February 2026 Peer Analysis and Balance Sheet Strategies Update

Well, good morning everyone. Thank you for joining us today. Happy to have you here for our peer analysis and balance sheet strategies update.

I am Andrew. This is Caroline. This is Tyler, as you all know, and plenty to talk about.

Well, first off, you can see we’ve upgraded the background, you know, big things are happening here with this nice-branded banner.

So, you know, kudos to our marketing communication team for helping with that.

But, excited to get going today here. As always, plenty to talk about.

So, we will cover three distinct areas, talking about what’s going on in the markets and the economy.

We’ll take a deep dive into some of the trends that we find most notable from the fourth-quarter 2025 call reports.

And lastly, we will wrap things up talking about some practical ideas that we can consider and put into place as we manage our balance sheets through this dynamic period.

So, as many of you know who joined us for these webinars, we’d like to kick things off with a light-hearted start, you know, something pop culture adjacent.

And just to bring you inside the wall a little bit here, what’s on the cutting room floor, there was no particular order, a Drake Maye banking connection, AI stranger things, a six, seven joke, although my kids tell me that’s, you know, that’s for old people now.

It’s not for the kids anymore.

But so, you know, because Drake Maye and the Patriots didn’t hold up their end of the bargain, we didn’t want we just, you know, we’re on to we’re on to basketball and hockey season, but also the Olympics.

So, with Tyler being our resident skier, I’m going to stop here because I can’t speak intelligently about this.

But Tyler was able to draw some parallels on the skiing side.

Well, yeah, with the Winter Olympics going on and all the snow on the ground, if you guys have been skiing, you might have noticed it’s been pretty good recently.

I thought it’d be fun to tie in one of our main topics today, which is deposit betas, that being the delta between the change and the cost of interest-bearing deposits and the policy rate, and then with skiing.

And whether you’ve ski raced before or just been watching the Olympics going on, you may have noticed that when you stay up on edge and really carving on the snow, you’re able to accelerate through turns and really accelerate around obstacles.

But when you start to skid out of those gates, and you skid out of the turn, it’s really hard to regain that discipline and catch back up.

One way to think about this is like the Fed; you don’t get to choose the trail, whether it be blue, green, or black. The Fed sets the slope, but we can tune our skis and set our strategy to it.

All right, we’re just going to trust that that is all accurate, but it sounded accurate.

And so let’s jump into the first area.

We’re going to walk through what’s happening in the markets and the economy.

And Caroline is going to tell us if we have a black diamond level economy ahead of us in the short and medium term.

Yeah.

I mean, I guess it depends on your position, right, where you’re angling those skis.
But I will say the data has been pretty interesting and a little bit confusing.

So, I’m going to walk you through kind of what we’re seeing on a very high level.

We’re going to keep this pretty short today because we’d rather jump into the details of the balance sheet, and we’re producing more content around markets in the economy that you guys are totally welcome to tune into.

We’d love to hear your feedback.

But just quickly, we’re going to walk through the Fed, inflation, employment, and then also housing.

So, at the most recent FOMC meeting, as was widely expected, rates were held constant, and the committee expressed a little bit more confidence in the outlook for the labor market.

So, they had previously been pretty bearish on where the labor market was going.

They expressed a little bit more optimism.

Part of that was because the unemployment rate had come down.

And on net, that week, we also saw the appointment or the nomination of Kevin Warsh for Fed Chair when Chair Powell’s term expires.

Markets didn’t really move that much.

So, if you’re looking at the Treasury curve, you’re seeing that basically the FOMC was viewed as largely in line with what had been expected.

We did get the FOMC minutes from this meeting yesterday, and they were a little bit more hawkish.

In particular, you had a few people in the meeting who wanted Chair Powell to introduce the idea that you could have the next action be a rate hike.

Again, that’s not a consensus; it’s not a majority; it did not come to pass in the statement or the messaging.

We’re just seeing that in the minutes.

And, of course, that preceded the inflation and the unemployment data that we’ve subsequently received.

So, my personal view is that I don’t think we need to look into that too much for the time being; we’re not getting major news or a change of direction coming out of the FOMC.

And it seems like Warsh’s appointment is basically being taken in stride by the markets. His views are largely known.

To some extent, the possibility of his nomination was priced into the curve, and you’re not seeing major volatility around that news.

Jumping into inflation. So, inflation remains stuck above target.

In general, over the last few months, what we’ve seen is that the sectors that are more sensitive to tariffs have seen outsized inflation, and the service sector, which had been most of the source of inflation in recent years, has come in a lot.

It’s worth noting that that’s not entirely true of the most recent print, where you saw inflation come in below expectations at 2.4. I’m speaking about CPI specifically.

And what you saw in that print was that goods were actually flat, and you saw a little bit more pressure coming from the services sector.

Housing was the biggest contributor, although it had come down a lot.

So, in general, I don’t think you should read into a single print too much.

