May 2026 Peer Analysis and Balance Sheet Strategies Update

Transcript for May 2026 Peer Analysis and Balance Sheet Strategies Update

Here in Greater Boston, it’s a summer-like day. So where else in the world would you rather be?

Hopefully your Wi-Fi extends to the backyard lounge chair and you can multitask and enjoy the nice weather as and maybe learn a thing or two about the balance sheet dynamics happening right now. I’m Andrew.

This is Tyler, happy to have you with us for our peer analytics and balance sheet strategy webinar. So, as usual, we will take you through three parts here.

We will discuss some of the happenings in the rate markets and the broader economy.

We’ll take a deep dive into key trends that we can take away from the first quarter call reports and then we’ll wrap things up talking about some actual strategies that we can put into place and things that we need to be concerned about.

So We’ll kick things off with a little reference here.

For those of you who may not know, this is from the Godfather 3 famous quote here, slightly tweaked to adapt to the banking industry.

Tyler’s got a lot of great traits and things that he brings to the table, but one of the things is that he doesn’t make me feel bad for getting older and having my references has become dated and dated and give quizzical looks.

So the fact that he can reference a movie from the early 90s, I believe, makes me feel a little bit better about that.

And just for full disclosure here, this is a very 2026 moment when everybody knows this is Al Pacino, right?

In my brain, I read Al Pacino as AI Pacino.

So that tells you where you know what’s on our minds in my mind these days, you know He’s only one of the most famous actors who’s ever lived but In any event hire for longer, you’ll see you’ll see will be a theme as we progress through the webinar here So let’s kick things off Talking about the markets and the economy So in last month’s FOMC meeting We had something that hasn’t happened in nearly three decades, and that is we had four dissenters, folks who disagreed with parts of the components of the convening of the Fed governors.

And as you can see, relative to recent months, that was an uptick versus the one, two, or in one instance, three members who dissented.

And there was disagreement about the forward guidance, about the decision to cut rates or not, a couple of months ago, when they held the rate steady, there were dissenters on both sides.

There was someone calling for a cut, and there was someone calling for a hike.

So there’s certainly a lot of balls in the air right now.

And we have a new Fed chairman, Kevin Warsh, starting, and Governor Moran, who was the consistent dissenter going back, calling for more cuts and more easing, which was certainly swimming against the tide of a lot of the folks who were voting members who were recognizing the changing tides in the economic landscape and the impacts of inflation, which we’ll get to in a little bit.

So certainly a very cloudy picture and not a lot of the governors on the same page as relates to the things that they have to dictate in terms of the direction of the economy and most importantly to us, interest rates.

So now I’d like to take a look on this slide what we’re doing here is trying to isolate the impact of the actual rhetoric coming out of the FOMC, the press conference, and isolating the impact of that on the curve by looking at, so what we’re looking at is the change from the day before the FOMC meeting versus where the yield curve is on the day after in basis points to try and isolate out some of those impacts of economic data.

And so what we see is that in both the March and April FOMC meeting, the front end of the curve did not really move very much from before to after the meeting, which is in line with what we’ve seen.

But the Fed’s really not projecting many cuts, if any, cuts in the next year.

So not much change on the front of the curve.

But we did see the back end of the curve, mid to back end of the curve, kick up after both meetings, 11 basis points in the middle of the curve, that two- and three-year area of the curve in the March meeting, and then five to seven basis points in the April meeting.

So I think that speaks to the market having a little bit less confidence in the Fed’s ability to maintain its longer run 2% inflation target.

So we are seeing the long end of the curve come up a little bit on yields.

So when we think about the shape of the curve, and we can look at it in a number of different ways.

Many of you have probably heard me opine that certain parts of the curve are more relevant to the depository balance sheet management than others.

This is showing over the course of the first quarter, as Tyler alluded to, that the movement was more pronounced in that two- to three-to three-year range than it was further out the yield curve.

I think back to the webinar that Tyler and Caroline did a fantastic New England and U.S. economic update.

And there was a slide there that looked at TIPS, Treasury Inflation-Protected Securities, and the change in the yields there and what we can suss out.

And what we saw there was that the energy and inflation discussion that is happening right now and the impact that it’s ultimately having on interest rates and the economy was much more pronounced on that two- to three-year range.

So It’s not necessarily structural like what we saw in 2021, 22, where there was this explosion in money supply and all the after effects that come with that.

That it may be more temporary in nature.

It doesn’t feel like temporary when we look at some of the phenomenal movements in interest rates.

And again, just sent a note to our team to take a look at what’s happening to long rates today.

a parabolic move in five, seven, 10-year rates.

But it’s really been on the front end of the curve, and as Tyler alluded to, when we look at projections for rate cuts, and at the beginning we say projections for rate cuts, rate movements, because there really are no rate cuts projected.

