February 2025 Peer Analysis and Balance Sheet Strategies Update

Hello, everyone; thank you for joining us today for our latest webinar.

We haven’t done one since November. It feels like a hundred years ago, sometimes relatively, when we get into the pace of doing them much more frequently, so I’m Andrew. This is Derek.

We have a full program to bring you all through today. We’ll start off by touching on what’s happening across the markets in the economy. We’ll take a deep dive into some trends that we were able to suss out from the fourth quarter call reports. Then we’ll wrap things up with a couple of things that we can be doing on the ALM side to put into practice some of the observations that we have on the 30,000 foot and then the ground up perspective as well.

So we’ll start things off with a question for you all, a similar question that we have asked many times before: where will the Fed funds range be at the end of December 2025?

And we put some buckets in, in terms of the hard landing, the medium landing, the soft landing, and then down here, I had to scroll, is higher for longer.

It’s interesting, and you’ll see it as the presentation goes on. We really see it in all three sections, but the opportunity exists when actual results deviate from what is priced in or what is expected.

The first chart that we’ll see in a few minutes in section one really speaks to that in terms of the idea that projections and $2 will get you a cup of coffee, as the old saying goes.

However, there are things that we can do from a risk perspective, such as a global balance sheet and risk management perspective, that can put us in good shape.

So we’ll give it just a little bit more time here to let some of the answers continue to flow in.

And the early results, I don’t know if you all can see them, but we can. They are kind of in line with our expectations.

But Stacey, if you want to wrap this up, then we can move on here.

So we can see the results here.

About 60% of people thought higher for longer is where we’re going to be at the end of this year.

It’s not too terribly surprising.

That is in line with market expectations.

And we didn’t do this, but anecdotally, we could go back and look at the previous instances where we asked this question and what the percentages were.

I really do not believe that they were this skewed towards the higher for longer.

So, this has been reactionary to what the environment has given us over the last couple of months.

And I think over, even since our last webinar, there’s been a lot of change in the environment, too.

So that alone has changed the sensor from last time.

It’s definitely interesting to see.

I thought you were going to say there’s been a change since we finalized the webinar slides two days ago.

​Sometimes, that seems to be the case.

So before we jump into section one, we’ll get to talking about inflation and regional and national economies.

But one thing that our team was able to suss out is looking at the CPI index and all the components that go into it and taking a closer-to-home look and seeing how some of the products where the New England states are the leaders nationally, in some cases globally, how those prices are doing.

We spent an awful lot of time with the color coding and the markings to make sure that they were consistent with what was going on.

So you can see the blueberries and the cranberries down at the bottom exhibiting an awful lot of price stability over the last 12 years.

Ice cream is stable – popped up in 21, 22 and has plateaued, and you can see the lobster volatility and lobster prices. Do interest rates have anything to do with lobster volatility?

But really, the reason that I wanted to put this through, as you can see on the sub header, I can’t take credit. We give this to Tyler, but we’ve just had to find a way to get the phrase crustacean inflation into the presentation because I think that’s awfully poetic.

So inflation and lobsters have been leading the way, but really, everything else closer to home is less so.

So, let’s jump into section one.

Let’s talk a little bit about what’s happening in the markets and the economy.

And I teased this during the poll section.

Many of you are familiar with this, maybe in a version close to this. You often see this referred to as the spaghetti chart, where we’re looking at the actual path of what we’ve experienced with the overnight Fed funds rate and then also what the expectations were at various points in time.

Those are those more subtle gray lines.

So, we’re not looking at futures pricing or forward rates that are inferred by what is built into the yield curve.

We’re looking at the dot-plat, the summary of economic projections that the Federal Reserve governors do on a quarterly basis and what their expectations for future short-term rates are going to be.

And you can see when rates were rising; they were significantly underestimating the likelihood or the magnitude of rate hikes that were coming to be.

We all know that story.

We lived it and breathed it with what happened with short-term interest rates in 22 and 23.

But then, as we hit the top of rates, the expectation shifted to now we weren’t underestimating the potential hikes.

We underestimated the aggressiveness and the magnitude of the other side of the coin when interest rates were going to go down, and we had that period of the plateau; I think it was about 18 months or so, where rates held high and verses that inverted v-curve or shape that many were forecasting that as fast as we came up, we were going to go down faster as well.

And that really hasn’t proven to be the case.