The narrative remains the same, that to some extent, a lot of the inflation pressure does seem to be linked to tariff-sensitive sectors.

And you are generally seeing inflation stuck above trend, inflation expectations stuck above trend, but some optimism from the FOMC that this will at least not get worse or may come down.

So, we’re going be keeping an eye on that over time.

And this chart is just showing you overall CPI and then CPI goods, which again, should be more sensitive to tariffs versus CPI services, all with energy excluded because it’s so volatile.

And note that the little gap there towards the right where it wasn’t because inflation went to zero, right?

If only.

No, that’s our government shutdown.

So, we are missing some sub-sectors of inflation from this period, just as a result of the government shutdown and the way that the data is collected.

So, there’s a decision made for some of the survey-based metrics that are usually collected by the BLS, basically not backfill that data because it’s too hard to go back and reconstruct data when the data wasn’t collected in real time.

You see that with the employment data as well.

We actually did get a lag on the most recent labor market data as well as a result of the government shutdown.

So, let’s all hope this doesn’t become too much of a trend.

On the employment side, so I mentioned that the FOMC was more optimistic about employment at the most recent meeting.

That was also true in the most recent employment data that we saw, where we had headline gains of, I think, 130,000 jobs, so more than was expected.

And you saw further decline in the unemployment rate to 4.3. Even beneath the hood, there were signs of strength there.

You saw things like part-time employment for economic reasons come down, temporary help move upward.

It’s all a strong print.

But at the same time, the revisions that we got from last year suggested that the labor market was a lot worse last year than we had previously believed.

That’s kind of consistent with what you would see in survey-based measures of sentiment about the labor market or job quits data, measures of employee confidence with their ability to find a new job.

So, you’re kind of starting to see the official sector data, which is also supported by state and local data, matching the sort of consumer trend, which is saying the job market’s not that great.

However, the reason for the FOMC’s optimism and the sort of confidence that the employment outlook might improve is really just strong growth figures.

So, we don’t have official Q4 GDP yet, but the Atlanta Fed’s estimate has that figure right now in the mid threes.

That’s come down a lot.

There was a while where that was in the mid fives, and people were really excited about growth.

A lot of it’s the product of consumer spending, and a lot of it is also a product of AI investment, so it’s tough to know how much that’ll actually translate to labor market strength, but the narrative goes that if you see strong GDP figures, maybe you’ll see that translate to continued strength in the labor market.

This chart is just showing you the unemployment rate in green and then hires in gray.

And that’s from the Joltz report, different from the employment situation report.

But basically, the trend is that you’re seeing unemployment move up, and it’s almost entirely a product of hiring remaining really low.

So, you’re not seeing massive layoffs yet, but you are seeing companies really retrench on hiring, particularly at lower levels and in certain sectors.

If you take out healthcare, it looks a lot worse.

And then the last thing I wanted to cover briefly is just a little bit on the housing market.

I think it’s going to be really important to think about the housing market this year.

There’s been a ton of policy change in this space.

So, we saw bipartisan legislation in the House and the Senate go through around housing reform.

Hopefully that’ll be consolidated into a single bill later this year.

You’ve also seen actions from the executive branch talking about the FHFA, for example, buying mortgages or an interest in banning investors from purchasing single-family homes.

There doesn’t seem to be a lot of consensus for that in Congress, but that is being discussed.

A lot of the narrative about inflation is that the reason inflation will continue to come down is because house prices will continue to trend flat or at least the pressure there will continue to come down.

This chart is showing you home prices using a Zillow index and also CPI, looking specifically at shelter.

So, CPI shelter was a huge contributor to inflation when we saw inflation at its peak around 9%.

It’s come down a lot since then.

In New England, home price appreciation remains really outsized and strong.

And even in January, where home prices nationally were pretty flat, New England was closer to 4%.

But I think what’s going to be interesting is to see, what does the housing market do over the course of this year?

Because you’re seeing an expectation that stabilization in these prices is going to bring down overall inflation which will allow for lower rates and also, it’s a major source of consumer strength and consumer spending.

So, if you see too much decline in house price appreciation or moderation house price appreciation you might see some of that consumer spending that’s been driving GDP go away.

So, this is the last chart in the economy section it’s just showing you mortgage rates and spreads relative to Treasurys.

What I wanted to highlight is that mortgage spreads have come in a lot.
So, some of this is a product of the fact that we’re just in an incredibly low-interest-rate volatility environment, which is kind of surprising when you think about all the news. It doesn’t always correlate.

Interest rate volatility, realized interest rate volatility, and implied interest rate volatility are quite low.

This was supported by things like the FHFA news that they’d be buying mortgages, but honestly spreads had come in a lot by then, so it wasn’t really the fundamental driver.

But I think it’s something keep an eye on. So, let’s shift to talking about the fourth quarter call report numbers.

So, you know, we’ll cover a number of bases. We’ll look at earnings and margin.

Obviously, credit quality is front and center for a lot of reasons.

