August 2026 Peer Analysis and Balance Sheet Strategies Update

I’m Andrew, this is Tyler, happy to have you here.

For our peer analysis and balance sheet strategies update, we will go through what is happening in the markets and the economy.

We’ll take a look at the second quarter call report data for banks and credit unions and have some, hopefully, useful insights as to what is happening on our member balance sheets.

Then lastly, we’ll tie it all together with some strategies for all parts of the balance sheet that really worked to put into practice the things that are happening in the aforementioned sections.

So a little bit of housekeeping before we jump into the formal agenda.

We’ve been keeping busy this summer with our writing and case study.

When I say we, it’s like 20% me and 80% Tyler.

I don’t know where he finds the time.

But if you check out our website, you’ll see a number of articles, case studies, and videos coming at things from a number of different angles.

So I’d invite everyone to check those out if you haven’t already.

And also we have a new colleague, a newish, new with an asterisk, I guess, I answer the full, Rich Moran, who some of you may remember having worked here at the bank previously.

He’s joined us as a relationship manager covering the Northern New England States and parts of Massachusetts.

So we have a number of folks here on the webinar who Rich will be your primary point of contact.

So if you haven’t spoken to them yet, I’m sure you will in short order and glad to have that that are going on.

So before jumping into the key topics, we will, you know, full disclosure, I have not yet seen the Odyssey, Toy Story 5 and the new Spider-Man movie were the top boat getters in my household.

So I can’t say for sure if this is an exact quote a spoiler in terms of Odysseus realizing that the market is now expecting rate hikes here.

But as we’ll go through it a little bit, there’s some rhyme and reason to what the market is pricing in. So let’s talk about markets.

So the first thing that really jumps off the page, and one of the challenging parts of this is from the time we prepare things, We hope nothing really substantial happens, and as Tyler pointed out this morning, some big news about increased buybacks for the long end of the curves.

And the executive summary there was that the Federal Reserve and Treasury believe that long-term rates are too high.

And so when we look at the change in term rates here, we’re looking at the 2, 5, 10, and 30-year rates since the beginning of this year, we are considerably higher.

And this is a theme, as we go through the entire presentation here, talking about the peer analytics, as well as things that we can put into place, is that rising term rates today is different than rising term rates three or four, four years ago.

I think it’s much more of an opportunity than a challenge. And we’ll see that with some of the numbers here.

So it’s interesting, I’ve annotated the most recent FOMC meetings, the first two meetings for Chairman Warsh.

And if you’ve seen our FOMC instant reaction videos, the biggest change has been the lack of communication and forward guidance in that Chairman Warsh wants the markets to not be watching the Fed, but make their own determinations of where things go.

So when we annotate and see where the meetings were and what the immediate reaction and also the secondary reaction to interest rates, we see that there was an immediate decline in rates, right?

Despite some of the hawkish bent, right?

The expectation that rates, short rates are probably not coming down anytime soon.

But this was pulled even before long rates started to rally today on the news of the increased buybacks.

But since the July meeting, we have seen rates start to come down.

And I think that tells us that the absolute and relative level of rates is pretty appealing, right?

At a certain point, absent existential crisis level, that there’s going to be marginal buyers of long-term rates at these types of levels.

But at the end of the day, the two primary concerns, as we’ve discussed many, many times before, the Fed is concerned with price stability and the employment picture.

So Tyler’s going to take us through what those two respective pictures look like.

Absolutely, thank you, Andrew.

And as we have seen recently, there’s been a lot of talk about hierarchy longer, but as mentioned, there is some reason to believe that we might be seeing some relief on both sides of the dual mandate.

So first here, we’re looking at PCE and CPI, year over year, that’s on the left side.

And we’re looking at June for PCE because July PCE is not quite out yet.

and then July CPI.

And so while the year-over-year is still running solidly above the Fed’s 2% long run goal for inflation, what we do see is that more recently, the momentum, as far as the acceleration in inflation has reduced.

We’re actually seeing some relief in the three-month annualized CPI rate. It’s actually now down below the Fed’s 2% goal.

We’re at 1.6%, and that’s rooted in May, 0.2% month-over-month increase.

And then we were flat in June.

And then in July, we were just, again, up 0.2% month-over-month, resulting in that 1.6% three-month annualized rate.

So some encouraging relief on the inflation front.

We’ll see if that continues to materialize.

And then we’re going to look here a little bit more in-depth or a little bit more granularity about what’s under the hood on inflation.

So this is CPI components broken out year-over-year.

change components broken out into different segments.

