August 2025 Peer Analysis and Balance Sheet Strategies Update

Well, good morning, everyone.

Thank you for joining us today for our latest installment of our peer analytics and balance sheet strategies update webinar.

I’m Andrew. This is Tyler.

Happy to have you with us here today as we take a look at what’s happening in the broader market and economic landscape.

We’ll take a deep dive into trends that are worth pointing out when looking at the call reports for banks and credit unions in the second quarter of 2025.

And then lastly, we’ll talk about some asset liability management strategies that tie together the industry trends as well as the macro overlay that we, the types of strategies that we should be considering and putting into action today.

So we have a jam-packed agenda.

So we’ll just keep things moving.

But just one quick administrative update.

If you did not see the announcement the other day that the Federal Home of Boston will now be accepting HECM bonds.

So that’s reverse mortgages guaranteed by Ginnie Mae as eligible collateral.

So I don’t know if you were expecting a different announcement that we may or may not have been referring to here, but you know, now that I think about it, you know, they have a microphone, they have a camera, we could have reenacted this.

I don’t know if we have like a suitcase or anything like that, but for those who don’t know, Taylor Swift, who’s been a frequent contributor to the kickoff slide for this webinar series in years past, is coming out with a new album this fall and announcing on Travis Kelsey’s guests the other day.

So we love the intersection of wholesale funding and pop culture here at the Federal Home Loan Bank of Boston. So let’s jump in to get a perspective on what’s happening in the world.

So this is one of our favorite charts that we like to look at, and many of you are familiar with this, and it’s the progression of the FOMC’s expectations for the path of future rates.

And to summarize this in one or two sentences is that the Fed and the market is often wrong.

And we know this story going back to ‘21 and ‘22, when rates were at the floor, the expectation that rates were going to rise slowly.

Well, what actually happened was the magnitude and the timing was way off. The actual results were much more aggressive.

When we got to the top of rates, the relationship flipped.

The market and the Fed’s expectations were that it was going to be aggressive to the downside and that obviously thus far has not been the case.

So as we sit here today, you can see as outlined by the light blue dots, the path is much more measured, and the expectation is much more measured.

And I think that table on the right-hand side is one of the most under-talked about aspects of what will the Fed do component of where sit here as it relates to interest rates. For a lot of us, it’s been our head for a long time.

2%, 2%, 2%. You hear that when you hear all things Fed.

But when you think about that long range projection, that has been ticking up.

And now it’s closer to 3%. It started when they said between 2-3%.

And now it’s right there in print at 3% and that has some implications and that has and when we’ll look at it in a slide or two on what some of those drivers are.

So ultimately what it comes down to for us is do we want to bet against the Fed, or do we want to agree with the Fed? You know there’s that saying don’t fight the Fed.

Well you know betting against the Fed has worked out well you know with the benefit of, But history doesn’t always repeat, but it often rhymes.

And as Andrew mentioned, I’m Tyler.

And on this chart, this ties in with the last chart.

We’re going to look here at zero-lower-bound probabilities over the next two, five, seven, and 10-year ranges.

And zero-lower-bound being the point at which the effective federal funds rate approaches 0%, which is as low as it can go.

The Bank of Japan might differ on that point, but the U.S. Fed’s never gone below 0%.

That’s as dovish as a position as they can have.

And what we see looking at this is right now; we’re at as low of a probability of a return to zero lower bound over those forward-looking time horizons as we’ve seen since prior to the GFC and prior to COVID-19.

And at face value, that might seem to imply that there’s not much of a chance of a return to zero lower bound.

But if we look a little closer, you’ll notice that right when those expectations of a return to zero lower bound are at their lowest, like they are right now and previous to the GFC and COVID-19.

It’s right before we return to zero lower bound.

And so this kind of speaks to an idea that we’re going to touch upon in the third section of the webinar, which is that often when the market has a consensus view on something, that’s maybe the time to go the other way.

It kind of calls upon the Buffett saying, be greedy when others are fearful and fearful when others are greedy.

So, the Fed explicitly calls out a focus on the labor markets and inflation, so it behooves us to look at those.

Okay, I believe we’re back now.

So let’s talk about the jobs report and the labor market.

So the last jobs report was quite an interesting reaction.

And it baked in some dovish expectations into the market for many participants.

And the driver really was the downward revisions.