We’ll continue with the theme related to what’s happening with mortgages, and we’ll look at growth in various dimensions, as well as take a deep dive into what the deposit portfolios look like and what they have look like and also the pricing side of that. So, let’s jump into looking at net interest margin.

And we see the continuation of the trend that we have for a couple quarters right now that the path of interest rates and the level of interest rates has been supportive of margin lift.

So, it banks in aggregate, the median NIM was up by eight basis points, quarter over quarter.

And the majority of members, and that’s what we see in this chart, the majority of members saw NIM expansion quarter over quarter.

This is where I pause on the unequivocal good news, is the rate of change and the rate of improvement is slowing and tapering off, right?

So, whether we look at, directionally, we’re still improving, but the magnitude of that change is not as strong as it has been.

And also, the percentage of members who have been able to grow NIM by a significant amount is tapering off as well.

And in fact, when we look at the percentage of members who have actually seen declines, that number is growing as well. So, we’re getting closer to that neutral state.

And one thing that’s important, and this is prevalent for both banks and credit unions, we’ll see credit unions on the next slide, is that because of the last five years and how really extraordinary in many ways that the interest rate environment and the banking climate has been, that the range of outcomes is much, much wider from one bank or one credit union to the next slide.

So, for example, you know, not here, but you’ll see in the rest of the presentation, we like to look at the percentiles of across all our banks and all our credit units.

And that can give us a good feel for what has happened, rather than just look at the average and the median.

And back in 2020, or even in 2022, the range between the 25th percentile and 75th percentile member in terms of net interest margin was about 90 basis points for banks and 50 basis points for credit unions. And that was a normalish range.

That range now in December of 2025 has increased by about 30 basis points for both banks and credit unions.

And again, that’s owing to the phenomenal interest rate volatility that we have had.

And as Caroline noted, it’s muted for going forward, that we’re in this flat yield curve environment.

But we’re still feeling the remnants and the aftershocks of the interest rate movements of the last five years, and that has created wholly different balance sheets from across our 350-plus depository members.

So, let’s look at credit unions, very similar story here.

And in terms of directionally, we’re still going in the right direction, but the magnitude is dampening a little bit.

And the primary driver continues to be on the cost of fund side.
There’s the yield on earning assets.

Caroline will look at loan yields in a little bit.

Tyler is going to look at the deposit betas.

But the primary driver of the NIM expansion that we have seen has been more so on the reduction in the funding cost side.

While there’s still opportunities to reprice on the asset side. But, you know, there are some moving pieces in terms of remixing as well as growth.

But just showing up and getting market-rate funding, or not even market-rate funding, but just funding in line with competition, that has led to enhancements in margin.

It’s not too late to take a look at asset quality.

What we’re seeing on the bank side first, and this is the median non-performing loans as percentage of loans by loan type.

What we’re seeing is broad-based deterioration, so just what every category except for construction has gotten worse, and even construction is just coming down from a relatively high level in Q3.

But every single category is deteriorating here.

We’re really seeing a lot of stress in multifamily, owner-occupied, commercial real estate as well, and the consumer.

Interestingly, a non-owner-occupied CRE, however, is not deteriorating as badly as owner-occupied commercial real estate.

I think part of that was there’s been so much emphasis on non-owner occupied over the last few years, and even some pushes from regulators to diversify that book into some CNI.

And interestingly enough, we see that CNI is now deteriorating while the non-owner-occupied is kind of leveling off.

But something to note here is that while there’s a broad-based deterioration as far as category wise, there’s really more dispersion as far as bank by bank.

So, what we’re seeing is a lot of members are really just kind of normalizing to pre-COVID levels. But then, within that, there’s really some banks in New England who are struggling a little bit more.

I think where we saw banks who took on some incremental risk, maybe went outside of their core lending verticals. Those are where we’ve seen some more intense trouble on the asset quality side.

And we’ll pivot now and take a look at the credit union side.

So very similar story as far as broad-based deterioration.

You know, personal and auto have kind of been the drivers, no pun intended, of a lot of the stress on the credit union side. Commercial real estate, not really as bad.

That’s a much smaller part of the books I think maybe the NCUA is putting a lot of attention on the those books despite how small they are for credit unions in general. And the one- to four-family not as much stress there. And we’ll make a little bit of a prediction here.

So, while we’re having this broad uptick.

I do think Q1 will come in lower. We have historically seen Q1 come in lower for credit unions just based on the denominator growing a little bit with a lot of loan origination on the personal and the resi-side and then a lot of a lot of deposits come in for credit unions in that first quarter, tax refunds and whatnot. So I do think Q1 will come in lower but I would say that it would not be surprising to see Q2 of 2026 come in you know somewhere between 80 and 100 basis points and delinquent loans as percentage of total loans.

But now the question is so if we get a little bit out in front of skis on asset quality, are we going to land in the powder or are we going to slide down on the ice?

So, what we’re looking at here is reserve ratios.

So, on the bank side, it’s median reserves, it’s percentage of non-performing assets.

