up the phone and call your RM, we’ll most certainly facilitate a meeting for you and get the ball rolling on that.

Well, thank you, Savvas.

This is great.

And I’ll point out two things. You know, I see this firsthand when I go on visits to members with Savvas and the other relationship managers. We talk to our CEO, CFO, and Treasurer of Contacts, and we point out some of these things. And maybe you haven’t been exposed to it like, you know, the contacts who our HCI group are dealing with or our MPF group are dealing with.

So really this is, we wanted to amplify, you know, all these tools in the toolkit and all the great things that our housing team is doing.

And the second thing is you should see in the GoToWebinar control panel in the chat, we dropped a link.

So we had recently sent out a survey asking for member feedback about our housing community investment programs and how we can tailor them to best meet your needs, what you like, what you don’t like, what you think we could improve going forward.

And as we’ve seen with this new rollout of the MPF permanent rate buy down and as we’ve seen with many of the pilot programs on the funding side, we’re always open to new ideas and finding new creative ways you know, to get some support and subsidy out into the market.

So let’s shift gears to talk about the liquidity risk management.

So you know, we talked in the first section about mitigating risk but retaining flexibility.

So we’re going to do something similar-ish over here.

Similar-ish is going to screw up the automated transcripting.

We’ll see how that looks.

So, when we think about extending out for liquidity benefits, that’s pretty straightforward, but whether our balance sheet needs or our preference or projection on interest rate path suggests that we want to be short. We want to have a repricing frequency be short. And so there’s two components to that. So the repricing frequency, if we can get it as short as we can, we will benefit if there is a sharp pivot in rates.

And we have a product, the SOFR Index Advance, that’s so for a next advance that does exactly that. We’ve talked about this before. It will reprice on a daily basis with a locked in spread.

And you can see the visual here that the spreads are pretty narrow when you look at three-, six-, nine- or 12-month advances. So when we convert that into nominal rates and look at the day one rate and contrast that to the daily cash manager advance, our overnight advance product. In fact, there’s cost savings here, or in the case of the 12 month, on par with the Daily Cash Manager is. So if for nothing else, there is the ability to save a basis point or two. And as we’ve talked about, given the pressure on margins, every basis point always counts, but I think right now we can all agree that it counts a little bit more right now. So one of the challenges though is we may look at and say, okay We do our forecasting and our budgeting We think we will have a need for a certain amount of wholesale funding for X amount of time But if we see a change in conditions, certainly if we see a move lower in rates that as we touch them on before. Maybe we get an acceleration in prepayments.

Maybe we have some outperformance in terms of deposit growth. Maybe we see some under-performance in terms of the loan growth coming in. So whereas maybe I thought I needed funding for six months, I only, when we get in practice, will need it for three months. So it would be great to have the ability, the option, and the flexibility to pay back the advance, even in the case of a Floating Rate Advance where if rates are moving down, you’re paying less. But if we get into an environment where deposits can flood in the door and they’re not going to be as market sensitive as close to wholesale rates as they are right now. You probably don’t want an advance of any shape or structure.

So we have an advance and we’re very similar to the SOFR Index Advance called the Callable SOFR Index Floater Advance and what that does essentially is it allows you much like the Member Option Advance? It allows you the ability to pay back the advance with no prepayment fee at a particular interval. So here we’re looking at a six-month maturity with a three-month lockout and a 12-month and a six-month. And if we look at those spreads of 18 and 21, they compare very favorably. In fact, they’re right on top of where the one without the option is. And that has moved around from anywhere from the current zero to one- or two-basis points beyond.

In any event, that’s a modest cost for the considerable value to be able to pay back that advance.

And when we think about basic asset liability management, we like the concept of buying options and having that flexibility. But coming down to paying for it is less fun, right?

So when you do have a very modest cost on that type of added flexibility, it can be a value.

So, you know, because of the floating rate nature, you’re going to be positioned for a hard pivot in rates.

And a topic for another day, maybe for our August peer analytics webinar, is the prospect that deposit costs may still go up even as we start to see some rate cuts. There are some dynamics there at play.

So we would want a hundred percent, you know, a hundred percent beta isn’t great when rates are going up. But when rates are going down a 100% beta is the best game in town. And that’s what um a floating rate advance will give you staying nimble on deposit gathering, efforts or asset cash flows we touched upon that that we can we have some idea of what our cash needs may be over a certain period of time but we want to have some flexibility that if we do better than we thought we were going to do, then we can get back to our core business of bringing in deposits, putting it out into loans and not having to rely on wholesale as much on both sides of the balance sheet. And liquidity metrics are a big thing as well because when you look at the sources and uses of funding, that is compared to rolling short-term funding, which is not going to be looked upon as favorably as saying having a three- or six- or 12-month advance. And again, you’re not giving up the floating rate exposure, which would benefit you in a down rate environment.

So we started out the first two sections aside from the housing overview, talking about real risk mitigation. How can we improve our interest rate risk or how can we improve our liquidity risk? Let’s flip it over to not risk, but to return.