It wasn’t so much the July report, it was the adjustments to May and June.

And those were the lowest nominal levels that we had seen going back just about six years.

So, when you look at the top chart and you see that declining dark blue line, you don’t need to be an expert chartist to see that that’s not probably a negative trend, not a positive trend, given the downward direction there.

But the context there is supported a little bit by the chart on the bottom when we look at the actual total number of employees that feed into that report.

And we saw, you know, with the COVID shock, it took a full two years to get back to that level and then growing ever since then.

But the fact of the matter is the growth rate that we’re seeing in 2025 for employees in the workforce has slowed down then versus where it was in 2015 to 2020 period.

So, 1.6 during that time and now 0.6 down in this time.

So, you know, it’s quite clear that maybe the pace of the strength of the economy is slowing down a little bit, but it’s not as dire as maybe if you were to just look in isolation at that downward sloping blue chart on the top.

For those of you who have been with us before, you know, now this is, we’re four slides in and that already I’m going to say this is one of my favorite charts for a second time now.

So we’re running at a 50% clip.

So for those of you who’ve been with us before, you know that this is our favorite way to look at and think about inflation, and that the idea that a return to a 2-3% year-over-year change does not mean that it’s time to declare victory on inflation because of the baked-in price pressures on the consumer and the corporation.

So again, going back to that long-range target of now it’s three, it used to be two to three, and it used to be before that 2%.

Well, here we are seeing the year-over-a-year change closer to three than it is to two, off of that elevated level that we saw in 2022, that quote unquote, transitory inflation.

So that gap between where a 2% trend line would have taken us versus where the actual index and actual prices that individuals and companies are exposed to on a daily basis, that gap is not changing.

So to this point, it really hasn’t impacted the spending patterns, the investment patterns of participants in the economy.

So people are figuring out a way to get by.

We don’t know when that next problem is going to be.

And often, for those of us who’ve around cycles. It’s never the thing that we always think about and talk about, right?

Whether it was private label mortgages or whatever the thing is.

So that’s always been our viewpoint on an office CRE, right?

It’s always the risk and the threat that is not fully on the radar that tends to rear its ugly head. So let’s pivot to talk about housing prices.

And before I forget, I have a note here.

We had a fabulous intern this summer who was a big contributor to some of this data here.

We took a deep dive into the housing market, and we looked at housing prices.

For those of you who know us, you know that we like to look at things as locally and regionally as we can and not just make assumptions on a national basis.

So housing prices on a national basis have been flat to down since 2022.

But that’s not the case here in New England.

The strength of the economy has been phenomenal.

The housing market has been robust.

So this is a look at the relative price of or listing prices of homes in each of the New England states relative to the national average.

So for the states, Mass, Connecticut, Rhode Island, and Vermont, we see almost like a V or a U shape in that ratio.

So that now just because it was coming down from 2017 to 2020 is not a bad thing.

It just means that valuations were high and nominal valuations were increasing, but nationally on a percentage basis, things were improving much more.

So the ratio shrunk.

But what’s interesting is that since 2022, when home prices nationally have been flat to slightly down, the ratio has been increasing.

So we’ve actually been able to capture price gains or improvements and really exhibit that strength in the localized economies.

Maine and New Hampshire have a little bit more of a checkmark or Nike swoosh type of shape in that there wasn’t the reduction in the ratio during those periods of growth, but we have seen the acceleration since then. So we’re going to take another look at housing here.

In this chart, we’re looking at house price accretion by various income quintiles, and so the way this chart is set up, starting on January 1st, 2015, all those different quintiles housing prices are indexed to 100, and then we look over the 10 years, up through 2023, which is when this data is available through, to see how those various quintiles of income have had their housing prices improve.

And it’s interesting, there’s almost an inverse relationship where the highest income households have had their home values accrete the least versus the lowest two quintiles have had really some nice outperformance on the increase of their home value since 2015.

And this is notable because it’s a reverse of a longer term especially since the 80s, where the highest quintile really outperformed and had their home values really increase in a large way relative to the other income groups.

So this is notable.

You might’ve seen it, you know, if you’re lending into these lower income communities that the housing prices have really popped.

And it’s important because these income groups, the lower income quintiles have a larger percentage of their network in their houses relative to the higher income quintiles, a lot more stocks and bonds.