And it’s a little frustrating, but for the credit union side, they look at it the opposite way. So, it’s delinquent loans as a percentage of reserves.

So, for banks, higher is better and for credit unions, lower is better.

And what we’re seeing here is that things are moving in the wrong direction.

So, we’re not as well-reserved as we were a couple years ago in 2023, things peaked out almost over 200% or over 200% as a median on the bank side and almost down around 50 as far as a reserve to ratio on the credit union side.

Interestingly, so the banks as a median are still adequately reserved or 130% of non-performing assets, but on the credit union side, the actual median credit union is not fully reserved.
There’s more delinquent loans than they have reserves.

So, something to watch there as we see, you know, the cracks continue to emerge and, you know, it’s something to watch on the reserve side as well.

Okay, yeah, I love that Tyler couldn’t resist sneaking a pun in there.

So, I wanted to talk a little bit about what’s going on with mortgages and with home loans, given that I think this is going to be such a major driver of the economic cycle this year.

So, the first thing I just wanted to show you is member MBS fair value.

So again, this isn’t home loans, this is MBS securities.

And this figure includes both the fair value, basically as a result of accounting changes, so changes in the market, and also the changes to fair value from acquiring mortgage-backed securities.

And what you’re seeing here is that that has ticked up over time and continued to tick up in the fourth quarter.

So, the fair value of our average, or this is actually showing our median member MBS increased, even as rising treasury yields means that existing MBS securities have increased unrealized losses.

So why is that?

Most of it is that the yield that members are incurring on MBS has increased a lot, and this is a product of the fact that you’re seeing higher interest rates, even though mortgage spreads, as I already told you, have come in, and you have all these losses on yields that were MBS that was bought before interest rates moved up.

So essentially, you’re in a world where the yield on newly issued MBS is extremely attractive to members, and that, on net, is driving fair value up.

So, what’s interesting is as this is happening, you’re actually seeing the total of member loans that are from one- to four-family residential real estate coming down over time.

So, this chart is just showing you the average and the median of the total loans that a member is issuing that are comprised of one- to four-family residential real estate.

And it’s trended down.

That’s largely just a product of origination.

So, you’re in an environment where origination is still down materially because home sales are down materially.

So, you’re at a point where, by its most recent figures, inventory is still 20% lower than what you’d see in a sort of a more normal environment.

It’s a challenge for members who want to get access to this market, but don’t actually see demand for origination.

Although this is true, the yields on those one- to four-mortgage loans have increased.

This is not surprising, right?

If you’re seeing this in MBS securities unexpectedly, as you would expect the yields that you’re actually getting on direct loans has also moved up a lot.

And again, this is mostly a product of the fact that you’re seeing treasury yields so much higher.

So, spreads are really tight on mortgages.

You’re not necessarily achieving a really wide spread on the loans that you’re issuing as more out of mortgage, but because treasury yields are so much higher, this is still a really attractive product to members.

However, the difference in the yield earned by members on their one- to four-family residential mortgage loans relative to the overall loans that they’re making has come in. So, this is a product of what Tyler was highlighting in terms of the credit story.

So obviously, with an individual member loan, there’s some component of credit, right?

You’re looking at the FICO score of who you’re lending to.

It’s nonetheless the case that because the asset is so well securitized and the historic performance of real estate, you see less of a credit component in a one- to four-family mortgage than you would in, say, something like an auto loan.

So, what you’re seeing is that the yield on the overall loan book is trending up more than the yield on the mortgage loans.

That doesn’t mean that mortgages aren’t an attractive place to be lending because on a risk-adjusted basis, they’re still tremendously compelling by historical standards.

So, we’re going to hop on to loan growth, but I’ll just come back to this at the end, but basically to summarize all of that information, where I think that leaves us is mortgage spreads are tighter on MBS.

The yields that you’re getting on mortgage loans are really attractive.

Origination is really challenging, and many books are being held down by these loans that were issued before you saw the rise in interest rates.

Well, thank you, Caroline.

And as is tradition, I forgot at the beginning to remind everyone that if you have any questions, you can enter them into the chat box, and we will be happy to cover them if anybody has any questions or topics they’d like to cover.

So, let’s talk about loan growth.

And this is really fascinating here to us because we are now into the second year of a cutting cycle from the moment of the first cut.

And I think that because the last two times interest rates came down as part of a cutting cycle, they were part of a hundred-year storm, and they came all the way down to zero percent.

So, we have long memories in some respects.

But in this cycle, at least as it pertains to loan growth, it hasn’t been the same magnitude of drop in that same short period of time. It has been more drawn out.

And so, when we look at loan growth, it’s in the eye of the beholder. Is loan growth slowing down?
Okay, here the bottom is about to fall out.

Or is it hanging in better than we otherwise would expect, 15, 18 months into the cutting cycle? I’m inclined to say it’s been more of the latter.