So starting on the left side, energy. What we see is that energy has really been what’s driving the inflation over the last year.

So a bit of a change from earlier in the cycle when we were seeing more intense inflation, but it was more broad across all the sectors when we were really seeing some really intense services, especially in shelter inflation.

While that’s still elevated, it’s not nearly as big of a piece as energy has become. And the core goods is running actually in a great spot.

So we’ll see if energy, well, big F with what’s going on in the Middle East.

But with that taken out, we could see some serious relief.

So as much as it does seem like right now, things are, there’s a lot of talk of higher for longer.

We’re just a couple of prints or some relief in the Middle East away from very, very different picture on the inflation outlook.

And we saw that, you know, good point there, Tyler, about the tensions and the ebbs and flows in the Middle East at various points in 2026.

We have seen rates start to rally as tensions ease a little bit.

So there is that natural shift.

Absolutely.

We’re now shifting to the other side of the dual mandate.

So we’re taking a look here, oh, there we go, on the labor side.

And so, starting on the left side, looking at three-month average payroll growth, what we see is that payroll growth has gotten really weak.

So, we’re running 20% three-month annualized job growth, which is quite weak for a country of over 300 million, so some softness there.

And then paired on the right side with some reduction in labor supply, so we’re seeing lower participation and then lower employment as a percentage of population, so that ratio reduced as well so far this year.

And then also with reduced immigration and actual immigration outflows, we’re seeing reduced labor supply.

So with those things both combined, that’s why we’re seeing despite kind of tepid job growth, we haven’t seen unemployment rise still at 4.1%.

And then getting on to, oh, getting stuck here again, a little overshoot right in the middle there. And now we’re looking at is a labor churn.

So what’s going on with both job openings and hiring rates on the left side, on the right side, a quits and layoff rates.

And the story here is really that we’re not seeing a lot of layoffs.

But we’re also not seeing a ton of hiring.

So it’s, it’s a weak job market.

But it’s not, say, you know, critical to the point where we’re seeing broad-based layoffs, right, because it’s cracks, but there’s not broad-based stress.

So it’ll be interesting to see whether things start to pick up on the hiring side or if we see some more deterioration on the layoff side.

And I think that will have a lot to do with where we go from here on the rates end.

So that brings us to the Proxy Fed Funds Rate.

So the Proxy Fed Funds Rate is a metric that the San Francisco Fed puts together and incorporates financial conditions, borrowing rates, mortgage rates, corporate debt issuance, things of the like, and then does some retrofitting to convert it to a comparable number relative to the Fed funds rate itself.

And this is fascinating because with the benefit of hindsight looking at the historical path of the two metrics, the proxy Fed funds rate does seem to be a leading indicator.

And again, hindsight, it’s easy to look at 17 years’ worth of data.

and in a spot and with that without the cut off of a spot in time and say oh look this is what happened and because we all knew it was coming it’s not that easy uh but we if we do look in certain periods right look at uh 2015 when uh the green line was starting to take up and that came right before rates started to rise after a long period of um zero bound rates We see it again on the downside in 2018 and 2019, and most notably in 2021, the proxy Fed funds rates started to move before, I wish we had looked at this at the time when we were all taken aback by the move in short-term rates during that period.

So as we sit here today, 455 in the proxy Fed funds rate.

And talking about financial conditions and the borrowing markets, and the Fed has talked about this in the recent press conferences, the boom in AI infrastructure spending and debt issuance.

One, it has an impact on the long-term rates, right?

I won’t go into the mechanics, but in order to hedge that issuance, that puts upward pressure on long-term rates.

But the other part is corporate spreads are at very stable, narrow levels right now.

The stock market is coming a little bit, but still doing very strong.

So that, we look at the economic data, but we look at the market-based data, and it’s painting a rosier picture, maybe than some of the softness that we’re seeing in labor or the challenges in inflation.

So that is one of the key drivers of why there is that gap between the constructed rate and the actual rate itself.

So let’s pivot into talking about the balance sheets.

So I think the first thing to talk about here is margins are doing fantastic, right?

These are two lovely sets of charts if you’re a bank or credit union executive.

And we look at that upward sloping trend, right?

We love to see certain metrics going from Southwest to Northeast.

And that’s what we see here with bank and interest markets.

So we had increases at the median, as well as on the upper and lower core tiles.

And when we compare back to where we were in December of 2020, on the banking side, we’re, for all three of those intervals, we’re doing a little slightly better.

On the credit union side, exponentially, not exponentially, but much better than where we were at the median 25th or 75th.

And this also comes in an environment, as we will get to, that is very conducive for things, given the level of short-term rates and long-term rates.