So it really speaks to the value of those first time home bounding programs.

We have Housing Our Workforce among other programs that offer down payment assistance to help those lower income groups get into houses. So if that is interesting to you, reach out to your RM.

We’d be happy to fill you in on that.

Okay, so let’s pivot to looking at what the call reports gave us in the second quarter here. So we’ll start off with good news.

We’re positive people.

The shift in net interest margin continues to be very, very favorable.

So here we’re looking, we’re bucketing all our members as some of you may know as we go through this. Blue will denote banks; green will be for credit unions.

So as we go from quarter to quarter and look at where folks fell in terms of quarter over quarter net interest margin change, the trend is improving.

We had 70% of credit unions and 53% of banks in the last quarter who saw a positive jump in Nim in excess of 10 basis points.

That’s phenomenal.

There’s a couple of drivers here, the asset side and the liability side.

Oh, there’s this groundbreaking analysis here.

Let’s talk about the asset side first.

The last great hike was in 2023.

We’ve been flat and then cut from there.

As we know, the intermediate and long end of the curve is not as impacted by future Fed policy as the short end of the yield curve is.

So since 2023, since that last rate hike in 2023, the 10-year Treasury is up by about 100 basis points.

So that has been such a boon to banks and credit unions for the ability to reprice the asset side.

right, that there was an explosion of liquidity and funding and growth in the immediate wake of COVID, and then to varying degrees, putting to work that funding in low-yielding assets, 3% mortgages and 1% investments.

So the median loan yield was up by 10 basis points, 12 basis points, I think, for banks and credit unions.

So, you’re getting the lift from the asset side.

And on the funding side, again, there’s been some improvements as well, because when we think about the last cut was in September or the end of 2024, and then even going back to the second quarter of 2024, that’s when rates were north of 5%.

So, if you’re doing the seven-month CD special, the 13-month CD special, those have been repricing, right?

You were out there at five and a quarter, and then now maybe you put it, if it did roll, it came back on at $375.

So, probably not too crazy about $375, but it beats the heck out of five and a quarter.

So, dampening some of that enthusiasm on the positive directional trend on NIM, is some context of where we are now relative to the low point over the last five years, but then also where we were five years ago.

So what we see is that three quarters of credit unions are higher than where they were five years ago. That’s that visual on the top.

So you can see the majority of folks are to that right of that zero-basis point change level.

And versus the low, folks have been able to increase by 84 basis points.

On the bank side, it hasn’t been quite the positive impact, although directionally, it’s still doing okay, where just 40% of banks are better off in NIM versus where they were five years ago.

And I think we talked about it a quarter or two ago when we looked at non-interest income.

Not all levels of rates are created equally.

Back then, we did have good fee income, especially for those who were heavily weighted towards secondary market mortgage activity.

So that obviously is not the same dynamic right now.

But where we are versus the low, the median bank member is a plus 48, which is a pretty good sign.

So, you know, obviously we want to be expanding NIM and as we get into the rest of this section and into the third section, we’ll talk about the dynamics of are we in expand NIM mode or are we protect NIMM mode for potential shifts in the industry risk or credit risk climate?

And so now I’d like to take a look at loan growth and capital ratios, a few different buckets of loan growth.

But first, before diving in, I’d like to take a look at or speak to overall loan growth this quarter. It was a really strong quarter.

So on the bank side, the median loan growth was 4.6%. That’s the strongest since Q2 2024.

And on the credit union side, it was 4.1% in loan growth and that’s strongest since Q4 2023.

So we see here banks that are doing the least lending or sorry the institutions that are doing the least of lending are the banks with the lowest capital asset ratio and the credit unions with the highest net worth to asset ratio and then the banks doing the most lending the greater than 10% lending this quarter are the most capitalized credit unions, sorry, most capitalized banks and least net worth to assets, credit unions.

And what I think this could speak to is the banks were a little bit more susceptible during COVID to have over lent and then seen that kind of whipsaw effect when rates coming up.

And now they’re maybe licking their wounds a little bit.

And so those banks with the lower capital assets are kind of scaling back risk versus some of the credit unions weren’t as adversely affected by that dynamic and are now maybe looking to grow earnings into a high-rate environment when we don’t understand this dynamic.

Okay.

So let’s pivot to talking about deposit growth.