And we can see it highlighted with the blue dots; that’s where we are most recently here.

And the big thing that jumps out is that the slope, the expectation, is much more modest, right? It’s not as steep aggressively up or down as where it has been.

As mentioned earlier, a common theme, and we’ll see this with balance sheet tactics, is the opportunity to exist when you do something that’s not priced.

So when there’s the expectation for stability and low volatility, the opportunity will be for things opposite that.

And we can’t underestimate the table on the right-hand side. I think this is the biggest takeaway.

And it’s been transparent, and it’s been right in front of our faces. And I’d have to go back and look at the transcripts, but I think we may have talked about this a time or two in past webinars, and we talk about it a lot. So maybe we did, maybe we didn’t. However, you can see the gradual progression of the long-run projection in terms of the Fed funds rate and the short-term rate.

And there’s a lot of things that go into that. And it used to be a 2% target, 2% target.

Then, its semantics said a 2% to 3% range.

So we all kind of ballpark that to be two-half, right? That’s between two and three. And now, here we sit right at three percent.

So we think about where rates may ultimately land, and really, they only land in projections and economist forecasts. We know that really things don’t go in a two-two straight line all the time.

But I think the important thing to focus on and take away when we talk about short-term rates is That I know I’ve said this before in public and in one-on-one conversations.

The last two times interest rates went down, it was an existential 100-year storm type of situation; they went down to 0 percent.

That always doesn’t have to be the case.

And we see that with how the economy has slowed down, excuse me, held in, and the pace of rate cuts has slowed down.

And even with many of your expectations, we might only see one or two more cuts.

Yeah, so let’s take a look at the treasury yield curve and see how it’s been affected since the last time we met back in November.

We’ve had significant flattening of the curve.

So, our pivot point is right about the two-year tenor.

And what we’re seeing is that the short ends are falling down due to the Fed cuts to be expected, moving in line with those cuts, but the long end of the curve is increasing slightly.

So, where we went from inversion, we’re now on a flat to positive curve.

There is some inversion up to the one-year mark, but it’s very, very small.

And I know the graph is showing a very positively sloped curve here, especially on the long end, but it’s a small spread.

There’s really not much difference between the short end and the long end.

So it’s definitely a different environment from what we’ve been used to.

And I think that’s one of the key takeaways, too, is that it is a different environment now, and that can change how we invest and how we’re using funding.

We’ll get into some of that later as well.

So, to that point, let’s take a look at how the steepness has changed over time.

So we’re looking at the last essential year here and breaking the curve down into three different pieces.

So your light blue line, that’s the short end, that’s essentially where the Fed’s moving, where the short-term rate’s doing.

​Then we’re getting to our middle with the green line.

The six months to the two-year spread, and we have the longer term, two to five years.

That’s looking more at your assets and what long-term funding looks like.

So, as you can see, once the Fed made its cut in September, that rate came right back up, and the curve flattened significantly.

And over the last two months, there has been a very small slope across all three segments of the curve.

So it’s quite indicative of rates staying flat, probably that soft landing, or even the higher for longer.

The point is rates aren’t moving quickly.

And it seems like the short end has made its move once the Fed made that cut.

And I’ll just add one point to your comments: You said something very important.

You said the parts of the curve.

I would add some further detail, I’d say the parts of the curve that matter to depositories. One of the things, and I know this opinion is shared by others, is that looking at the 210 steepness is a fun graphic for CNBC. I don’t think I know how applicable it is to managing a community depository balance sheet, so when you look at the stratification of the nside of five years, I think those are the things that can really tell us where the opportunity set is changing for better or for worse. Definitely.

So, we’ve talked about the curve a little bit.

So, let’s take a look at some of the spreads.

Mortgage spreads are definitely on the tighter side right now compared to 2024.

But there’s still a lot of run room there.

Outperforming from treasuries, that treasury bill movement.

So, with the mortgage rates, you always have the pay-down risk.

But we’re at a decent rate right now where you can possibly fund it shorter and still be in decent shape if that does happen.

So it’d be interesting to see how these spreads move throughout the year and how tight that becomes.

You mentioned the prepayment risk, but with any risk, are we getting compensated for that risk?

So that really is the takeaway when you look at the nominal level of rates, as well as the magnitude of how wide spreads are.

So, let’s shift back more towards the economic side for a while and look at the unemployment rate.