Just think about back in 2020, let’s just use a very simple example.

You were a depository institution, and your entire business model consisted of non-interest-bearing deposits that you then placed at the Fed.

Today, that would make you a 75th percentile bank, and it would make you about a 45th percentile. Whereas in 2020, that would make you the worst performing bank and the worst performing credit.

So there are inherent advantages to where we are in the rate cycle.

And we see that with the trend of margins.

And as we look back historically about the different experience that we’ve had.

So this chart bears some similarities to this one in terms of looking at the ebb and flows or the direction of where margin is trending.

So, as we look back over the last four and a half years, we had three different regimes.

We had that period when rate hikes were commencing, and we were able to lag on deposit rates.

And we saw the majority, two-thirds of banks and credit unions, who saw significant NIM expansion.

We saw asset yields start to go up.

Our funding costs were pretty stable.

Then the check came due a little bit in that second period, where the funding rates started to catch up.

We don’t need to belabor and talk about that.

Thank goodness it’s in the rear-view mirror.

And now we have this period, right, where we had the pause at the top, we had the beginning of rate cuts, another pause, and then whatever we want to call the position we’re in today, we’re starting to see that expansion again, right?

So where we have 85% of banks who’ve seen their NIM expand greater than 20 basis points during that period, 77% of credit units.

And as we saw in the prior chart, credit unions have already done a lot of expanding.

They held on much better in that funding catch-up period.

So it’s not necessarily an apples-to-apples comparison.

So what is the key driver of this margin expansion?

And it’s the asset side of the balance sheet.

So if we look at the interest income to assets change quarter over quarter, And we look at it, each one of these bars signifies a five-basis point move.

And the lighter colored bar right there in the middle signifies zero.

So we can see clearly the distribution is skewed to the right-hand side pretty significantly.

So the majority of banks and the majority of credit unions have been able to enhance their yields.

And what’s really fascinating about this is you might imagine we know it because we’re in the weeds with the analysis, that there’s such consistency here in terms of who’s benefiting, contrast that to the different sizes and shapes and focuses of balance sheets.

When we think about floating rate CNI lenders and fixed rate auto lenders and the ability to, despite what your loan and deposit book looks like, transform profiles with off balance sheet That the path of rates and the shape and the makeup of balance sheets lends itself to such a favorable repricing of the balance sheet, I think is a very good thing.

Let’s now take a look at the growth side, starting with loans.

So what we’re looking at here, split up by a few different groups.

So 0% starting on the bottom, then 0% to 5% growth year over year, and then 5% to 10% and greater than 10% both on the credit unions on the left and banks on the right.

What we see is that growth, while it slowed down a little bit quarter over quarter, it’s still, the quote we’ve been hearing a lot is it’s still surprisingly good, better than expected.

We’re seeing 2.78% this quarter year over year growth on the credit union side and 3.81% on the bank side.

So again, things are still surprisingly good, though interesting that we still see a lot of bifurcation.

So still 27% on the credit union side and 20% on the bank side, seeing a less than 0% growth.

And then near 20% on both sides, banks and credit unions, seeing above 10%.

So big difference if you’re say down in Southern Connecticut or Boston Metro versus maybe Northern New England, really kind of different growth profiles going on concurrently.

Then I’ll give it back to Andrew for the deposits on.

Yeah, so I’ll give a shout out to one of our newest colleagues, Tom Haymaker, who is part of our first line credit risk and member analytics group.

And so he had the idea to say, you know, let’s go a layer or two beyond just looking at loan growth, right?

But what is happening across the rest of the balance sheet as loans are growing or not growing?

So what we’ve done is continue to use those same loan growth buckets, right?

Negative growth, zero to five, or 10, and greater than 10%, and see the impact on cash, bonds, deposits, or borrowings.

And there’s some interesting takeaways here.

We can see that banks have been more willing than credit unions where there has not been long growth, right?

As Tyler pointed out, whether because of geographical considerations or the business model or whatever the case is, we have seen a little bit of a tick up in cash.

And even as we get into those who have had above average loan growth, credit unions have been more willing to draw down on that cash.

And it’s not just with the cash side of the equation, but also in the bond portfolio.

So we move along to the second grouping there.

We can see, as you might expect, where negative loan growth was the case for credit unions, that they were more eager and willing to move into the investment portfolio.

We’ll get into the investment portfolio in a little bit.

Shifting to deposits, we look at the bank side.

That’s the natural progression that you might expect to see, and in fact, those numbers are almost right on the nose of each of those categories, and it’s what we would like to see.