And so we’ll look at the top line here, and then we’ll dig into some of the composition and cost in the next slide.

But the first thing to note is when you look at credit unions, there is that seasonality effect that creates some of those humps in the first quarter when we go back over time.

But for both banks and credit unions, the top-line deposit growth was not even 1%.

It was an even zero for credit unions, in terms of the median, and on the bank side, it was 0.8%.

What we’ve been seeing is, and here we have listed the top quartile and the bottom quartile marks for growth as well.

And we’re seeing a compression.

We’re not seeing a wide range between, for lack of a better way to describe it, the haves and the have nots, right?

The ones who are able to get, you know, A plus levels of growth and the ones who are really struggling.

You can see that compression, that the difference between the top quartile and the bottom quartile is really compacted.

And as we like to do, We like to weave in the qualitative feedback and commentary that we get from talking to members all day long.

And it aligns with what we’re seeing here on the numbers.

The best characterization of deposit growth qualitatively when talking to members is they seem to be pleasantly surprised, right?

Nobody is bragging and puffing their chest out about how great deposit gathering efforts are going.

Either from volume or cost or the intersection of both of those.

But there are pockets where it’s starting to tick up here and there.

However, one trend here that is a fantastic positive trend, I would imagine for most, is going to be the decreasing reliance on term deposits.

Where, obviously, we saw an explosion as interest rates moved into the 4% to 5% range.

So, you know, here we’re looking at the top, quarter-over-quarter growth, the percentage of members that were able to achieve growth in a particular metric.

So we’re looking at term deposits, share certificates and drafts for credit unions and time deposits and non-interest-bearing deposits for banks.

So you can see that the dark green and then the dark blue respectively moving in a downward direction, which is a positive development So, you know when we look at these things and tie them into actual dollar movements or even percentage movements It’s not about when it goes from 51 to 49 then that means decrease There’s that band between 40-60% of members where it’s kind of going sideways So, we’re not seeing a reduction in CD balances just yet, right?

I’m sure there’s some transition from, oh, we had members or customers who had maturing CDs, and they just decided to dump it into a money market account.

There’s obviously something going on.

But in terms of an aggregate on a wholesale level, also, that’s not the best word to use to mix things up.

But on the big picture level, we’re not seeing the flow from CDs to non-maturity deposits just yet, but the growth is certainly slowing down. So that creates some great opportunity.

And the other part of that, more prevalent on the bank side, is that growth in non-interest-bearing deposits. And that is gold for running a bank balance sheet, right?

Being able to get that low-cost transactional type funding, especially as short-term interest rates have persisted at the high level that they are, right?

When interest rates are at four to 5%, your deposit franchise is that much more valuable than it is when interest rates are at zero, 1% and 2%.

On the bottom, we look at some of the correlation between reliance on CDs and the cost of funds changes.

And there certainly directionally is some relationship as we look on a quarter-to-quarter basis for those who are reliant on CDs versus the change in cost of funds. But it’s not as strong as we necessarily would have expected.

But when we do look at the bottom right, we see a pretty strong correlation between how much you have in CDs and the overall cost of funds.

So to me, that tells us that maybe there’s going to be some volatility for the folks who lean into CDs a little bit more.

But structurally, and this is not breaking news, structurally, CDs are going to tend to put pressure on the cost of funds at the top of the house.

So now let’s take a look at credit quality.

We’re going to start on the bank side.

And so on this chart, we’re looking at non-performing loans, a couple of categories as well as total non-performing loans to loans, but we see that this quarter asset quality has deteriorated up about seven basis points from Q1 of this year, but it’s a different story than we’ve seen the past couple of quarters.

So if you’ve turned into our previous couple of webinars, you might have heard me talk about real emphasis on non-owner-occupied CRE, a lot of pain there, and you might have heard a lot of talk about, you know, Payne’s suburban office, B &C office, but what we see this quarter is that that has actually improved.

You know, non-owner-occupied got a little bit better and relatively flat on the owner-occupied CRE side.

And then another reversal of trend is construction actually got a little bit better.

It’s still elevated, but that was a real, you know, last quarter, that was a little point of real point of concern, and it seems to be trending in the right direction now.

But the real emphasis this quarter is C&I. That really jumped quite a bit.