Very simple.

The unemployment rate and the inflation rate are the two things that the Fed cares about, so we’re going to care about it.

So we can look at the top level, the national unemployment rate, and part of why there was so much momentum for rate cuts and aggressive rate cuts over the last two years was that it was starting to tick up.

So you can see, in the early part of 2023, we started to see a rise in the national unemployment rate.

And now, I would caution you about a couple of things. Here is one: it was occurring at a very, very low rate.

That 3.4 rate from a national unemployment rate is very, very low historically.

And when you do start to see upticks in the unemployment rate, and I think it was, if not the last webinar, the two webinars before, we looked at going back 50, 70 years, I think it was.

And it didn’t take much of a rise in the unemployment rate for the Fed to feel compelled to act and, in many cases, act aggressively.

But when you look at the beginning of a cycle, and this was a trend that we sussed out looking at credit trends in bank and credit union loan portfolios, it is that there may be some early movements, but it’s on the most at-risk segments.

So here in New England, things we’ve been talking about for a while are that the economy is very robust, diversified, and strong. So when you look at the unemployment rate across our six-state footprint, there wasn’t much to worry about; you know, the northern New England states, in particular, have extremely low unemployment rates.

So if you go from one and a half to one point seven, Okay, wonderful. It went up by 0.2%. There are other states that would trade in a nanosecond.

However, Rhode Island and Connecticut have spent some time above the national limit.

But look at Connecticut in particular.

The unemployment rate has come down by about 1%, more than that actually, since 2024. So that is indicative of good things happening in the economy.

But I think that it’s not a coincidence also that we have seen a plateau since the middle of 2024 in the national unemployment rate, and that dovetails with that shift in sentiment from the Fed in terms of we don’t need to cut rates as much as we thought we did when the unemployment rate was at risk and the labor market was very clearly softening.

So, let’s take another look here at the labor market. We’ll look at the quit layoff and hiring rates because that’s an interesting data point.

As many of us have done many times over the last five years, we stripped out the 2020 data because it completely blew up the scaling of the charts, and it was a dull animal.

We could put that over to the side there.

So that’s why there are those gaps in the charts.

But there are some mixed signals here that this has been a very odd economic boom and recovery because you’ve seen the hiring rate and the quit rate continue to ratchet down ever since rates started rising.

So, I think some part of it was consumers and individuals being very cautious about the prospects for the booming economy.

It wasn’t necessarily a pedal-to-the-metal situation.

There haven’t been really many meaningful ticks up in the layoff rate, so that is good.

But I think maybe the other part about the quit and the hiring rate not going higher as the economy is, quote-unquote, doing better is that it’s a function of cautiousness and conservatism coming out of COVID.

And there’s probably still an inflation component as well, which is that businesses and individuals found out how to do more with less.

And in terms of growing their business, expanding, and taking risks, it doesn’t necessarily involve going out and hiring 20 people.

Maybe it’s technological investments, maybe it’s facilities, whatever the case specific to the business.

But just in terms of employing people, maybe some of those historical relationships have broken down a little bit.

Inflation is the other key component of the Fed’s economic areas of emphasis.

And we’ll pat ourselves a little bit on the back here because we’ve been saying derivations of persistently high inflation, sticky inflation for a while.

I won’t get up on my soapbox about the methodology of looking at the one-year, year-over-year percentage change and all that goes into that.

But I’ll throw out this visual is, in a way, an economics Rorschach test, and you see what you want to see.

You can say that when we look at these underlying inflation measures that the Federal Reserve Bank of Atlanta puts together, there were drops in all the components from December of 2023 to the most recent one in December of 2024.

So that’s a good thing; inflation is coming down.

But you can see those dark blue dots.

That is the target based on the core PCE, the Fed’s favorite inflation measure.

So that’s where each one of those individual seven metrics will need to be to get the Fed where they need to be. There’s still an awful lot of room.

Again, put aside that other asterisk component to how these things are calculated.

So this aligns with the hawkishness.

This aligns with the change in the expectations in that we’re looking at some of the more volatile components or some of the more stable components. Prices are just high. It’s not just eggs.

So, let’s jump into section two.

Let’s take a look at what’s happening across the balance sheets.

So bad news about prices and eggs aside, let’s start off with some good news.

And net interest margins are improving wholesale pretty much across the board.