The most current probabilities, looking at it when we’re in the green room a little bit earlier here was that there’s greater odds of a hike than when talking about by the end of this year. There’s greater odds of a hike, not versus a cut, but of holding firm.

I think it’s something, it’s about 60-40 that odds are skewing in favor of a one or two basis point hike versus unchanged, which is pretty incredible considering the last 18 to 24 months.

So we’ll continue talking about the yield curve.

And now this marks four slides where we’re talking about the yield curve, but we actually haven’t shown you a yield curve, which I think is, you know, impressive and sad in its own way.

But this is an interesting chart where we’re looking at the path of Fed funds, the effect of Fed funds rate over the last 25 years.

But the green dots signify where on the yield curve was the lowest rate.

So when it’s along the bottom, like we see for most of the time here, that’s when the curve is positively sloped.

And then when the green dots are very high, that’s when the yield curve is inverted, more so as it gets the green dots go higher and higher.

A couple interesting things to think about here is that one, as quick as the rise in rates was in 21 and 22, the move down in rates has been much slower than in the previous cutting rate regimes.

Not to mention that the pause at the top, which we’re all familiar with, that was longer than what we have seen in past interest rate cycles.

And where we are today, we are now at the point where the very, very front end of the yield curve the lowest nominal rate on the board.

But as you can suss out by looking at this chart, maybe easier for me because I put it together and been looking at it longer than you all have been looking at it for about 30 seconds here, but when the short end of the yield curve is the cheapest point, we historically haven’t been this high nominally, right?

You look at all that that period after the great financial crisis when short-term rates were at 0%, well, the lowest point in the curve was the very, very front end.

And the curve inverts as rates go higher, and then that signals a pivot to a down rate cycle.

But it seems like we’ve kind of hit the pause button here, right?

And so we’re in the situation where, at least in recent months, it seems like the narrative is that there’s more hikes on the horizon and we can debate this all day long, but we are in this unique opportunity or situation where there’s more real estate to the downside.

We think about when we were with the benefit of hindsight and maybe hopefully you’re having these conversations at the time, but the idea of extending asset duration or having short liabilities When interest rates were so low that unless you were a true believer in the prospect of sustained negative rates then It was asymmetric in a bad way in terms of where rates could go.

So what we’re in some regard That’s a little muddier, but it is a little bit more balanced So now I can take a look at a few different measures that look at either side or both sides of the dual mandate So the labor side and the price stability side of the feds mandate.

So on this first slide, we’re looking at a couple sort of leading indicators of labor market strength or weakness.

So on the top, we’re looking at both U3 and U6 unemployment.

So U3 unemployment is kind of like the more traditional unemployment that you hear about.

So that’s those who are unemployed but actively seeking work out of the total labor force.

And then U6 is a little bit a broader measure.

So it’s both including the U3 and people who are actively seeking work but unemployed, but then it’s also including folks who become discouraged and so have given up the job search and are unemployed, but part of the labor market.

And then also those who are underemployed.

So part-time, but want to be full-time and aren’t able to get those hours.

And that can be kind of an indicator of where things are going, if there’s kind of a weakness on the fringes of the labor economy.

And so what we see is that both matters have come down materially from COVID when they were much higher, but they are creeping back up.

Notably U6 as well as U3 unemployment, up to 8.2% on the U6 most recently, and then 4.3% on U3, so something to watch there.

And then those gaps are when we had that government shutdown so with the gap in data, but something to watch there on that front.

And then on the bottom, we’re looking at another indicator which is temporary health unemployment.

And we’re looking at year over year change.

So we see on the left side during COVID, almost 45% year over year change, temporary work as many businesses were bringing people in to deal with that huge demand during COVID for certain, there’s just so much labor turnover during that time.

But what we’ve seen is that that came way down to almost a negative 10% and during the winter of 2024, but now it’s creeping back up towards almost positive again.

So we’re almost adding temporary help on a year-over-year basis. So that’s actually a more positive signal.

So kind of a little bit of a mixed reading from the tea leaves here, but both are interesting to consider.

And then another, on the other side of mandate, we’re looking at both headline CPI and then energy CPI change year over year. So the blue line being energy and the green line being headline.

And so what we see is that energy was running way ahead, the change in energy CPI was running way ahead of total headline CPI during 2021-2022 during that or following the Russian invasion of Ukraine and the oil price shocks there.

Since then we’ve the energy CPI come way back down and then and with that headline CPI has also come back down not quite to where the Fed would like it to be at 2% but it got you know down below two and a half percent somewhat recently but now we’ve seen it kick up we’re at 3.8 percent headline CPI but really notably we’re back up to almost 20% energy CPI a change year-over-year so something to there if the energy prices from this new turmoil in the Middle East continues, that could continue to put pressure, upward pressure on headline CPI.

And so we’re also looking here at the consumer price index change again year over year, same as the last slide, but then also comparing it this time to the average hourly earnings change year over year.

So it’s kind of seeing how much wages are keeping up with the cost of living.