And if anything, you can almost argue that most of the overall increase in total non-performing loans was born out of the increase in the C&I, which is even more notable because C&I loans have been decreasing as a percentage of total loans, from a little bit north of 8% to now around 7% on average for member balance sheets.

I think this is interesting just in the context of over the last few years, some banks have moved into C&I and reduced some of their CRE exposure, just in light of some of the trends I just mentioned.

But now that that’s reversing, it’ll be notable to see if that continues.

We’re going to do a little bit of a deeper dive on that in the next slide.

And so what we’re looking at here is member bank C&I, non-performing loans versus loans, and then U.S. Chapter 11, which are business bankruptcies, and then the total number per year since 2015.

And it’s notable, or what’s interesting is over time, these two measures have moved in tandem, but with the business bankruptcies tending to lag a little bit, just due to they have to play out with the legal process.

It takes a little bit longer than just recategorizing a loan on the balance sheet.

And so what we see is when COVID hit that Q1 of 2020, there was a brief spike in non-performing loans, and then they immediately fell way down.

And that was due to the heavy stimulus, the PPP in the very low-rate environment that we had to support business activity during the COVID-19 crisis.

And then we see that bankruptcies came down as well, but lagged.

And then as we got deeper into COVID or coming out of it to 2022, some of the more heavy stimulus was pulled back.

We did see non-performing loans tick back up to kind of pre-COVID levels.

And then after that, bankruptcies have lagged, but they’ve come up as well.

But more recently, it’s interesting that while non-performing loans did fall back down, it did spike this quarter.

And so, in light of not having any of that COVID stimulus anymore and this much higher rate environment, many of those COVID-19 loans that were rolling off are now being written at much higher rates and much lower debt coverage servicing ratios.

It’s going to be interesting to see if this quarter’s jump is just an aberration or the beginning of a bigger trend in C&I deterioration.

And so on this chart, we’re taking a look at one-to-four family originations split between HELOCs and then Closed-end.

And so while they moved together the last few years, or recently starting a Q1 of 2024, they’ve moved in opposite directions.

So HELOCs have been taking up a larger percentage of member bank balance sheets, whereas Closed-end are slightly smaller percentage.

And one way to understand this is that many consumers have very low rates on their existing houses, so they’re not really willing to sell and take on a higher rate, but they do have a lot of equity looking to tap into.

And while credit union call reports don’t have this level of breaking out of different types of one to four family originations, from my conversations with credit union members, it’s a very similar trend that they’ve seen as well. So what are the implications of this?

If you are doing a lot of HELOC lending and maybe not seeing those lines being tapped, it could create some liquidity concerns, as well as, you know, while one to four family, the Closed-end originations are falling as a percentage of overall balance sheets.

And you may know these percentages do seem a little bit low, that’s because we’re looking at all members as a combined balance sheet.

So if you do a lot of one to four with any lending, your percentage of both heat locks and closed end are going to be a lot higher than we see here.

But if you are doing a lot of Closed-end one to four, it might be worth considering right now to sell some of those into MPF.

Because while those really high coupon loans are nice right now for NIM, do consider that if we do see the rate cuts that are currently being projected, materialize, a lot of those loans, especially those high coupon ones that you just wrote, might prepay.

So consider maybe selling those into MPF and locking in that fee income now.

And so now we’re going to pivot and look at the credit union side for overall credit quality and then by category.

Slightly different look here just because of that aforementioned difference in credit union call reports.

So we’re looking at 60-plus-day delinquent loans and a couple of different categories just due to that.

And so we look at the overall loans, total loans not performing, or have 60-plus-day delinquent. They have ticked up from Q1. But it is possible, and I think if you look historically, that this trend is more due to Q1 credit union asset quality. It is usually better than in other quarters.

I think that’s really due to the influx of tax return funds into those deposit accounts.

So the consumers are doing a little bit better, and the increase, the new loan volume originations increase the denominator on the total loans.

So while it has ticked up from Q1, it’s almost flat from Q4 2024.

And if we’re looking at it by category, auto is getting better used, is really improving, pretty much flat on new cars.

And consumer loans are actually improving, which is the opposite of the trend in the banks.

Banks, we’re seeing consumer loans get a little bit worse, but they’re still better than the credit So it’s more of a convergence that’s going on there and the Cree really solid on the credit union side But a much smaller percentage of those balance sheets and the one to four family I think this is really what’s driving the overall trend.