So, you had about three-quarters of members who were able to see margin expansion in the most recent quarter. That’s fantastic news.

You can see the banks versus the credit unions by the shading in the bars.

The asterisk again to the good news is that look at what the median NIM was for banks versus credit unions.

Banks are in the mid-2% range, so banks really got beat up a lot.

I’m not telling any bankers something that they don’t know.

So, while we’re seeing the improvements and the bottoming and the trend up, hopefully, there’s still a way to go probably to get us back to the levels of profitability and even risk management that we care to have.

And we’ll tease it.

It’ll come up a couple of times as we move through here.

What’s happening with the shape of the yield curve is going to help accelerate some of these positive trends.

So the natural question is, what is driving this improvement in net interest margin? Is it the asset side, or is it the liability side?

And the answer is both, and it depends.

So, when we talk about credit units, the bigger driver has been the repricing of the loan book.

As you can see on the left-hand side, yields continue to ratchet up significantly higher. We’ll get back to banks in a second.

However, on the funding side, there was a little bit of a tick-up in funding costs for credit unions.

But again, it’s a first-world problem here, where your cost of funds went from 164 to 166 when the marginal rate is into the fours and used to be in the five.

So when we’ve talked about this, credit unions at large have done a spectacular job of maintaining deposit balances and even having some deposit rate discipline in there as well.

But it was really the asset side that was the driver for credit unions.

For banks, it was different.

It was the cost and funds improvement.

And again, here’s a theme that we’ll talk about in a couple of different areas: the repricing of what was happening.

If you had a 5% rate, you would feel compelled to be uber-competitive.

And when the Fed cut in September, if it was a money market account, we were at an event with a handful of bankers. And it was a golf event.

And I think one gentleman, the CFO, stopped in his backswing to send an email to say lower the rates on the money market accounts because there was that eagerness with rates coming down.

So, continuing with this theme of questions, I want to see, okay, for those who had improvements in NIM and had improvements on the funding side of the balance sheet, was there a particular characteristic that was shared?22:20
And so I want to look at the relationship between those who had a heavy reliance on CDs in terms of the total deposit book and the number has really been growing for everybody.

I want to see if there was a relationship between how reliant you were or are on term deposits and the quarter-over-quarter change in the cost of interest-bearing deposits.

Not the level, but the change.

And we really didn’t see a relationship between those two factors.

Certainly, it’s not pictured here, but there absolutely is a relationship between those who have higher CD balances and those who don’t.

So, what is the takeaway here?

Are we talking about the change in the money markets right there from the side of the golf course?

When you think about the one-year Treasury rate, it was north of 5% up until about July of last year.

So, even though we’re now in a much better place nominal rate-wise, we forget that the rate that we had to be out there in order to bring in deposits was north of five not too long ago.

So, it takes some time for that funding to cycle through.

If you did an 11-month CD in July right at the top, you still have a couple more months before you can really ratchet that rate down as the CD comes up for renewals.

So the takeaway is that I think if we run this version of the chart in the next quarter and the quarter after that, we will see a growing relationship.

And those who are more CD-reliant will have that; it’s like putting the extra espresso shot in your Starbucks.

So, those folks with the CDs will see some significant improvements.

And it will be the reverse because if we do only get one more cut, those folks who were leading with the money market products, they were able to if they wanted to get a hundred percent beta and lower those rates by a hundred basis points, it was less so for those who were, you know, reliant on the CD product.

So that kind of segues us into our investment yield conversation.

I think we bring this up every time.

There’s been lots of movement in it, but it’s an important piece of our members’ balance sheets.

So, when deposits were plentiful and there was a lot of cash to go around, especially during a pandemic, all that went into those 1% bonds.

Over time, we’ve seen the yields improving, and I think we show this chart every time just to show that improvement.

​But what we can see is that now, probably 50% of credit unions and about 2% of banks are over that 3.5% threshold.

So, really good news, but a couple of different factors influencing this is that the credit unions historically have had more cash, so you have more opportunity to invest as the rates have gone higher.

So all those new rates are coming in at the higher amount, whereas banks have been a little bit more sticky.

And then in the credit union space, as Andrew was mentioning, there’s been more deposit growth, and you’ve been able to hold on to deposits a little bit stronger, giving more liquidity to get into the investment portfolio.

So I’d expect if rates continue this way, those one percent will start rolling off.