We want to come in and have loan growth and deposit growth match each other, and we take that deposit to fund that loan, and we have a good little business, especially as teaser the rest for the section three, the yield curve is our friend right now.

And then in borrowings, we see the big tail at the right-hand side, and that’s what we’re here for, right?

So the fact that you are able to capture loan growth, as Tyler said, whether it’s surprisingly good or just flat out good, which has been challenging.

Because when you think about our experience of When rates start to decline, so we go back over a year or so, our first rate cut, we think about the watch out below, right?

Where the last couple of times that rates have gone down, it was sharp and it was quick.

This cycle has been anything but.

So I think that drives a lot of the surprisingly good clarifier to things.

So certainly you’re a community-based institution, you want to be lending and to the extent that you have capacity and you have the demand and the pricing is right and it’s a challenging market for deposits, then that’s what we’re here for.

So now taking a look a little bit more specifically on the residential side for loan growth and seeing what’s going on.

So starting the left side with first lien mortgages and then junior liens for both banks and credit unions.

So we see growth has been pretty strong year over year, both in first liens, though even stronger in junior liens and home equity loans.

And so that might be a little bit surprising, especially on the first lean side, because I think most of us would like to see better volume on the residential side currently.

But the reason that we’re seeing growth in the actual book be so strong is that pretty much everything you’re putting on is sticking.

There really hasn’t been a lot of prepay activity, maybe a little bit started up when we got that little downtick in mortgage rates a few months back, but then they came back up.

So everything is effectively sticking.

And then on the HELOC side, what we’re seeing that growth that’s actually almost doubled what we see on that first mortgage side is that there’s that lock-in effect.

I’m not laying out anything new here, but so many of your borrowers or members and customers have huge home equity built up in their mortgage, and they have a very mortgage rate that makes it very disadvantageous to go out and to buy new home even if it would make sense for various reasons.

So they’re tapping into that equity whether it’s to make up for housing costs or to do other things that money get into the market.

So overall we’re seeing quite strong home equity growth and then on the right side we’re looking at that as a share of one to four family and so in both cases banks and credit unions it’s increasing up over 2% on the credit union side over the past few years, a couple of years, and almost over 3% on the bank side. So again, we’re seeing a lot more movement into home equity.

It’ll be interesting to see as we get a little bit deeper into the cycle and get further away from the beginning of rate hikes, if just fatigue and timing leads to more people coming back into the market because they just can’t wait any longer.

But so far, we’re seeing more people tap into that equity and just put.

Is it fair to say that this trend is one of the contributors to increasing asset sensitivity for banks and guardians? Yeah, absolutely.

I mean, just all those low coupon long, you know, now some of the duration on your residential mortgages is like truly 30 years for those ones you put on a few years ago because those borrowers are never going to put that back.

So now I’m going to get onto the next slide here and take a look at what’s going on in sale activity for mortgages.

So while we’re well below what was going on during COVID, where we were doing almost $14 billion, and we’re just selling almost $14 billion worth of mortgages into the secondary market.

While we’ve recovered from when we got down to $2 billion in 2023, things are still below that COVID peak, but continuing to tick up.

And we won’t get too far into it because we’re going to get into it in section three.

but just because you’re putting on these nice high coupons, five, 6%, high sixes, doesn’t mean that mortgage necessarily should stay on the books.

That mortgage needs to earn its place.

And it’ll do that by considering all your other options for as far as redeployment or paying down advances.

And once you think about it holistically, you can really appreciate whether it makes sense to hold that mortgage or possibly sell it to the secondary market or to us, to MPF.

I’ll just interject briefly.

If anyone has any questions or things we’d like to address, you can use the chat function on GoTo, and we can field those as they come in.

Absolutely.

Please do.

So now we’re going to take a look at credit quality.

Starting on the bank side, some of you might recognize this chart.

We’ve used it the last few webinars.

This is credit quality by category, you know, loan category, looking at the last three quarters, and its non-performing loans as a percentage of loans in that loan type.

So we see some improvement overall in NPLs on the bank side.

Interesting, there’s been a lot of talk recently about deterioration on the consumer side, but we really don’t see that playing out in the numbers for our You know, despite, you know, right now, personal bankruptcies are continuing to stream up.

It’s not on the slide, but just New York Fed bankruptcy I did on the personal side and business side have been streaming upward, personal outrunning business, but we really don’t see that playing out, at least not yet.

So one to four family, both closed end and HELOCs improving quarter over quarter, construction relatively flat, multi-family ticking down, but we do see there’s a bit of a reversal.