Many have been preparing for significant drops in loan growth, but put the data aside, we have conversations all day long with New England banks and credit unions, and we hear the phrase surprisingly robust loan pipeline, less so on the one-to-four family side.

But talking about either commercial or auto, whatever the case is, we hear surprisingly robust more than we hear it’s bone dry.

So, not to say that there aren’t places and geographies, for example, where things are changing more rapidly.

But when we think about, you know, not shown here, but when we dig into the subcategories, as Caroline alluded to, the one- to four-family is pretty, the demand is pretty modest.

And combine that with the fact that the paydowns in the rollover, because they are such long assets and that the principal received each month, don’t need to tell anybody on this call that it is slow to turn over – slower than, say, for example, something like CRE or floating rate CNI or auto loans that have 60-month finals and really begin to accelerate the amortization.

Home equity loans continue to be on fire.

I think for credit unions, it was somewhere north of 85 or 90% of credit unions who saw growth, dollar growth, in home equity loans quarter over quarter.

Auto origination has slowed down for sure on the credit union side.

And on the commercial real estate slide, I know Tyler has done some work there.

I don’t think we’re going to dive into it too much here, but he’s got an article coming out soon talking about the CRE repricing wave and where we would expect to see volume and activity there.

But again, closer to being surprisingly robust than the alternative.

So, let’s flip over to the other side of the balance sheet.

And again, fascinating maybe to us, maybe to you guys, I don’t know, but not to people outside of our industry, and this is part and parcel with, okay, rates are starting to come down, the economy is kind of sort of slowing down.

I think many have been bracing for deposits to all of a sudden start flooding in like they have in the previous two cycles, and while that hasn’t been the case, deposit growth has ticked up and has improved, but I think the biggest thing to note is that the dispersion between member to member or even in the case of the chart on the left-hand side by geography has been pretty drastic.

And so I think it underscores the concept that this is not an environment where we could just show up and all the deposits in the world fall into our lap.

Or, in the opposite, that everybody is in the same boat as I was, right?

Like when we think about when in 22 and 2023, that was a challenging time for deposit gathering.

And there was misery loves company that, you know, I can’t tell you how many meetings I went on and where someone was at minus 2% growth, and they were hanging their heads.

And I said, from someone who looks at a lot of call reports, you’re kind of in that middle zone that you’re not a bottom decile performer with those types of absolute numbers.

So, you look at the chart on the left, you can see now when thinking of the member count in each one of these states, with the exception of Massachusetts.

There are some sample-size issues, but a true statistician would really talk about the sample sizes.

But I say, well, heck, if the median growth rate is 5%, then that means that whether it’s the business model or the geography, that some good things are happening.

But you do see some wildly different results.

Look at New Hampshire, for example, negative deposit growth for banks, but 7%, 70% on the credit union side.

On the right-hand side, I think this is the more powerful visual when we look at the percentiles and see such a wildly different result.

Look at that middle 50%, right?

The 25th percentile and the 75th, 9% to 10% at the higher end.

I think many would be more than happy with that type of deposit growth.

We’ll get to what is the cost and what are the types of deposits in just a second.

But then on the other side, look at the 25th percentile, barely negative for credit unions and minus 3.4% for banks.

So that’s pretty sharp for that middle 50%.

We’re not talking about the outliers, right?

The unique business model, or, you know, we’re not factoring in merger and acquisition activity, you know, odd things like that.

We’re just talking about normal, show up, try to gather deposits so we can make our loans types of institutions.

So to see that type of range, an almost 12 to 15% range between that middle 50%, it really just underscores how challenging of an environment this is right now.

So I tease the idea of deposit composition.

So, looking at that deposit growth number just simply doesn’t really tell the whole picture because, as I alluded to, hey, we can pay up for five-month CDs, pay a rate comparable to the Classic Advance rate, and achieve growth.

But really, what is that doing for our balance sheet, whether it’s margin or interest rate risk or liquidity risk? Short answer: not much.

So when we look at a couple of different types of deposit composition factors here, we can see that the emphasis on CDs has been declining, which I’m sure is a welcome development for many. More so on banks than credit unions.

So when we look at the top, when we look at the percentage of members who have seen growth quarter over quarter, that number has steadily been coming down.

So when we get into that, somewhere between 45% and 55%.

That’s the cruising altitude where we’re not having outsized growth or contraction in any one bucket.

So it’s interesting that credit unions remain above.

We look at non-interest-bearing balances, which is the gold that we’re all in search of, right, and share drafts on the credit union side.

And a little bit of an uptick in the fourth quarter for credit unions, which as Tyler alluded to before, there’s some seasonality that see in the first quarter.

So I think that that may lead to a good six-month stretch in terms of deposit gathering and liquidity on the credit union side if those typical Q1 forces come to light.

But I think the thing to point out here is that there was a lift in coming out of COVID for banks, less so for credit unions, is extremely stable in terms of interest-bearing balances coming into the fold. And that is contracted.

So it’s going to be challenging to not lead with rates and to lead on the other factors that bring customers into your institution.