So we see during COVID there was kind of a brief change where it went from the cost of living briefly went lower when at the very beginning of COVID before we saw that huge price spike due to all the easing in the economy from the Fed to help ease the COVID-19 pandemic results.

Let me see what happened after that is that our average hourly earnings did not keep up with the price consumer price index change so because that really, really aggressive easing from the Fed to try and, you know, again, alleviate the impacts of COVID-19 that caused that what was, you know, thought to be transitory, but then it wasn’t really, really high inflation. And that ran ahead of the increase in wages.

We saw that reverse for much of the last two years.

So, you know, the change in wages was ahead of the change in CPI. But we’ve seen that flip recently, just in the last month, those two lines have crossed.

And that’s notable because when prices are increasing faster than wages, it’s going to be pressure on the consumer, consumer sentiment, and the consumer credit.

So we’ll see how that impacts all those things and if this continues to play out.

And then next, let’s see, there we go.

We’re going to pivot a little bit, take a look at something a little bit outside of macro.

But I thought it would be notable to look at this because in a lot of conversations we’ve been having with depositories, we get the question, what do you guys think about stable coins?

you’re hearing about adoption, things like that.

So I thought it’d be interesting to take a look at, this is an S &P global survey from Q1, from this quarter, Q1, 2026, asking depository, so banks of all sizes, asking them where they stand on preparation for an adoption of stable coins.

And so it’s interesting to see, from the left side, we’re looking at the current stable coin stance, this is across all, banks of all sizes.

We see that almost 40% have not even considered or not even preparing for stable coins or monitoring it at all.

There’s another 40% that are watching it, keeping tabs on it, but not actively developing policies or anything like that.

There is a little bit less than 10%, the 7% who are preparing for it, developing some policies, frameworks, governance around stablecoins, but there’s no one who’s actively building any capabilities or piloting any programs around this.

So if you’re wondering if you’re missing out, if you’re behind the ball, it doesn’t seem, so most people are kind of on the sidelines, waiting to see what happens.

And then just another look on the right here is by asset size.

So one of the things that we’ve heard a lot about with stable coins is that it might benefit larger banks, so that larger banks, at least, would probably get into it more quickly.

And so we do see that playing out in the survey data.

So banks under a billion in assets, over half of them haven’t even, are not currently preparing for stable coin adoption, but that percent’s lower for banks over a billion dollars.

It’s only about 30%.

So there is a little bit of a dispersion there by asset size.

And then lastly, another for last week for section one, just an interesting piece of data here.

So looking at the total amount of branches across credit unions in the Federal Home Loan Bank system, sorry, the Federal Home Loan Bank of Austin credit union members, looking at how many branches they have. And so what we see is that this, they were ticking up for a while.

So, you know, prior to COVID to COVID or about a year after, I think there’s been a lag for plans that had already been in place prior to COVID.

So up through 2021 or 2020, yeah, 2021, branch counts were increasing pretty steadily year over year.

That did stop and actually they decreased for a couple of years, I think probably as a result of COVID and some sentiments about moving away from branch banking, but we’ve seen that’s reversed.

And not only has it started to tick up, but it actually jumped a pretty good amount up over a thousand for the first time.

just this quarter. And this is looking back over the last 10 years.

Something notable just there that, you know, as much as there’s a lot of talk about, you know, getting away from branch banking, clearly, you know, the in-person depository relationships are not going away.

And I would add just the reason we didn’t look at this from the bank side was just a lack of availability. They don’t have this in the call report like they do for credit unions.

So bankers write the FDIC and ask them for more call report fields so Tyler can do analysis.

I’m sure everyone would be in agreement with that sentiment.

Just kidding.

So let’s talk about the first quarter call reports and some trends happening across the balance sheet.

So we’ll start off with net interest margin.

And starting back from 2020, we all know the story, the impact, and the trial and rate nims that we saw in 2023 and 2024 as the higher interest rate regime was beginning to get fully digested and both sides of the balance sheet reacted.

And what we see is that for banks, the median net interest income was up slightly, just two basis points, and for credit unions, down just a few basis points.

So call it mixed, they’re mostly stable.

And we’ll talk about cost of funds first because we have a lot to talk about on the asset side because it’s a very interesting dynamic and we had to put our thinking caps on and do some second and third level analysis to try and get a good thesis together there.

But on the cost of funds, it’s good to see that it’s continuing to come down.

And when we look at some of the interest rate dynamics in a few slides, you’ll see why I think we can feel good about the six or seven basis point decline in cost of funds.

Yields on earning assets, you know, frankly, this was a surprise to me to see it come down the way it has.

And I think And Tyler’s going to talk about loan yields a little bit more in a second.

But the thing that we have to think about here is the impact of growth and the impact of remixing.

So we’ll get to those in a little bit.