So if you look at much lower Q1 and backup and Q2, but we’re actually down from Q4 of 2024. So, not a lot of concern there, and I do think that’s kind of driving that underlying dynamic for the overall non-performing loans. So, let’s talk about the investment portfolio a little bit.

We referenced earlier how loan yields have been able to reprice because loan growth has continued to be strong, and also because the yield curve has been our friend in terms of intermediate and long-end rates remaining at the higher end.

Investments haven’t had that same acceleration of repricing.

In fact, things are looking like they’re plateauing out a little bit, and one really non-quantitative perspective on that is it’s because of the accounting rules, right?

Because of other comprehensive income.

So it stares us in the face.

We know exactly what the unrealized loss is on securities.

We don’t have to do that for fixed-rate loans that were originated before interest rates went up.

So I think there’s a lot of hesitation on replacing or even growing the investment portfolio.

So here you can see the median and the top and bottom quartile yields and really that trend of flattening out.

But it’s noted in the subheader up top, only 18% of credit unions and 36% of banks have increased the nominal size of the bond portfolio since 2022, despite the high level of yields and the widespread attainability on that side of the markets.

And so you might have noticed a lot of M&A going on this year.

So we’re looking at where we’re at so far this year and what that implies as far as where we might end up at the end of the year.

So we’re looking at total deals for both credit unions and banks combined for New England and nationally.

And so as we see we’re at about 54.

We’re at 15 deals for New England thus far this year and 204 nationally So if that you know rate of M&A continues will end up the year at 24 Deals in New England and about 334 nationally, which would be a best year in five years for New England in a solid year nationally and so well a lot of that is the you know, what’s been talked about a lot, you know, the a more friendly regulatory environment where some deals that maybe wouldn’t have been approved a couple of years ago are being approved and they’re closing a lot more quickly.

Another part of it, too, is the improvements in bank valuations and credit union valuations as well.

So as bank stock prices and a deal to net, you know, to net tangible value ratios improve, it actually benefits both the buyers and the sellers.

So on the buy side, you have a little bit more buyer power when your valuation is higher, and then on the selling side, those sellers are more willing to sell into a strong valuation environment.

So if we continue to see recovery in bank equities and deal to net tangible equity ratios throughout the rest of this year, we couldn’t even see an acceleration in M&A activity.

Yeah, that’s a good point, and I think the two things to add on to the M &A discussion is.

When loan credit performance is calm, that gives some more conviction in deals getting consummated.

And the other part is a unique wrinkle that we have here in the Northeast is the prevalence of mutual banks.

And we continue to see a lot of activity on the multi-bank a mutual holding company model, the 456 family of banks approach.

So that is a driving activity on the M&A front, as well.

So let’s wrap things up in the third section here with some balance sheet strategies to consider.

So when we think about things from the top down, we talked a little before and asked the question of how can we reprice the asset side given where interest rates are.

So this very busy chart here is all the readings going back 25 years of treasury yields and the Fed funds rate.

And the top rate is where you want to be for a number of different reasons, especially for the asset side of the balance sheet.

But then also, as we noted before, your deposit franchise has the most value and has the most benefit from an ALM perspective, when market wholesale rates are high, but your cost of funds is able to be much, much lower than that because of the value proposition you offer to depositors, independent of we can pay the highest rate on a deposit.

So, on the deposit side is how do we maintain pricing discipline is a big conversation that having with many folks.

And as the prospects for loan growth have shifted from rocking and rolling, most folks experiencing high single digits or even into double digits, as that is moderating, then obviously one of the quick and easy levers we should do, sitting at the intersection of everything, is we don’t have to be as aggressive on the deposit gathering side, especially as we saw that growth wasn’t too, too great on the deposit side.

So, depending on if you’ve tempered balance sheet growth over the last couple of quarters, maybe you’re rebuilding some of the liquidity and your capital ratios are in a place where you like them to be, then really defending that deposit franchise that you have built is going to be paramount.

So, one point on risk management and capital allocation, I use the expression of fighting the last war.

And that’s something that we all can get sucked into every now and again.

And as we talked about three, four slides ago, with the investment portfolio being the prime example of that.

So it’s really difficult to separate out the pains and the missteps that maybe occurred over there, versus the opportunity that presents itself right now.