So commercial real estate had been getting better after there being a lot of attention on it.

But a year ago, it kind of went back into the shadows, and weren’t paying as much attention to it.

But now we’re seeing some deterioration again.

They are potentially just with a lot of mortgages now getting put back on at higher rates.

Sorry, not mortgages, commercial real estate loans, getting put on a higher rate than they were a few years ago when commercial real estate rates would have been 300 basis points lower. So that could be contributing to some of that pain.

We’ll see that it continues to materialize and then see it not getting a little bit better than as mentioned consumer overall improvement.

Tyler, I’ll put you on the spot again for a question.

So I think back to the New England Economic Webinar you and Caroline did earlier this year.

When we think about the strong signs in consumer or other parts of the loan book being as objective as possible, can we attribute that to just the strength and durability relatively speaking of the economies and geographies that we have here in New England versus the rest of the country?

Yeah, I think that’s safe to say, you know, the U.S.

economy at large is strong, but New England just seems to weather those storms much more consistently.

You know, if you look at like housing prices during 06, they really, or 07, they really didn’t come down nearly as much as they did nationally in New England.

And I think that just speaks to the durability of both the Boston economy, that Connecticut Metro or New York Metro, then the broader New England economy.

So, you know, while the rest of the country, a little bit more, especially down south, they’d be impacted by oil or less impacted by it.

Some of the fear over biotech hasn’t been as strong as we were worried about.

So things are pretty strong.

And so we’ll see now on the credit union side.

And again, interesting that, you know, that fear over personal credit and consumer credit really isn’t materializing.

So we see, well, quarter over quarter credit union, delinquency, 60 plus day delinquency did tick up.

There’s a dynamic I’ve mentioned this number of times the last few webinars, but it’s always worth bringing up again, that q1 credit quality for credit unions tends to look a lot better because they tend to put on a lot of loans in that first quarter, so the denominator grows.

And then there’s a lot of tax rebates and things coming so the numerator gets a little healthier, consumers a little bit healthier.

So pretty much every single year, you see Q1 come in like 10, about 10 basis points lower.

So if you really take that effect out, it’s more of just an even ramp downward in delinquencies.

So used cars, new cars improving, unsecured personal credit cards improving, one to four family getting better.

And Cree also getting better.

If you notice, it looks a little bit lower than it did, in previous iterations of the slide that’s just because of some remixing in our membership, we had a member leave the mix that was a big Cree lender.

Things look a little bit different there, but very, very healthy on the commercial real estate side for credit unions.

And now looking at the credit pipeline, so looking, starting from the left side to the right on each of these charts, both banks on the left, credit unions on the right, we’re looking at short-term It’s kind of the waterfall of credit, you know, asset quality flow through.

And what’s interesting, we don’t see a new way of materializing, but things are kind of flowing through the pipeline.

So we’re seeing from two years ago to now, restructuring is up, you know, charge-offs, especially on the credit union side, running strong, and not accruals, but we’re not seeing as much on the short-term delinquency side.

So again, some of those short-term delinquencies from a year or two ago, you know, continuing to flow through to charge ops, but we’re not seeing a new way emerging on top of it.

And then one more look on the credit quality.

Sorry, I’m having a little bit of trouble today with these slide transitions.

So what we’re looking at is members who are seeing increases of non-performing loans of greater than 25 basis points every year, 50 basis points, and then 100 basis points.

And the takeaway here is that we’re not seeing a lot of real blow ups, you know, increases of just 25 BIPs year over year, only 20% in banks, 25% in credit unions, 50 BIPs, 10-15% on the credit union bank side, and then, you know, only seeing less than 5% of members see over 100 basic point, you know, essentially blow ups in non-performing loans.

But I think that speaks to is that overall, like we just saw things are improving and in those cases where things are getting worse It’s maybe members where you know, one vertical really kind of blew up say CNI they got into it didn’t go so well or you know some of these kind of more niche things like marijuana lending didn’t go so well or Maybe one large suburban office project blew up and that drove a big uptick but other than that things are moving steady and not too much of a not too many instances of real large stress.

So let’s take a look at what’s happening with investment portfolio yields as well as the market values relative to cost basis.

We talked about the asset side of the balance sheet repricing, and we can clearly see that over time.

The trend has been consistently rising for banks, and credit unions took a little dip last quarter, but as we saw with the loan growth and impact on the rest of the balance sheet slide, that increase that we saw reconciles with the growth that we saw there as well.

I’ll point out one interesting thing with banks here.

You can see we grew last quarter, but before that, it looked like we were plateauing out a little, right?