But one thing that does jump out is that I think there was a lot of impact, probably more than we had expected, of some of the higher rates that maybe we put on the books over the last six to 18 months, the 6% and 7% yields, that we were feeling the refi impact, even with the very, very short term that we held them for, that we saw those yields start to come back into market rates because of, not just because of market rate movements, but because of prepayments.

So that’s a dynamic that’s at play and then it’s not all sunshine just because higher rates are here and the marginal rate is higher than what the existing loan yield was.

Yeah, so to follow up on that. We’re looking on the top of the credit union side. We’re looking at the actual yield but you’re currently getting on your current book of loans and then on the right on the for the credit unions.

The IR, the interest rate, those are the measures of what you’re getting for new production.

And then for banks, we don’t have the new production numbers. We’re just looking at yields by loan type.

But so back up to the top on the credit unit side, we see that yields have increased almost 20 basis points.

And this is year over year. So Q1 2025 to Q1, or this quarter, Q1 2026.

And while yields are up 20 basis points, the actual new production is lower by 20 or more basis points in most cases.

In some cases, almost 40 depending on the loan type, especially in those used auto loans have really come down quite a bit.

So I think part of that dynamic is that you’re having some of that older lower coupon stuff rolling off the books.

And then while what you’re putting on now is a little bit lower than it was a year ago, it’s in most cases higher than what you currently have in your yield on your current yield on your existing books.

So things are still creative and we’ll likely continue to see that as a lot of lower coupon stuff that was put on a few years ago during that surge in loan growth continues to roll off and that’ll be again, creative and again back on the bottom for the bank side, we do see yields in every category are continuing to tick up.

So I tease the idea that it’s remixing impact but also growth.

and so let’s look at total asset growth and as many of us know and as we’ve talked about in the past the seasonality in the first quarter for deposit inflows is much more pronounced for credit unions than as bank so it’s a little choppier when you look along the right hand side in green, but I think there’s an interesting trend there when we look on the left at the bank so we can see the median total asset growth really starting to slow down 1.9% last quarter, quarter over quarter, in contrast to this time last year, where it was at 4%, which is a number that we could probably feel good with most of the time.

When we go to that second level there, and on the bottom tables, and we see the loan growth and the deposit growth, you can see that loan growth really is slowing down for both banks and credit unions.

In fact, the median credit union had negative loan growth.

Deposits were surprisingly strong.

You can see the seasonality impact on the right-hand side for the share growth for credit unions, typical of Q1, but for banks, I think a 4% middle of the road for deposit growth.

Just in terms of balances, we’re not talking about the types of product or the rate, which are very important considerations, obviously, but just looking at the balances, 4% is a good starting point.

So let’s continue to stay on the topic of loan growth and look at an angle that we like to look at in terms of the percentage of members who were able to grow in any given quarter relative to where they had been.

And when you see that band around 45% to 55%, that’s kind of the holding steady range, right?

And when you see deviations above or below that, that’s when you really, you can tell that they’re significant headwinds or tailwinds for what’s happening in those sectors.

So for credit unions, you can see really it’s home equities, unsurprisingly, right, given the impact of rates on originations on the first mortgage side. So home equity is a great way to do that.

Now, how do we marry that with the fact that loan growth on a dollar basis was really struggling, as we saw on the last slide?

Well, that’s a function of home equities are going to typically be a smaller size than some of the other loan categories that are higher balances.

And we can see, again, another thing contributing to the lack of loan growth is the auto side, where both new and used autos, 32% of members, 39% of members were able to expand.

So that is very difficult, right?

Because they are so short, they do pay down rapidly, they really have to have the origination machine cranking in order to make dollar balances grow higher.

And on the bank side, in blue, no real outliers other than to say that commercial real estate and this reconciles with a lot of the conversations that we’ve been having with members and even tying to the relative durability of the New England economies, most of the New England economies, that commercial real estate has that opposite impact of home equities, right?

Because it is larger dollar amounts, you don’t necessarily need to have a record number of loans in the pipeline.

Just the right types of loans and the right sizes that maybe allow you to overcome some of the challenges that are happening in other parts of the balance sheet.

So we’ll hand it to Tyler, and credit and asset quality is certainly a big topic.

So we’re going to spend some time on that one here.

Yeah, so this first slide we’re looking at for banks, we’re looking at non-performing loans by loan type.

And this is an average of the percentage of non-performing loans across the membership.

So we did that to limit the impact of asset size on this reading.

And so what we see is that broadly, starting on the left, for total NPLs, non-performing loans as a percentage of loans, it’s just creeped up slightly.

I mean, you can’t see it.

If you go out a few decimal points, it went up a little bit.

But if you get into the category by category, most categories kicked up a decent amount.

I think what that speaks to is that while overall asset quality wasn’t deteriorating as much, within each category, there’s some members who are having some trouble and are putting off some higher readings or some higher percentages of non-performing assets.

You know, looking at one to four family on both sides, it’s still deteriorating.