And so based on what we’ve been discussing, I think almost everyone at this point is expecting some sort of easing over the next 12 months from the Fed.

So that begs the question, how do we optimize funding in a Fong rate scenario?

And so what we look at here are a couple of different rate cut scenarios.

So one, a little bit more hawkish, three cut, three 25 basis point cut scenario, and then a little bit more dovish, a six-basis point cut scenario.

I picked these because right now the market’s pricing in between about four and five cuts, so this gives a slightly more dovish, slightly more hawkish look.

And the products we’re using here, so for the fixed rate, we’re looking at the 12-month CDA.

So that’s 3.98% starting today.

And that’s discounted funding that you can qualify for based on affordable housing activity that you do.

And so the regular classic advanced rate for that same 12 months is 4.03%.

So we can use 4% as kind of the, you know, the rate to compare to as far as fixed and floating.

And then on the floating side, we’re looking at the one-month, one-year, a discount note auction floater.

So that takes the one-month or the four weeks, a discount note auction floater plus a spread.

And it’s a one-year structure where it reprices every month based on the discount note auction rate.

And you get the option to prepay that at each one of those repricing intervals.

So you get the upside of falling rates as they fall, but also that prepay ability.

We’re also looking at the call of SOFR.

So this is a one-year structure which follows SOFR plus a spread with a six-month option to call in the funding, send it back to us after six months with no fee.

And it’s only one more basis point of cost versus the regular one-year SOFR index advance.

Something to keep in mind there, if you want that little bit of flexibility, you don’t have to pay up very much for it.

And we also lumped in the daily cash manager with that, because it’s about the same rate as both those SOFR structures.

And so something to keep in mind there, if you’re rolling the daily cash manager, going out and getting that one year of liquidity with SOFR doesn’t cost you any more, You don’t have to roll the funding every night, but so which one’s going to win and it really depends So if we do have that three cut scenario, you would have been better off going fixed It’s not by a lot, but it would have panned out better Especially on the first of the discount note versus the sofa would be a little bit tighter To going fixed, but if we do see six cuts, you would definitely have been better off going floating And it does depend on the timing if we front load some of those cuts earlier in the year then it would take less cuts for floating to win versus fixed.

So that is something to keep in mind, but really, so the big break even is about 4.5 to five cuts.

And so this kind of brings up that earlier point about when the market is heavily pricing and are heavily expecting interest rate cuts, it seems like no brainer, you follow the market, go floating, but because they’re already so heavily priced in, it only makes sense really if you see something like more than six cuts in the next year.

So something to keep in mind as you opportunistically choose funding sources.

And that’s a good point about the interest rate risk management component of it.

Where it differs a little bit, as we all know, is the liquidity risk need.

And that’s why some of the things Tyler mentioned here, particularly the callable floating rate advances, can be valuable because if liquidity conditions change, you started out saying, I need money for six months because of loan growth and deposit growth.

independent of which way rates are going to go, but if all of a sudden at the three-month mark, loan growth ground to a halt, deposit growth outperforms, then you’re not in that position anymore where you need wholesale funding and you’d be more than happy to give it right back to us and that’s the way these things are supposed to work.

And so a little bit of a deeper dive on that CDA funding, so the Community Development Advance.

So as I mentioned, these are discounted advances tied to your affordable housing lending activity. So we have CDA and CDA Extra.

The difference is being CDA was a little bit more deeply discounted, slightly lower cap on subsidy and slightly different to qualification.

But for both of these, a very simple qualification process, just one page with checking boxes.

Yeah, so most of you are going to qualify, your arm would be happy to walk through that process.

But what we’re looking at here is the spread versus regular classic advances.

And if you might notice, the six- and nine-month tenors, which wouldn’t have been there previously, this is brand new; we just introduced this.

So if you’ve been striding away from these CDA discounted funding because of that tenor, you know We’re only going one year plus previously now is the time to dive in especially looking at that discount at the six month is Ten basis points, so we’re getting 412 versus 422 on the regular classic advance And if you go out past two years, we’re talking ten plus basis points of savings It’s one way to look at think about this especially in context of that previous slide It’s almost like you’re getting half or even the full, you know extra rate cut day one So kind of a no-brainer, especially with that shorter six-month term.

So if that sounds interesting to you, please reach out to your RM.