And that’s despite even we’re getting very incremental prepayments from those 1% bonds still on the books, and the marginal rate is, even if it wasn’t at the five and a half that it is now, it was still with a four-handle, still accretive to what it was on the books.

So when we see that flat line there or the plateau, that tells me that the growth really wasn’t there.

But when we look at it here, we see that one of two things, that time is starting to heal wounds, we’re starting to see more paydowns, right?

Finally, those bonds are coming back.

but organically, and or we’re starting to see the growth as well.

We look at the right-hand side; this shows the unrealized loss mark.

And again, this is the time that heals interest rate risk moves.

And what I had mentioned earlier about this is probably more opportunity than challenge, where we are with rates.

So the portfolios absent doing anything are shortening over time, such that we have about a four-point differential in how much the bond portfolio was underwater.

And that’s both the decline in those securities themselves, but also if you’re adding securities on day one, a 0% loss or gain, or if they rally a little bit, a little bit of a gain, which we haven’t seen in a while, then that is going to blend the average to be in a much more advantageous position.

So again, we’ll look at the interest rate risk profile in the investment portfolio. So we went back to the fourth quarter of 2021.

And again, this is a function. This is just banks.

This is a function of the bank call report being a little more granular with this section here.

So we put folks into core tiles in terms of how much of the long securities portfolio reliance that they had.

And as you might expect, starting with the top, we would see that decline over time.

You were overexposed, rates went up, and you want nothing more than to just reduce that exposure.

What’s interesting to me is that the bottom parts, the lowest quartile in that second section, haven’t increased.

There’s a little bit of an increase in that bottom quartile.

So I think from an ALM strategy perspective, you did well to be underweight, a focus that didn’t perform particularly well during that period, that there may be some opportunistic ability to increase that, especially if you’re underweight, these longer securities, because of where the marginal rates are.

I’ll tackle this one question here, and I’ll do it at this point, because it actually dovetails nicely with next slide. So the question was, why is NIMH higher for credit unions rather than banks?

And I think the biggest driver there is the cost of funds, the deposits, right?

We mentioned it with that second NIM slide and talking about how credit unions did fare better than banks during that second regime of the funding catch-up.

And we’ll see in a second the difference in cost of deposits for banks versus credit unions.

And just as a friendly reminder, when we’re looking at these numbers here, unless it’s otherwise explicitly stated that it’s all banks or all credit unions, we’re looking at our membership footprint here when we’re saying here is the number for banks, here is the number for credit unions.

So now we’ll get on to that deposit side, as Andrew mentioned.

So, first, looking at the cost of interest rate deposits, five percentile, so 25th percentile median and then the 75th percentile for banks on the left, credit unions on the right.

And as Andrew mentioned, we see pretty huge disparity between the bank side and the credit union side.

I mean, looking at that 75th percentile, it peaked out at 315 basis points, cost of funds We’re right around the middle of 2024 versus 210 basis points on the credit union side.

It’s over 100 basis points, you know, divided between the two, but we do see on both sides is that relief is playing out.

So you’re seeing a lot of those higher coupon number, those 5% CDs, we’re not doing any of those anymore.

Thankfully, those have rolled off, and we are seeing relief, you know, coming down, not quite 100 basis points, but somewhere in that 50, 56 basis point range on the bank side, a little bit less on the credit union side, things didn’t peak out quite as high.

So relief has been a little bit less, you know, a little bit lesser.

But interesting that while the cost is coming down, because again, this is the cost of your existing book.

So those sticker prices that you’re putting out are a little bit higher.

So we are seeing a return of some of those four handle CDs even going out to a year, which is interesting.

So we’ll see whether this funding really does continue.

A lot of that would depend on the Fed, but also what kind of betas members are able to achieve in their pricing.

And so now we’re looking at by category of deposit type and what those deposit and borrowing costs look like by percentile, again, 25, 75 and medium.

Starting on the left side with banks, the top looking at borrowings, definitely more expensive than the rest of the deposit book or then deposits.

And then on the time deposit side, those jumbo CDs running still pretty strong, I mean, pretty high, you know, three and a half percent average cost or median cost across the membership. Other time deposits still up above 3%.

We are seeing a little bit better on the money market side, which we’ll speak a little bit about more later, where even at the 75th percentile, It’s only 225 or 226 basis points of cost.

And of course, interest bearing counts, that’s the fuel that we, those really valuable deposits running very, very cheap.