Construction is improving.

Multifamily, getting a little bit worse, but not quite to the same degree.

Interestingly, we had seen previously a dynamic where owner-occupied Cree was improving while non-owner-occupied was getting a little bit worse.

That’s reversed.

Now they’re both deteriorating.

C and I are coming back down just a little bit from Q4, but that’s likely just a little bit of an end-of-year cleanup and the impacts of that, and the consumer relatively flat.

Next, we’re going to take a look on the credit union side.

And so it’s a little bit different with the credit unions, just the way that they report non-performing or delinquent loans by category.

It’s in a dollar amount, not a percentage.

So we did have to go and do the total dollar amount across the membership and then divide it up that way.

So it is a little bit influenced by asset size for the credit unions.

So, what we see is that, well, non-performing or delinquent loans did tick down from Q4 to Q1.

I will take a little bit of a victory lap on this one.

I did say in our Q4 webinar that we would likely see credit union delinquencies tick down relative to Q4 and Q1, but that that would be reflective of a trend year over year that happens where credit unions, like Andrew mentioned, they have a really strong deposit inflow and their members are generally a little bit more plush with cash coming in from tax returns.

And also the loan growth is a lot heavier in Q1.

So you have a larger denominator and then healthier members in the numerator.

So you tend to see actually about a 12 to 13 basis point decrease from Q4 to Q1 every year in delinquencies.

So really, the read here is that, if anything, it’s at best a flat, but maybe even a really, this is taking up.

So really, we want to watch what happens in Q2 and see if we’re up into the mid 80 basis points, percentage of delinquent loans, 60 days plus delinquent loans, out of total loans.

And then category by category, there’s a huge amount of dispersion.

We’re seeing pain both on the consumer side, auto, and then things are improving on the Cree side.

and that probably is more of a true decrease on that one.

And so I thought it would be interesting to look at sort of the credit stress migration, so looking at early stage, so zero to 90 day past due, and then 90 plus day past due combined with non-accrual, so stuff where you’re no longer recording interest income, and then net charge-offs to see how that’s flowing through, you know, the credit stress is actually flowing through to material losses.

And so on the top, this is the banks.

And so what we see is that zero to 90 day past due, it’s continuing to tick up.

90 plus day past due and non-accrual, continuing to tick up.

And while charge-offs did tick down Q1, if you look back over the last few years, you see that in Q4, it ticks up.

Probably banks are kind of cleaning up some of those non-performing assets, just writing it off, taking the charge off at the end of the year.

So you do see Q1 tend to be lower over the last few years, so interesting to see what happens in Q2 throughout the rest of the year with charge-off migration.

On the credit union side, we’ve seen kind of more of a stable charge-off situation.

While we are a little bit higher than we were a couple years ago, we were starting from a more elevated place, likely due to credit unions having just so much more consumer and unsecured type lending and, say, even auto, a little bit harder to, say, collect on that asset versus a residential real estate.

But so what we do see, again, and this is actually speaking to what I was talking about where from Q4 to Q1 every year, you see that 12 to 13 basis point tick down in non-performing assets.

We see that here in the green line over the past two years, and we see it again this year.

So again, we’ll be very interested to see what happens in Q2 throughout the rest of the year on the credit union side.

And then I wanted here to just break down that charge-off activity by category, so it’s a little bit more granular on the bank side, really on the credit union side, just two categories that we can look at.

We see that, you know, again, from Q4 to Q1, things did tick down, likely where Q4 was elevated from banks just cleaning up some of those non-performing assets.

But interestingly, on the one-to-four family, multifamily, there’s really very little charge-off activity, or sorry, the net charge-off is, it’s almost zero.

you know, you’re walking away from those pretty cleanly.

And if any, actually, while those on the one for all say zero, one of those is actually negative.

So you’re actually making a little bit of money on those, on that charge of activity.

But we do see where it’s really concentrated for the banks is in the consumer.

And then CNI, and to a lesser extent construction, where you just, you know, the quality of that collateral is just a little bit less, less so when you have to actually collect on it.

And then on the credit union side, We see, speaking to that, for the credit cards, much more elevated charge off versus total loans.

Let’s take a look at the composition of the deposit portfolio, first for banks and then for credit unions.

It’s interesting to see that as banks get larger, so we have here on the x-axis all of our banks in ascending asset size.

As they get larger, there’s less and less reliance on term CDs.

And we also, it’s a little subtler, but there isn’t a deviation in the strategies, right?

And so we’re at the smaller size, you have folks who are super, super reliant, and then some folks who do not really have any exposure to CDs.

On the right-hand side, we’re looking at transaction accounts and where we sit today versus where we have been over the last one to three to five years.

And what we can take away from this is that where was the peak of the CD reliance?

And so it’s not outlined here, but we have seen some positive trends in the growth of money markets, transaction accounts, even non-interest-bearing accounts, which is probably the most glass half full thing that we can think about that’s happening on the deposit side right now. We saw the top line deposit growth number a few slides back.