And one of the byproducts when we put this all together is that banks have been leaning into interest-bearing non-maturity deposits more so than CDs and, you know, seeking, obviously, everyone’s seeking non-interest-bearing balances, but in terms of moving the needle to bring them into the fold, where credit unions have been more aggressive, continue to be more aggressive on CD pricing and bringing in CDs, but have also had greater success on the non-interest-bearing with share drives. Andrew, I think you may have had a question there.

Oh, sure, let’s see here.

Does deposit growth rate include broker deposits or are they excluded?

That is an excellent question, and that was one of my talking points that didn’t make its way in.

The way the call report gets constructed is that it treats all deposits the same.

It’s on our list to tailor the data a little bit more to strip that out.

So if we actually go back to that slide for one second, and we can walk through this.

So that’s why you see a little more volatility in the blue in the blue bars versus the green lines because you do have on the extremes right.

You know I’ll admit when I was looking through this data I saw a couple situations where bank deposits were down double digits and I said oh you know let’s take a closer look at this and it was broker deposits it wasn’t like core deposits all running out the I think that is most prevalent on the wings, on the extremes in the 10th and the 90th percentile.

You can see the big growth and then the big declines in the 10th percentile, but you can see it’s much more analogous to what the experience that the credit unions are seeing where broker deposit usage is significantly less in banks.

So, I think that is a truer indication of where deposit flows are going.

But on net, broker deposit usage has been declining very slightly over the last few quarters.

Thank you for the question.

So, to tie back in with the first slide on deposit betas, many of you may be asking, with the Fed finally cutting again, when do I get to fully pass on that easing to my depository customers?

So we’re going take a look at deposit betas, which again is that the delta between the cost of interest-bearing deposits and the policy rate or effective federal funds rate.

And so on the top of the slide that chart we’re looking at is that relationship, and so as we see, obviously, the cost of interest-bearing deposits, this slide is for banks, next slide is for credit unions, but that cost of interest-bearing deposits falls more slowly than the daily federal funds rate.

And so to quantify this on the bottom side, we’re looking at the actual deposit beta.

So to calculate this, we take over the period of the easing, so from the peak to trough on daily fed funds, we take that period and then look at the change in the cost of interest-bearing deposits and divide that by the change in daily fed funds.

And that kind of gives us the relationship between those or that delta.

And so what we see on the bottom here, we’re comparing the number of quarters that the peak to trough took on the falling rate, in that falling rate, each falling rate cycle.

And then the actual beta and so the relationship that we that I found here is really strongest with The length of the cutting cycle that really tells you to what extent or how quickly you’re going to be able to pass on those cuts to customers so the longer the cycle the more evenly is closer to one to one That you’re going to be able to you know pass those cuts along and then the more quickly that the cuts happen The more of that there’s going be a lag in your ability to pass on those cuts to customers.

Then we’ll take a look on the credit union side as well.

The data doesn’t go back quite as far, but we have three cycles that we see here.

What we’re going to notice is that the data is much lower on the credit union side.

Part of that is that you have a reliance on CDs, and just the rates starting a little bit lower, and then ending a little bit less high.

So part of that, the mix, less money markets in the deposit mix for the credit unions, and also a little bit more duration, tends to be on the credit union CD book where they’re offering higher rates all the way out the curve, versus we’ve seen more banks kind of pull shorter and only offer promos at the short end of the curve.

And also that rural versus urban dispersion, where a lot more of the credit unions are in these rural areas, where they’re able to keep rates a little bit lower, a little bit less volatility on rates.

All right, so let’s pivot to balance sheet tragedies and think about how do we tie this all together, right?

The economic and market outlook, combined with the transformations, small and large, that are happening on our balance sheet.

So I think a big question is how do we balance and how do we target these three things here? – Cost Growth and Mix.

And I think, you know, without a clear crystal ball on interest rates and credit, and like we said, you know, with our long memories of the last two cycles and all that came to be from there, it’s challenging.

And so I think even if growth slows down at some point, then there’s going to be some opportunity.

And we’ll see that in a slide or two when we talk about pricing discipline and the remixing of the balance sheet, that that is the focus, that is where the opportunity is right now, because growth may continue to be challenging because, you know, any way you slice it, there has been phenomenal growth over the last few years.

And one of the challenges was that there was growth, and earnings weren’t catching up.

So maybe when growth exceeds earnings, then that leverages the balance sheet that much more.

So now growth is tempering, earnings and margin are starting to pick up a little bit. So we’re able to rebuild capital a little bit.

So, a couple of questions and say, is the time to extend asset duration?

And one could argue yes, even if you don’t think that rates are going to go all the way to the floor again, we talk to a lot of folks and we see a lot of ALCO reports from many institutions, no matter your lending focus, your deposit composition, your interest rate risk positioning, that prolonged down rate environments is the most challenging interest rate environment for your balance sheet.

We saw this in 2020, 21, when we looked at the income simulation models.