So another thing that is worth considering right now, if you had grown your wholesale funding and taken out advances when interest rates were high, they’re approaching, and you’re still paying a high coupon on it.

So let’s consider an example where you have six months left to go on in advance and you’re paying 5%.

Well, the curve’s lower, the curve’s inverted, as Tyler said, the number of cuts is getting priced into the market.

But maybe because loan growth is slowing down, you’re not necessarily in that position where you need incremental funding.

So we’ve talked about this a little bit in past instances, but it continues to be attractive as the curve shape and the path of rates create an advanced environment for structure.

So essentially, you have the ability to, rather than prepay the advance and be subject to a prepayment fee if you were to pay off the advance, is that you can restructure the advance and roll that fee into a new advance, keeping the balance that you have outstanding flat, so no incremental borrowings.

So one way that we think about putting that into practice, we can see the visual on the So, if you have that advance at 5%, you have cash sitting at the Fed at 440, that’s negative carry.

That’s not so great.

Well, you use some of that cash to extend out and look at investments, and that example that I used there was the five-year treasury plus 100 basis points, which is more or less where you can be right now for looking at certain types of mortgage-backed securities.

So, in that case, you’re improving your yield and you’re extending out the curve.

And maybe we want to dampen some of that interest rate risk, right?

We believe in some of the things we talked about saying the time to bet that rates are going to go down hard is when no one else is expecting or pricing in that to be the case.

Well, we’re bankers, we’re risk managers first.

Well, we can mitigate some of that by extending, restructuring the advance.

So moving out the curve from a six-month advance to a three-year advance, and because of the shape of the yield curve, we’re actually able to reduce the rate on the funding as well.

So now we went from having a negative carry environment to a little bit of incremental spread there, but then an interest rate risk mismatch, but less so than if we had bought a five-year asset and had it funded overnight.

So we talked about the shape of the yield curve and the path of rates.

And, you know, we could have done a whole presentation on the first two slides of 45 minutes talking about what the Fed is going to do, but we had bigger and better things to cover.

But the fact of the matter is, when there is great uncertainty about the path of interest rates, that creates a pricing opportunity.

And you see it in prepayable assets, and you see it in on the funding side.

So our puttable advances continue to be presenting a lot of opportunity, not just because of the shape of the inverted yield curve, but also because of that value, because as we all know, when there’s uncertainty, uncertainty and volatility have negative connotations, but if it provides more spread in the case of a liability, that means a lower rate relative to the bullet advance, then that’s going to be a good scenario.

So a couple examples of ways that folks have been using these types of advances.

We talked about maintaining deposit pricing disciplines.

So if you think about some of the structures on the shorter end of the curve, where you can get into the mid 3% range, then you can use that tactically versus how you’re pricing term deposits on the front line.

And another thing to consider there is at current levels, the benefit of short-term rates persisting, the dividend impact is in excess of 20 basis points.

So make sure that you’re incorporating that into the arithmetic.

Funding fixed-rate assets.

So whether it’s investment leverage or continuing to charge away with you’re one of the fortunate folks so where loan growth at these levels and DSCRs are okay and fixed rate loans are able to come on the books.

You know, there’s ways to get 3% or thereabouts on a loan versus the wholesale funding, but also 100 basis points or more on a wholesale versus wholesale situation, which that grosses up pretty nicely in terms of an ROE.

When you think about a 1% spread, it’s going to get you to most likely into double-digit ROE territory, which is pretty good math.

And then the last part is I think it’s beneficial to be opportunistic and take advantage of what the yield curve is giving us, especially if you, again, you are a believer that, hey, the long range expectation for rates is closer to three than it is to two or zero, right?

this idea of a soft landing, that rates always don’t always have to go down to zero and be part of an existential crisis.

So when you think about immunizing some of that risk for some of those long-term assets that have paid off, so as you look at some of the structures here that can get you at or south of 3%, then that’s certainly something you want to take into consideration.

So that brings us to the end of our presentation here.

We really appreciate the time here.

As always, we say that this is great, we enjoy, you know, digging deep into the presentation and putting together these insights.

So if there’s anything that, you know, offline or tailored to your institution that you would like some support on, please reach out.

we’re not hard to find, and we’d be more than happy to give you some assistance there.

So with that, we will sign off and hope you have a great rest of the day and the rest of the summer.

Thank you.