So we can see that three years ago, that was really the trial.

That’s where there was, that was before the CD boom really accelerated when rates had capped out at the high, high levels that they were at.

We see a similar dynamic in terms of the flow between transaction accounts and, excuse me, shared drafts and CDs as banks, right?

The dynamic where the trial was three years ago and we’re starting to be middle of the road versus where we were one year ago.

The CD reliance on the left-hand side, the scatterplot, That’s where the credit unions show a different trend.

Now, it’s not a ton of correlation.

You can see the trend line there.

But as credit unions get larger, they tend to get, at least in New England here, they are more and more reliant on CDs.

We do see that same tightening of the individual institutions relative to the trend line.

There aren’t the big outliers to the upside and the downside.

But interesting nonetheless when we think about how banks and credit unions Strategize on their deposit approach So let’s look at the investment portfolio, you know, given that we have this backup in intermediate and term rates our least favorite topic of unrealized losses in the bond portfolio Comes to light and I’ll call back to a long time ago When I was learning how to be a balance sheet manager and investment portfolio manager for community banks You know my brain couldn’t comprehend it at the time But the person I was working with told me that because we want unrealized losses in the bond portfolio And the reason is because we tend to have an asset sensitive bias and that means that things are going well And I’m not going to scroll back to the margin chart but For many institutions the vast majority of institutions They’re doing better today on margin and earnings than they were when they had the maximum amount of unrealized losses, right?

so You know, that’s that that’s where asset liability management differs from total return investing So here we can see in gray Is where the marks are less than 90 cents on the dollar and see that number is declining And despite the persistence of hire for longer or even this most recent backup in rates.

And the thing that we can attribute that to is the passage of time, right?

The approaching maturities.

Now it doesn’t maybe not, doesn’t feel like it for those low coupon bonds that you bought in 2021, but that was five years ago.

So even if it had a seven, 10-year average life at the time, we have had the incremental pay down.

We have had some shortening.

So, it doesn’t exist in perpetuity as a 10-year bond.

It gets shorter and shorter and shorter over time.

And then similar to the loan yields, we do see that dynamic where loan yields are starting to come down in the median.

We can see that tick down in gray a few basis points.

Interesting though that at the 75th percentile, that did increase a little bit.

And I think that is attributable to the growth, right?

If you’re more aggressive in growing the portfolios, and the majority of institutions have shrunk their bond portfolio over the last few quarters, but the more that you’re reinvesting, and that’s a theme that we’re going to continue to talk about, the more that you’re reinvesting and taking advantage of these higher rates, it allows you to roll over the asset side.

Similar concepts on the credit union side with the caveat that about structurally 30% of our credit unions smaller, tend to be smaller credit unions don’t have a bond portfolio.

So when you don’t have a bond portfolio, you don’t have unrealized losses.

So that’s why you see the larger section up there in black.

But we do see the dynamic of declining investment portfolio yields, and I think that’s attributable to generally speaking a shorter investment portfolio going in overall, which cuts both ways, right?

You ride the upside that much quicker, but as the front if you charge back on the loan yields, that today’s yields may have been lower than where they were at the peak of short-term rates.

So let’s transition to talking about strategies and quickly go through just three questions related to interest rate risk, credit, and liquidity.

And when we think about interest rate risk, given the slowdown in growth and the roll of shorter assets, excuse me, of the lower coupon assets, then we may be getting back to where most folks are more neutral.

And when you look at your income simulation results, and we had the situation a number of years ago where a common refrain we would hear was we used to be asset sensitive, now we’re liability sensitive as asset extension occurred and the deposit transformation assumptions happened, but I get the sense that we could be more back to neutral.

And I would posit this.

When you look at the different scenarios, and many of us are rooting for shorter-term rates to move lower to help on nominal deposit cost, but for many, many institutions, whether you’re asset-sensitive, especially, but even for the liability-sensitive ones, lower long-term rates is the risk for the institution from an earnings perspective and possibly from a capital perspective too.

So I would keep that in mind because most impactfully, it mutes the value of the deposit franchise, right?

We talked about how surprisingly share drafts and non-interest-bearing accounts have been growing at a good clip.

That is the magic that makes this whole thing work.

When we have 6% to 7% loan yields and 5% bond yields, and the ability to bring in deposits well, well, well below wholesale rates.

Credit, you know, Tyler’s done a great job, you know, getting into the weeds on some of those numbers.

But, you know, community institutions, your edge is your ability to understand your local economies and how you extend credit.

But the fact of the matter is, we have geopolitical and national drivers of the economy, Right?

Who knows what the impact of rising energy costs?

I know, and many of you have, I did it just this morning, filling up the gas tank, and I had to, I don’t wear glasses, but I thought I had to put on glasses because I couldn’t believe what it cost to fill up a tank.