You probably won’t see the paydowns there, but you’ll get the stream of income.

And it’s a good way to redeploy into these higher asset rates.

​Yeah. And we spared everybody by putting in the unrealized loss chart here.

But with the up in the yield curve that we talked about, really across the board, there was some weakening from September to December.

​And I don’t think it quite hit the peak declines that we saw right out of the gate in 2021-2022.

And that’s a function of fixed income because securities get shorter and shorter, as they approach the maturity date.

So, all else equal, four and a half in 2024 is not the same as the four-and-a-half market rate in 2021.

So, it really is a battle between how quickly you can reprice those slow assets and those low-yielding assets that you have on the books.

Yeah.

And I think one of the things that we should touch on, too, is when the rates were going lower right before the Fed hike. There were definitely more talks about taking an unrealized loss since it was a little more beneficial.

But since those hikes have happened, the environment has changed quite a bit.

So, talking less about that and more about how to reinvest what’s coming in the future.

So, with all our members, there’s a give-and-take relationship between the loan and deposit.

At times, we see the loan portfolio driving growth, yet at other times, we’ll see the deposit book driving the growth as well.

So what we’ve seen over the last quarter or so is that the amount of deposits is increasing for members, whereas the loan growth is stalling compared to that deposit growth.

An interesting dynamic is happening in terms of the liquidity aspect of each of our members.

So, taking a look at this relationship kind of gives us an idea of where our members are heading and what that profile will start looking like as we’re moving forward.

And to that point, we wanted to take a look at the loan growth within their portfolios.

So we know loan growth is somewhat down compared to deposits, but how’s the remixing happening?

There are a couple of different factors at play, but what we see for banks is that both the housing affordability around here and the inventory are low, so supplies are low, but multifamily is a spot of growth.

It also has a decent credit profile, so moving into kind of the unknown and the uneasiness about what the future holds, that credit profile can be something to go to sleep with at night and give us some comfort.

On the credit union side, we’re seeing new autos go down quite a bit.

It looks like there’s quite a bit of remixing going there towards the commercial side.

And the same idea: there are a lot more credit opportunities there in terms of bettering that credit profile. So it looks like that’s going to continue remixing.

And we’ll see in a couple of quarters where we stand with that.

So, keeping on the topic of loan growth, let’s lift it back up to more of a 30,000 foot as opposed to looking at the individual sectors.

And let’s bucket members into those who simply had positive loan growth in the quarter, who were able to clear 5%, and who were able to, fortunately, clear 10%.

A couple of interesting things come out when we look at the data.

Now, we can clearly see that there are more and more members who are not growing loans quarter over quarter.

But that’s okay because we’ve had an exceptional period of loan growth and it’s occurred in an inverted yield curve, it’s converted in a very competitive market in terms of spreads, and it’s also come on the heels of forced leverage through all those deposits that came in 2020 and 2021.

So we were growing loans when we had a capital ratio that was probably stretched a bit more than where we would have otherwise gotten to with the normal course of business, retained earnings, and the like.

But what’s interesting is that for all three of the buckets, positive plus five and plus 10, for credit unions, it’s really ratcheting down across the board.

So things are slowing.

Derek talked about auto loan growth, new auto loan growth, and negative growth.

But what’s interesting about the banks is we’re seeing an uptake in those who are greater than 10%.

So I think what’s interesting there is that we talked a lot about niches and knowing what business to do. Are you trying to be everything to everybody, or are we focusing on certain sectors?

And I think that that is becoming that much more apparent and that much more valuable in this current environment that, yeah, globally, not globally like the world, but globally, just broadly, loan growth is slowing down. But that doesn’t mean it has to slow down for you.

If you’ve identified opportunities, you can manage the risk accordingly.

And again, that’s the edge of being a community bank or credit union, your ability to underwrite your credits and the businesses and individuals you want to be in.

So, when we look at some more positive signs on bank loan growth relative to credit union growth, I think that tells us that the corporate and the commercial landscape is maybe that the prospects are looking a little stronger than maybe the individual or the consumer side of the house.

So, let’s shift from loans to deposits and talk about some trends here that we’re seeing in the deposit mix.

And I think this is going to be one of the big takeaways here for what’s going to happen in 2025: we are seeing some trends that everybody probably enjoys very much.