And then on the credit union side, looking much cheaper for shares and deposits, of course, and then even for borrowed money, you know, more expensive than the rest of the book, which is, you know, goes out saying and the interest bearing liabilities, as we mentioned before, much cheaper for credit unions than banks, whether that be the geography that they’re operating in, membership base, different growth profiles, but we’re seeing different pricing dynamics going on for credit unions.

And then looking now at duration and what’s going on in the CD books with the banks and credit unions.

Banks on the left looking at CDs, the percent greater than a year, sorry, less than a year, from one year to three years, and then longer than three years.

And seeing what the percent breakdown was between those in 2023 versus now, what we see is that what we already started with a very short duration, you know, over 85% were less than a year for banks and almost 70% were less than a year for credit unions, going back a couple of years, four years.

We’ve gotten even more concentrated in that short bucket.

we’re up over 90% on both the bank and credit union side; it’s being less than a year and only 1% going out past three years.

Which begs an interesting question that we’ll get into a little bit more in section three, just where money market rates are so much more advantageous and CD duration has gotten so short, where is that value insofar as doing say a five-month CD pricing at so high relative to money market? Okay, so let’s get into some strategies and ideas here.

And I’ll keep it simple here, that first bullet point, the yield curve is our friend right now.

I’d encourage everybody to go into your next ALCO meeting and you don’t have to just say that in the meeting, but I would repeat this multiple times because it really is such a considerable difference in the operating environment we’ve had for a while.

So when we think about the things that we would want in a yield curve, along the right-hand side, We want term rates where we place our assets.

We would want them to be at high levels.

We would want some positive slope between the front end and the intermediate end, for our short and long.

But then also we would want the short end to have some upside by having the ability for it to go down.

I know that was more confusing than it needed to be.

We would want room for the front end to reprice lower.

So right now we have all three of those things working in our favor.

At various points over the last five years, we’ve had one or two of those things, right?

We think back to 23 and 24, we had high term rates.

We had room for the front end of our price lower, but the curve was inverted by 150, 200 basis points.

It’s very difficult to be a depository institution in that timeframe.

Rewind to 21 and 22.

We had positive slope, 150, 200 basis points of slope.

fantastic.

We had, but there was no room for term rates, excuse me, for the front end to go lower, right? And the value of our deposit franchises were muted.

And even when we thought we had high term rates, they weren’t as high as they thought, right?

If we had stayed at two and a half percent five-year with short-term fund rates, we could have done well, right?

We think back to 09 to 15, When we had sloping curve and we had that zero bound rate environment for a long time, once we worked out the credit issues of 08-09, that was a very, very good operating environment for banks and creditors.

But as we know, that was very short lived in 2021-22.

So the yield curve is our friend.

The yield curve is providing us opportunities to reprice the asset side, but also have some targeted opportunities on the liability side.

So when we talk about loan how to fund loans and that whether it’s surprisingly good or good or great Certainly, you know talking about the increased asset sensitivity that and the level of rates There’s some opportunity in the intermediate part of the of the curve We haven’t explicitly looked at it But we’re good spreads are narrow mortgages have lagged the move in treasuries as we’re getting higher So it’s a tricky proposition to retain mortgages on the balance sheets So, as we think about deploying liquidity and managing liquidity levels, I would look to the liquidity benefits of the mortgage portfolio and say, aside from the flow business that maybe we’d look to sell at 102 or thereabouts, but if we have anything in the retained portfolio that could be served as a vehicle to fund some of that higher spread, higher rate opportunities, then it’s worth exploring.

So we’ll go right from our right to left here on the bottom chart So maybe if you portfolioed some of those high sixes low seven percent rates as rates got up very high And if they haven’t prepaid yet, they are candidates to prepay, right?

And so you look at where the price was as of a couple days ago.

So With the rallying rates, I think we could slide those Over to the left a notch or two So but for each coupon is going to be a little bit better in price probably than what we see here on the page.

So those certainly are candidates to sell before the borrower prepays.

As we move along, we look at that middle section, that stuff that’s just slightly below the going rate, where maybe you would never sell a flow mortgage, right?

Why would you at par and a half?

But if it’s something that you retain, there’s an opportunity to grow other parts the loan portfolio without getting into the CD chasing game, right, which you probably don’t feel great about doing.

Or continuing to grow wholesale funding, which may or may not, you know, depending on your liquidity, depending on your capital position, may not be something that you want to do.

As you move further to the left, you can see on the top chart, the green bar is below 5%. We don’t need to talk about them right now. They’re at deeper discounts.

It’s a whole other equation to discuss those, and we’re happy to do those.

But for right now, you look at some of the ones that are at just slight, slight discounts, something like a five and three quarters at 98.