Big surprise here, but it hits you when you look at that number, especially as we head into the summer and where people tend to drive and travel more.

And liquidity, it’s that seesaw effect where we have so, so much and we’re drowning in liquidity.

It’s a good problem to have, but then it swings the other way.

And it’s not just about the balance sheet decisions, but it’s about the aforementioned path of rates and path of the economy that has that knock-on effects of what our liquidity profile is going to look like.

So, you know, here’s an interesting way to look at where is the wind, is it at our face or is it at our back, in terms of the pricing dynamics and the ability to roll over.

So this is looking, you know, more from the deposit side, the current six-month Treasury, but then also where the Treasury was six months ago.

And this is meant to signify, is the going rate today going to be higher or lower than what a term CD, for example, would be rolling off at.

And we saw for a while over the last two years, we had some real margin enhancement opportunities because we had the 5% promotional CD rolling off.

We’re in a 4% world.

And while it may sound crazy, but going from five to four helps expand our NIM.

Doesn’t feel great about paying for, but it does help.

So that has dissipated a little bit now that we’re in this environment where cuts are being priced into the market.

Wholly different story on the asset side of the equation.

This is why we’re pounding the table on to the extent that you have the capital and liquidity to do so.

Growth, even if it’s wholesale growth, allows you to roll over that asset side.

So when we look at the five-year treasury versus where it was five years ago, you can see that big, big gap between the green and the blue there.

And interestingly, where we are today is that pretty much anything you do with a maturing or prepaid asset today, whether it’s loan security or otherwise, even if you stick it in IORB, you’re potentially getting a higher rate than what you were doing before.

So it’s pretty incredible when you step back and think about the path of rates and the ability to reprice the book.

You know, just think about it conceptually.

You have some of those one, one and a half percent bonds rolling off.

And here we have five percent yields that hopefully we’re able to take advantage of.

So I just want to discuss a couple of ideas around deposit pricing, some of the things we discussed so far.

One of the first ones and credit to Andrew for this idea was, you know, you don’t you don’t have to pay up automatically.

Someone else will be above market.

Does not necessarily have to be you.

So if you think about, say you go out and you raise $10 million in deposits, $2 million each from, so sorry, so you go above market, market’s at $4, you go $4.25 on your CD special and you bring in a few million dollars from each of your competitor depositories, people see the CD rate in the newspaper, they bring it in and they open accounts with you.

But if your marginal cost of funds on those new monies that you brought in is higher than the cost that all your competitors are now paying for wholesale CDs or Federal Home Loan Bank advances that they use to backfill those CDs you brought over. Did you really win?

I mean, you might have won the deposits, but you actually lost the greater cost of funds battle.

And, you know, as far as having a strong deposit base, a sticky deposit base, so something to keep in mind there.

You don’t have to be the one to go above, you know, stay at or a little bit below market, maybe negotiate for some of those key relationships.

But otherwise, stay below and maintain your cost of funds, especially your marginal cost of funds.

Other ideas, just pricing more evenly across the CD curve.

We often see members going high on the, say like a five- or a seven-, nine-month CD special and having the rest of the offerings extremely low, like 50 basis points or something like that.

But some of your members might actually appreciate the flexibility of having terms that line up with what they need in their own personal balance sheets.

And there’s some relative value to be captured there.

if you’re offering competitive terms, competitive rates throughout the CD curve, you can pick up some activity at an attractive spread, especially relative to other alternatives.

If you can get some activity further down the curve, 12-plus months, like 18, 24 months, it’s a little bit harder to get growth there.

But your spread relative to treasury rates, to advance rates, to wholesale CDs might be really, really strong further down the curve.

So, thinking about being a little bit more competitive down there where some members haven’t even been making offerings at all.

So something to consider there.

And then also, say if you are going to go above market, you do have some really, really compelling lending activity or asset spread, and the activity that you can do that makes sense to go above market on a rate.

Do it where you have flexibility.

So maybe do it in a money market where you can go something tied to SOFR, maybe even SOFR Plus.

But then, once the Fed starts cutting, not only can you bring it down with SOFR, but as long as you don’t lock in that spread to SOFR or whatnot, you can bring down that rate more quickly than the Fed and get positive beta.

So keep in mind there, if you’re going to go above, maybe don’t lock it in long term, go above, but then have that retain that flexibility to bring down the rate as the Fed cuts or they don’t.

Yeah.

No, that’s great, Tyler.

And it’s the positively sloped yield curve can work in your advantage in terms of the and this dovetails into some of these approaches that we’ll talk about where the time to bet on lower rates is not when the market’s pricing in lower rates it’s when they’re not pricing in lower rates.

So we’ve talked a little bit about investment leverage. It’s something that we believe that is particularly attractive because you do have that positive slope as your friend so the day one spread is there.