We are seeing less and less come into CDs and term deposits and more and more into non-interest bearing. And so the majority of credit unions grew share drafts last quarter, which is fantastic non-interest-bearing for banks, I’ll admit that this surprised me even though I should know this, and I looked at this data that we just missed by a couple of basis points for the third consecutive quarter where more members than not grew non-interest-bearing accounts.

And so we talked about the mark-to-market of unrealized losses on the bonds.

What’s the mark-to-market on a 0% check down on our share draft?

And how valuable is that in a world where You could buy 5% investments or 6% and 7% loans?

The answer is very, very valuable.

So that we’re seeing growth, as Derek outlined, more deposits are coming in than loans.

So that’s the top line.

That’s good.

But the mix is occurring.

The one component that we haven’t talked about is price and rate.

We’ll get to that in a second.

But at the top level and the mix, good things are happening on deposits.

So, talk about credit.

And all this talk about rate risk and liquidity risk, and I saw a bank CEO last week, and we knowingly shook our heads about this and said, all this focus about rate risk and liquidity risk, and I just hope we all don’t collectively lose sight of credit risk.

When we looked at the various sectors that have contributed to non-performing loans, it’s been non-owner-occupied CRE that has contributed about half of that, and that number had been increasing until last quarter.

Interestingly, what we saw was that the groups that had the largest increase in MPLs as a percentage of the loan book were 1-4 family and CNI, two groups that were doing pretty well and towards the bottom end of the range.

So maybe that is similar to what we talked about with the unemployment rate, where early on, you get the usual suspects of who would be ticking up in a certain metric. But when the cycle starts to get a little mature, everybody gets more or less impacted by those dynamics.

We’ll see credit and data a little bit different in terms of the way we can slice and dice this. But what’s interesting is that what you think might be the usual suspect, the unsecured personal consumer loans, we’re a little less than half.

I would have guessed it would be more than that relative to the one to four family in the autos.

And CRE is a much smaller component of the credit union balance sheet in general.

But by nature, it does lend itself towards some more bumps in the road relative to autos and resi. So you can see that component there is generally outsized versus what the balance sheet is, but you know, on a dollar basis.

Yeah, it’s still pretty small, as is the stock price. So we put together an index of all our publicly traded bank members and put it into a nice one-number index of a hundred. So, we can look at it in that regard.

And I say this all the time, your credit union or mutual, this is still valuable information because you get to see what the market thinks of the prospects for the industry.

And we’re sitting like family feud style and say, what are the things that we’re rooting for to have positive performance for a bank balance sheet?

We may say a stable economy, we may say lower short-term rates, and we may say a steeper yield curve.

Well, we’ve got all three of those things that have happened or have been happening over the last year.

And you can see really that since September as well, and that coincides with the change in the shape of the yield curve, short-term rates down, and intermediate rates up, and it’s been a good thing for bank stocks.

The last part of that is value valuations as measured by price to tangible book value, which were very, very, very low.

So you get the macro tourists in the equity investing world who say, well, their banks are cheap enough that they’re worth a bet as well.

This improves the outlook for the bank industry in general, at least as it pertains to the capital markets.

And we see that with a lot of the M&A activity that has been ramping up over the last few months as well.

And then we probably would expect to consider it.

So, let’s wrap things up in section three and talk about some balance sheet strategies.

We’ve talked about how call reports and balance sheet data have changed.

We talked about how economic and market sub-change and yield curves have changed.

So those are the questions we should be asking and the tactics that we should be considering.

I am not necessarily dealing with this, but at least considering that it should be changing as well.

So we’ve teased this a little bit, but on the lending side, it’s the shape of the yield curve is our friend once again, and it’s ironic that it’s flat, but it feels like a 500-basis point sloped yield curve because we were in an inverted yield curve for so, so long.

But the thing that I keep asking on the lending side is, given how tight liquidity has been, our spreads where they need to be, especially if you think we’re in the later innings of the credit cycle here, that’s the TBD.

investments. It’s a challenge.

We have the recent history and the pain that was caused by the investment book, and we’ll get to it in a few slides, but the opportunity is there.

The rates are high, the spreads are wide, and there’s an opportunity to smooth out some of the exposures on the current and future balance sheets.

On the deposit side, we talked about the growth in the mix.

The rate, well, it’s come down because short-term interest rates have come down.