So there could be a window to mitigate that.

The core loan and deposit growth.

And then with that caveat of efficient pricing, I mentioned it kind of tongue in cheek talking about the deposit growth and saying, you can hit any number that you want on deposit growth, but is it going to be a contributor to your earnings, interest rate risk and or liquidity.

And on the topic of liquidity, something that is obviously, you know, very close and on the radar here with us.

We are two years out, and from the March 2023 banking turmoil, we’re five years out from the COVID experience.

So when we think about the regulatory view on liquidity management, both on balance sheet and off balance sheet, and one I keep coming back to, it’s obviously gotten quiet over the last couple of months relative to March of 2023, is assumptions on the potential deposit outflows in stress scenarios, right?

Because a sticky core deposit base is a fantastic foundation for your liquidity needs.

But if that gets challenged, then that really changes the narrative on what off-balance sheet liquidity probably needs to look like.

Yeah, so on the theme of remixing your balance sheet, so what I wanted to speak with you about very quickly is what resources are available at the bank to help you think about mixing up the way that your mortgage structure looks like.

So if I were a CFO today, I would want more mortgage issuance at these rates, and I would want a way to deal with the lower-coupon mortgages that are clogging up your balance sheet.

So the first thing I want to recommend is that you should look into the MPF program that we have here.

Essentially, we have experts here who can talk to you in more detail about how the program works.

But essentially, what it does is it allows you to share the credit risk with the Federal Home Loan Bank of Boston, and you’re paid for sharing that credit risk.

The FHLB adopts a first-loss account and essentially protects you from the initial losses that could be incurred on the mortgage.

So you can offload that from your balance sheet, continue to receive some income from sharing the credit loss, and have some protection from the FHLB.

So if I were a CFO, I’d be thinking about doing that, particularly with loans that no longer looked as attractive to me in the current environment.

And then the other thing is that if you were struggling with origination because there’s just not demand for mortgages as a result of low turnover and housing activity, you might think about using the Federal Home Loan Banks programs to expand your customer base.

So we have a variety of programs that are intended to support Affordable Housing in New England.

That’s one of the core missions of the bank for housing program, Equity Builder Program, there are CDA Advances and CDA Extra Advances.

And all of these are intended to get housing to people who need it.

They’re also a resource for you to think about how you can tap into your community and make these programs available and bolster your own sort of mortgage issuance, if that’s something that you’re interested in doing.

So now I’d like to look at deposit-based a little more granularly and looking at kind of what’s really driving that as far as what are we replacing and then what are we putting on to replace those fees we put on six months ago.

So what we’re looking at on the top here is the green line is today’s six-month treasury rate and then the gray line is the six-month treasury rate six months ago and then that green is the replacement gap.

So today minus six months ago.

So when that’s above zero, we’re placing runoff at higher than market levels.

And when that’s below zero, we’re actually able to replace CDs at a lower rate than we were putting them on six months ago.

And so what we see here is that over time, so in spring of 2024, a lot of cuts priced into the curve, those didn’t materialize until later in the year.

And once those did materialize in the fall of 2024, that’s when we saw that gap really increase.

So there was help coming by way of Fed easing and allowing you to reprice a little bit lower.

This is the treasury rate that we’re looking at here.

So you’re using it as a proxy for your ability to price CDs.

And then as that cutting cycle kind of eased or slowed down, we saw that actually in the summer of 2025, invert.

So you were actually putting CDs on, potentially at a higher rate than you were six months prior.

Now we’re back into a favorable area where you’re able to replace CDs at a lower rate, but we’re starting to see that reverse.

And there are one to three cuts on the horizon, whether those materialize or not, what’s for sure is that we are getting towards the end of the cutting cycle.

So there’s going be less help just coming from the Fed, less just kind of easy help coming from them.

So what does that mean for pricing?

We need to have that discipline to make sure that we’re able to continue to pass those cuts that already happened along to customers and then continue to bring pricing down once the Fed ceases to ease.

And so then on the bottom left quadrant here, Caroline, we’ll look at why it’s so important to maintain that discipline.

So you might be, you’re cruising along, doing a great job, keeping cost of funds around 2% and you feel pretty good.

You’re doing a three-and-a-half percent CD special that’s at the bottom of the federal funds band, being at 350 to 375 basis points.

Seems pretty good, seems like a good setup, But if just 33% of the CDs that you’re putting on are coming out of your book of money markets or other deposits, you’re actually paying four and a quarter, 425 basis points for that CD special.

When you compare that to the daily cash manager at 394, which when you factor in our dividend at 705 basis points, it’s actually 3.75 that you’re paying for the daily cash manager, all in cost.

So it’s 50 basis points you’re saving versus doing that CD special.

So that really tells us that it’s time to maybe think about where is the rate where we can bring in money markets, where we can really pass on that easing, kind of move away from the CDs.

And so on the bottom right, we’re kind of thinking about that insofar as where your balance sheet is positioned.