If you’re fortunate enough to have loan demand in CRE or autos or anything where there’s greater coupons and greater spreads, there’s arithmetic that I think you’ll like in terms of how quickly can earn back the spreads, but then also have more of a manageable duration profile and a more predictable duration profile because you don’t have the prepay risk that you would have in a residential mortgage portfolio.

Going back to the deposit side, some of the advantages and also challenges that this yield curve is presenting.

What we’re looking at is the advanced curve and then what each of those prices look like, 25 basis points lower, 50 basis points lower, and then 75 basis points lower.

So part of the idea here is if you, well, first off, money markets are really where the value is.

You can price below where you can be for equivalent advances that are further down the curve, but then also for better than your CD promotions at those levels.

That’s what allows you to do is to start at a lower nominal pricing point, but then potentially still having better relative value.

You can be above market relative to peers, but then still have an attractive nominal rate to you.

And then as the Fed cuts, you’re able to pass those through directly, as opposed to the five-month CD, you might be waiting four months to be able to pass that through and reprice down, especially when we have hikes cut, hikes priced in. What if things go the other way?

We get it through dovish prints.

All of a sudden, those 4%, five-month, one-year CDs aren’t looking so hot versus if you’d done that growth campaign in the money markets.

As soon as the Fed cuts, you can pass those along. If they hike, you don’t necessarily have to pass those all the way through.

If the customer notices it, maybe they call you up and ask for it and negotiate.

But if not, we’re able to retain that lower rate.

But say if we are going to go with the CD route, what this slide is showing us is that there is value to go a little bit further down the curve, and if you’re able to get some savings relative to where advances are, it can be quite attractive.

Say looking out at 18 months, if we’re able to get just 50 basis points of savings versus where advances are, that’s 374.

So we can get some relatively decent duration even out through three years, we’re going 50 basis points lower, or four years plus, if we’re going down 70 basis points lower, we’re getting below four handle rates with duration.

And I think there’s a decent argument to be made that that would have a lot more value, say sub 4%, two year, maybe even three-year CD versus a five-month CD at 4% or one year CD at 4%.

So of course it is, we have heard the demand further down the curve is a little bit more tepid, but if you’re able to get any traction there, it’ll be really attractive for you.

So lastly, we’ll talk about three ideas on the investment side.

And this assumes it’s not the decision between I have cash, should I go buy investments?

In that case, I think it’s probably a yes, because if for no other reason, the slope of the curve tells you that you’re going to pick up yield pretty much no matter what you do.

But Assuming that it’s going to involve some level of funding, here’s three ideas to think about.

So I think certainly as we talked about increased asset sensitivity and certainly with the loan growth and tightening of liquidity, if you have an asset-sensitive and liquidity-like profile, I think that there’s some opportunity to really hedge the true risk, right?

Higher for longer, I don’t think, is the income statement risk.

It’s a range do go down, right?

So there’s the opportunity to add intermediate rate assets and fund it at the very short end.

We’ve talked about the time of the case study.

We’ve talked about it in numerous webinars.

I’d familiarize yourself with the SOFR Floater Advance that we have.

There’s a lot of opportunity and value there.

The second one is a pretty straightforward example where to pull forward some of the reinvestment to the current period.

We saw this just this morning with the announcement and the subsequent drop-in long-term interest rates.

If you see value in the level of rates and the types of assets that you’d want to be looking at and, hey, maybe you have $30 million or $10 million or $50 million rolling off your portfolio, P &I, over the next six months, 12 months, you can pull it into that current period and use advances to ladder that, such that when you do get your paydowns next month of $4 million, well then you have your $4 million advance to pair it off and pay down that advance.

And you don’t risk waiting to redeploy when market conditions may not be as optimal.

The last thing is create capacity to add duration.

I think that’s the value of the advanced curve, where you may see the value in the long end of the curve or the intermediate part of the curve. But you know what?

Adding that much interest rate risk is not something that you necessarily want to do.

And this is that we’ve talked about this before, the Nike swoosh type strategy, where if you nudge the liabilities out a little bit, say by five-year assets and have one to two-year liabilities from an ALM profile, you’re going to neutral, right?

Your spread is going to be pretty locked in for the near term, but then as those roll off, you have a shorter duration.

You’re probably in a better position to deal with that inherent liability sensitivity than you are today.

So, you know, that brings us to the end. Thank you, everyone, for joining with us.

Hopefully, you found this to be insightful and useful.

And as always, if there’s anything that we can be of assistance with, we are more than happy to help out where we can.

So thank you all and have a great rest of your day.

Thank you..