We can’t lose sight of the focus that we are spread managers, and it’s the spread, and there’s some marginal cost of funds components, and we’ll talk about that a little bit as well.

So we have a couple of things, at least on the wholesale funding side, that as always, you know us, these things don’t exist in a bubble.

No one goes to a cocktail party and says, I have the best Home Loan Bank Boston advance portfolio around.

It’s about doing what’s right for the broader balance sheet.

So we’ve got five ideas.

We’ll hop across them.

And there should be something for everybody here, more or less.

Sure. So, the first one we’ll get into is short-term cash management.

As we’ve mentioned throughout the whole webinar, there’s a lot of uncertainty for the future.

What’s going to happen to rates, what’s going on in the economy.

So we’ve seen the urge to stay short with funding.

So, there are two different ways to do that.

You have the overnight funding, or you can go a little bit longer, fund through the week.

As everyone knows, you need to buy activity stock, but it comes with a dividend, which is a benefit when it comes to the overall funding cost.

So, in these examples, if you fund overnight, you get about 3% for the stock purchase.

When you’re looking at the dividend, and we just announced that it’s about 330 over the 90-day SOFR average, comes out to about a 15.6 basis point benefit. So your overnight funding there is 4.4%.40:28However, when you move out of overnight into a longer term, the stock is 4%. That changes the dividend benefit for you.

So if you’re doing a one-week classic, you’re at 454, and you factor in that dividend payment comes down 22.9 basis points, then you’re looking at an all-in rate of 431.

So you’re funding for the same time, you’re getting the same benefit, but that dividend is working harder for you, and you’re getting a better all-in benefit.

So, it’s something to look at as you’re trying to fund shorter. You’re not going too far out on the curve, but that dividend play can actually make a big difference in terms of your overall funding rate.

Yeah, and to the point that this is like six months ago when the five-year rate was lower than IORB, and you can say, well, you can fund out longer and save money right away.

Obviously, it’s not quite the leap of faith going out to one week versus rolling an expected rolling of funds on an overnight basis for the duration of one week.

Yep.

So, the other thing we can look at is some of our floating rate advances. These are actually two of my favorites I’m most interested in.

You have the callable sofa and the Discount Note Auction Advance.

So, we won’t get into all of the nitty-gritty details.

If you have questions, please feel free to call us, and we can walk you through them.

But one of the key points here is that it’s going to be a floating rate, so repricing is the reprices.

On the discount note, you can reprice every four or 13 weeks, depending on which one you choose, but you also have the ability to call that.

The option sits with the member, so say your deposits are coming in faster than you thought, there’s asset pay down, loans are prepaying, you have more liquidity than you thought you would in a couple of months, you have the ability to give that funding back with no prepaid penalty. So, it’s a very valuable option there.

And with the rates, it’s going to move with the market.

So, if there is another cut coming from the Fed, you’ll see that change in rate, and we won’t get stuck at a higher rate.

Additionally, if the market goes up, we’ll see that as well, but you still have the option to call.

So, this is very flexible funding, and I think it’s a great way to use in advance from Home Bank just in terms of your funding needs.

Yeah, no, this is a great point, and I’ll point back to January of last year when six or seven rate cuts were priced in, and one of the ideas some of you may remember, we were pounding the table. I know our relationship manager, and we’re sick of hearing it from us. Say there’s value; the curve is pricing in six or seven cuts, and the way that yield curves math and fixed income math work is that it’s priced in. So now it’s not priced in.

So, when you look at these two floating rate advances, they are a basis point or two cheaper than where the fixed rate alternative.

But as Derek alluded to, you get the benefit of if rate cuts surprise to the downside, then you’re going to benefit by the automatic repricing.

And the call option gives you the flexibility to forget the interest rate component; you can just give the funding back if you don’t need it anymore, which is something that we’re probably all rooting for given how stretched liquidity has been over the last couple of months, years.

So rate mitigation with flexibility.

If you have structural liability sensitivity and the NEV test for credit unions or EVE is bumping up against metrics or otherwise not in a place where you would love it to be, then this is a solution to help you get there.

So, shorten assets and lengthen liabilities.

We’ll get to the asset side in a second.

So, if we want to extend out the curve with a fixed rate, there are trade-offs to that.

So we can do that with a long-term classic.

We could do it, for example, a 10-year structure, and that’s going to help us a lot when we model out the plus three hundred basis point rate shocks.