So if we’re not bringing on a lot of loans, low deposits, let’s maybe try and reshape the book into the money markets.

We don’t need to be going above market to bring in deposits, and then backfill with advances.

Same thing, low loans and high deposits, especially on this one.

Let’s really, really try and not pay up and manage down cost of funds, manage deposit mix.

If you are having high loans, lower deposits, you can pay up selectively, maybe negotiate rates, and then backfill with deposits as needed so you’re able to maintain that discipline on the top line rate.

And then lastly, if you’re having high loans, strong loan growth, strong deposit growth, that’s great.

But make sure you don’t have that winner’s curse where you’re giving away the farm on the deposit side just to fund some slightly above trend loan growth.

Okay.

So we’ve talked a little bit granularly here.

And so when we talk about what is the yield curve pricing in, and this fluctuates, don’t quote me if it’s not 100% accurate, but there’s still a few more cuts to go.

But what’s priced into the market today is two and a half cuts through the end of not 26, but 2027.

So, you know, if you want a very simple model of bank or credit union balance sheet management is the time to bet on something is when everyone else is not betting on it, right?

So, you know, owing to the comment a few slides earlier that if the biggest risk for earnings and risk, the credit profile, is a prolonged down rate environment, then we have the opportunity to have better entry points today than, say, when the yield curve was inverted.

And when you think about the path of short and intermediate-term rates over the last few years.

The cuts that we’ve seen thus far have helped our funding cost, and the intermediate part of the curve has remained high to the point where every loan or investment that we put on is still accretive to what the existing yield is on.

So there is a lot of opportunity there, which segues into the second part here: Does investment leverage still have appeal?

The good and bad part about our job is that we have time public time stamps on a lot of the that we talk about.

So, you know, when we look back 12 months ago to this version of the webinar in 2025, we were metaphorically banging the table on the prospects of pre-investing some of your cash flows and to the extent that you have the capital and liquidity to support it, that there was a lot of opportunity to capture some of those high yields, and funded a little bit shorter in anticipation of a slowdown in loan growth or deposit growth.

And I’ll cut to the chase and say that was fantastically timed there through luck or scale.

But I think that the opportunity still exists there, especially that there is now a little bit of a slope in the yield curve, that if you have the interest rate risk capacity to tiptoe out the curve, that there’s going to be some opportunity there.

And so the last thing here I’ll point out, OK, what types of advances look good or not as good in this current environment?

Caroline talked about the reduction in industry volatility, which is kind of a head stretcher.

Mathematically, volatility is one thing, versus qualitatively, how we would think about volatility or uncertainty.

And there’s no shortage of uncertainty.

But mathematically, volatility is low.

So, the puttable advances that have been supremely popular for a number of years now, there’s potential for cost savings, but it’s not nearly the magnitude of what it once was because of lower volatility, but also because the yield curve isn’t inverted.

So that is another dynamic. So one thing that we are seeing a lot of value and opportunity in is the floating rate advances, where you get that dynamic repricing.

Beta is often seen as a bad word for banks and credit unions.

But in the context of wholesale funding, 100% beta, if we move into further cuts, is a phenomenal thing.

So there isn’t that dance of should we lower the rates or where should we go out on this deposit promo. It’s mathematical. It’s driven off of wholesale rates.

We also have seen That some folks who have been able to be top quartile, top decile in terms of loan growth have tiptoed out of the curve a little bit, and while the savings, you know, there still is some inversion, right?

I think we’ve got very desensitized to what an inverted yield curve means right, you know for forever.

It was 100 150 basis points. So at the one-year mark our curve is inverted 20 basis points something like that.

So, still cost savings to extend out, but not nearly the potential because many, many cuts aren’t priced in.

And the last thing I’ll mention, so those are strategies for now, strategies for later.

Again, given the cloudy economic climate, narrow spreads on a lot of investments and loans, I would be prepared, and those of you who have been with us, you hear me say this, I prepare for the what if.

Just like we do, you know, we do fire drills to prepare for what happens if something happens in the building?

I would have ALCO fire drills right now, right?

That if we do see something happen, something blow up, that we know what we want to do, right?

Do we have an appetite to take advantage of those opportunities when they come?

And also, if we do see that significant drop in interest rates that gets us to another supremely low rate environment, think back to the experiences of 2020, 2021, 2022 you, with the benefit of hindsight, what do we wish now that we could have done back then on both sides of the balance sheet to get to a more balanced and comfortable state?

So with that, we will wrap things up.

As always, we thank everyone for joining in and for your participation.

These are supremely fun for us to do, the preparation and the presentation.

And as always, if there’s anything that we can be of assistance with, you know where to reach us, and we wish everybody smooth powder and happy trails.

Is that accurate?

Sure.

Pray for snow.

Okay.

Oh, I don’t know about that.

No, no.

Forget the ground dog.

North of Boston.

Only in very selected areas.

Other than that, sunny skies and green grass. All right. Thank you, everyone..