And, you know, we looked at it earlier in terms of the margin pressure that we have all, the majority of us have experienced over the last two years. But again, let’s call back to 2019, a similar-ish; there’s the ish again, Similar “ish” scenario to where we are right now. And I think this underscores that really the challenging environment that we’re in so we’re looking at the distribution of return on assets below certain levels here. And I would call your attention to the third one in from the left below 50-basis points ROA. Back in the first quarter of 2019 just 28 percent of our members our bank and credit union members here in New England had an ROA below 50 basis points. Now, as of the first quarter of this year, it’s doubled that at over 56%. So, any way you slice it, bank, credit union, public, mutual, large, small, commercially oriented, retail oriented, everywhere in between, there is pressure on earnings.

So when we think about putting on investment leverage are growing the balance sheet to grow through the margin pressure, there’s certainly pros and cons.

And, you know, when we think about the things working against it, the headwinds, we’re using up more of our off-balance sheet liquidity by tapping funding, certainly. Deposit gathering still continues to be difficult. We may have, you know, it’s tough to say, hey, I’m going to go out and do this when I may have to continue to tap it for deposit replacement over the coming months. And then you have more of the qualitative aspect of, wait, we’re going to talk about taking interest rate risk and leaning on the bond portfolio when those two things have not served us well over the last year or two. But many times we all know this, we’ve been through various cycles, that the seemingly counterintuitive things are often the ones that provide the most value going forward. Capital management is a consideration as well when you think about that, forced growth that we all had from the deposit influx in 2020 and 21 and as we talked about in the earlier section, we didn’t really have the flexibility to remix the balance sheet use transitioning investments to go fund the incremental loan growth. You know, roll-off or selling of investments to fund the incremental loan growth, which the loan growth has been, it was phenomenal.

And now it’s just playing good to great right now, which is another support of maybe higher for longer, maybe the hard pivot isn’t right around the corner because if loans are growing, even if we’re starting to get a little bit tighter on credit, if the demand is there, that kind of tells you something about the state of the economy. But let’s look at the things in support of this idea. We have the highest nominal treasury rates in a generation, really, right? There are many people who haven’t seen 4 or 5% base rates, and then on top of that, we do have mortgage-backed security spreads higher, really, than average when we look at over long term. So there is value in being able to capture some of those 5, 6% spreads. We talked about the NIM pressure. The near-term liability-sensitive, long-term asset-sensitive, we’ve talked about this before. We call it the Nike swoosh profile, where in rate shocks, we dip a little bit, but then over the long term, we start to get the paydowns of the assets and deposit pricing pressure hopefully cools off. So that dip, that difference creates an opportunity to, and we’ll see in the next slide, on a certain type of structuring.

And then from a liquidity perspective, it’s kind of interesting to say, oh, liquidity getting tighter but think of when we if we take an approach of buying mortgage-backed securities and funding it with advances what does that do from a liquidity perspective it reduces off-balance sheet liquidity but actually improves on balance sheet liquidity because it adds liquid investments and non-underwater liquid investments to the balance sheet so it’s trading the off-balance sheet liquidity, that the dry powder, the capacity for on balance sheet liquidity.

So here’s an example of an approach that we think is interesting and then has some nice value right now, where if we were to look at, you know, putting an advertising asset out there, call it five years, that’s going to have some very modest pay downs and certainly as we look to, you know, what did we wish we did differently back in 2019 is probably put more prepayment protection onto the asset side of the balance sheet. So whether that’s loans, talking about loan prepayment provisions, which are great in theory, you know, tough to enforce all the time, right? But on the investment side, we can do that in a number of different ways with coupons and the structures of the types of investments.

But so this is just a simple ladder to taking advances from 12 to 24 months with a little bit of solve for X in terms of short-term funding there. And there are a couple of reasons why this may be attractive. So with the inversion of the yield curve, tiptoeing out to that 12-to-24-month range does give you some cost savings.

So this has a blended average rate of 506 versus the marginal overnight or one month closer to five and a half. It’s a very attractive point on the curve just from a spread basis. Our one-year Classic Advance has been at single-digit spreads to Treasury. So as Savvas alluded to before, when looking at the CDA advances, that’s pretty narrow right there. But then really, I think the big appeal here is that it manages nicely with that swoosh Profile of the ink for the income simulation where this is a strategy that is Interest rate risk neutral in the near term right because we have our funding in place We have our asset in place But then the funding starts to roll off, and then we have a longer duration asset that needs to be replaced So that’s that long-term liability sensitive strategy But if we have a long-term asset sensitive balance sheet those things match up And it provides us earnings now in an interest rate risk-neutral way in a period when we really, really need those earnings for many. So it’s subject to the idiosyncratic nature of your balance sheet. Do you have the capital? Do you have the liquidity? This is far from a one-size-fits-all approach. But with anything, we’ve had these discussions. We expect to have more of these discussions.

If you want to pick our brains and want us to put some numbers around to help be supportive, we’re more than happy to do that. So that brings us to an end here, and only two minutes over, which I think may be a personal best for me. I’m going to give Savvas all the credit for that. So thank you very much, everyone, for attending. Please do take a second to look at the HCI survey and provide some feedback if you can. That would be very much appreciated. And as we said, you know, we’re happy to do this. We’re happy to help you in any way you can. So if there’s anything that we can do, anything that sparks some interest here, reach out. We’re not very difficult to find, and we would love to keep the conversation going.

Thank you, everyone, and everyone have a great rest of your day. Take care.