But we may not like that 494 rate till the end of time, and we may not need wholesale funding for the duration there.

It helps address the problem today, the NEV issue today, but the future doesn’t give us the flexibility.

The HLB-Option Advance, the puttable advance, to tend your structure, the rate’s better, but you don’t have the flexibility.

You don’t have the cash flow control that you would if we talked about the three Cs of extending funding here.

You don’t have the cash flow control because you’re selling the option to lower the rate.

So, it doesn’t give you that same benefit in the rate shock scenarios, but the member option does because, as the name tells us, you control the option.

Now, everyone likes the idea of paying for options; excuse me, everyone likes the idea of what the options give them, but not the idea of paying for them.

So, it is more expensive than the bullitt and the HLB Option alternative.

But let’s look at the key points here.

We extend the funding today and get that benefit.

But then we have the flexibility in the case of if we do a 10-year maturity with a one-year lockout, we can give the fund back.

We’re not locked into the 10-year term like we are with the classic.

And now I’ll come back to that shortening asset side.

When you sell bonds at a loss, that gets you more or less to the same place when you extend funding, right?

You sell seven-year bonds or put on a seven-year funding.

Mathematically, it should be the same, except that selling bonds at a loss destroys capital and impacts earnings.

So, that dynamic is in this play.

There’s the incremental cost versus what the borrowing otherwise may have been.

And then, really, the way to think about it is to compare the rate on the member option versus the one-year Classic Advance, and you suss it out.

So, you can lose 15% on the bond loss or pay an incremental 100 basis points over here and have that flow through earnings incrementally across multiple quarters and not just one big hit.

Again, earnings are one thing, but it’s the capital that is so precious that we should be safeguarding right now.

​But I think if you have liability sensitivity and even NEV issues, then this should be a tire that is getting kicked.

So we talked about deposit pricing and all the variables there.

Tyler, our newest member, put up a case study on our website using the marginal cost of funds approach.

Now it’s closer to four, maybe even below. Some folks have told us. That’s fantastic.

But we really have to think about it in terms of spreads.

And cannibalization is still an issue because there are still sleepy depositors, and there are still people at different rates.

​So we can’t lose sight of the fact that even with some modest assumptions, only 33% cannibalization of a particular bucket, you still get to that 5% marginal cost of funds.

So, we have some tools and resources where we can run some scenarios on the marginal cost of funds.

So reach out if it’s something that you’re grappling and debating with. We can help assist in that regard.

So, strengthen in the future balance sheet.48:35That is wonderfully generic, sure; who wouldn’t love to do that?

But this is more specific to the idea of investment leverage.

And we’ve talked about it three, four, and five times, in that the shape of the yield curve is our friend right now relative to where it’s been, and it behooves us to look at opportunities that are attractive given that environment.

So, here’s 25 years’ worth of data looking at where intermediate yield curve rates are as well as the slope of the curve between one and five years.

And that serves as a proxy for what our spread would be if and when we fund.

The good thing is that with a flat yield curve, we don’t need the slope of the yield curve to do the heavy lifting for us.

And remember, when the curve is sloped, it’s not a free lunch.

This means that short-term rates are expected to go up.

So there’s always that risk

It’s the opposite of what we deal with on the inverted side.

However, when the curve is flat like it is right now, the opportunity is that you can let the asset spread do the bulk of the work, right?

The plus 100 in the mortgage in the MBS security.

So, if you’re thinking about where you can get the mortgage-backed security yield, where you can fund if you have the liquidity, and where you have the capital to be able to do this strategically, then there’s going to be an awful lot of opportunity there.

Also, if we do surprise at the downside in terms of rate cuts, rates are at very, very high levels right now, and we don’t have a lot of gains in the investment book.

We have the opposite right now.

So, to create that opportunity, to be able to reprice that book, as Derek showed in that wave chart, where the more we can put five, five and a half assets on, where historically we’ve been two to three percent, then that has long-term future balance sheet benefits.

So that brings us to the end here.

So, we appreciate your time here.

This is always one of our favorite things to do, to take this walk down the markets and the economy and what’s happening on balance sheets.

So, as I mentioned, please reach out.

We have plenty of tools and resources where we can go through all the different things that we’ve shown you here and always happy and willing to have a discussion.

So thank you again, thank you very much, and have a great rest of your day.