And the ability to accelerate the repricing of the side of the balance sheet, again, tied together with your income simulation results, that if you really feel the pinch in the pressure of long rates going down, and we know from past cycles that long rates move before short rates, right? So there is the ability to see that happen.

So short rates are going to be dynamic and reactive to what happens to long rates.

And one approach, there’s many, many ways you can go about this.

But one thing that I have been a fan of for a while is that look at your expected cash flows, whether it’s P &I runoff, or even if you have the MBS portfolio, or if you have bullet maturities in your bond portfolio in any way, shape, or form.

The great flexibility afforded by advances allows you to tailor those.

So maybe you put on some leverage now, and you have maturities at six, seven, eight, and 13 months, because that lines up with what your cash flow profile rolling off is.

So you’re pre-investing or pre-replacing those yields, because here we are in an environment where, again, we’ve seen parabolic moves in intermediate-term rates.

And we want to be investing when things are attractive, not when we quote unquote, have to.

Again, keeping with that theme of the time to bet on rates going down is not when everybody in the market is pricing it.

I think there’s an awful lot of value in Floating Rate advances right now and being at the front end of the curve, because it’s going to be the cheapest rate on the board today if that is a focus.

Now, there’s no free lunches.

It’s subject to change, but a day one spread, as we call it, is going to be pretty appealing relative to some other alternatives.

And the reason why the Floating Rate advances, I think, make more sense than just simply being on the short end of the curve is you have term liquidity, where you may need term liquidity.

You have the ability to generate loans, or the deposit gathering is difficult.

In terms of the types and cost of the deposit gathering, it’s difficult.

But from a rate perspective, you don’t need or want to go out that far.

But the liquidity you do.

So that’s the way you can separate those two characteristics and meet your needs on one and meet your needs on the other in different ways.

And some of our advanced features, and we’re happy to talk more about it, it doesn’t lock you into the term. It gives you the ability to pay them off quickly.

And I’m a huge advocate of having that flexibility in your hands, the members’ hands, such that if rates do start to go down, not only do you get the repricing benefits, which is great, but what usually accompanies aggressive rates down and influx of deposits or slowdown in loans.

And an advance that goes from 4% to 3% is great rather than a fixed rate, but what’s even better than that is a 1% deposit.

So you want to maintain that flexibility.

And that’s something that we can learn from past cycles.

And lastly, we’ll talk about mortgages.

We all know the volumes are stressed from this backup at rates, but to the extent that you have some New purchase volume and mortgages coming in the door I would caution beats being tempted by the high sticker rates, right and as we talked about Where despite higher rates which should mean that that asset yield repricing is our friend right now We have seen prepayments.

So a six and a half percent mortgage today if we do see a pivot to 50, 75 basis points lower in rates, that loan will be here today and gone tomorrow.

So, there’s other ways to lock in better prepayment protection than a currently issued mortgage.

And to the extent that you have some locked up interest rate risk or liquidity risk, and you have some capital support that, we’ve been having more and more conversations with about season loan sales, taking some of the loans that you may have in the books from 2021 at 3% handles and selling them at discounted rates.

And again, depending on your concentration, your capital, there may be some merit there.

And I was talking with members of our NPF team just the other day in terms of looking at the spreads on the current coupons, right, where I think the current mortgage rate relative to the 10-year treasury is about 190 basis points or so, rewind about 15 months ago.

That was over 300 basis points.

And so I’ll end the presentation here by just saying that we all know we’re balance sheet managers.

That means we’re spread managers, not rate prognosticators.

So when we look at things, we’re looking at the spread.

We’re looking at that plus 190 relative to the plus 300 that it used to be, not just the sticker rate of, oh, great.

We’re at 650 when we used to be at 575.

So we manage our spreads, we remain nimble, and we keep chugging along and hopefully good things will come.

So that brings us to the end, a clean eight minutes over.

So thank you everyone so much. Hopefully there was something of value that you were able to get out of this.

And as always, you know where to find us and we’re happy to share whatever insights and resources that we have at our disposal to help you on day-to-day managing your balance sheet.

So enjoy the rest of your day. Hope the air conditioning is working. Go get some sun and we’ll talk to you all soon. Thank you. Bye.

Here in Greater Boston a summer-like day. So where else in the world would you rather be?

Hopefully your Wi-Fi extends to the backyard lounge chair, and you can multitask and enjoy the nice weather as and maybe learn a thing or two about The balance sheet dynamics happening right now. I’m Andrew.

This is Tyler Happy to have you with us for our peer analytics and balance sheet strategy webinar So as usual we will take you through three parts here.

We will discuss some of the happenings in the rate markets and the broader economy.

We’ll take a deep dive into key trends that we can take away from the first quarter call reports and then we’ll wrap things up talking about some actual strategies that we can put into place and things that we need to be concerned about.

So We’ll kick things off with a little reference here.

For those of you who may not know, this is from the Godfather 3 famous quote here, slightly tweaked to adapt to the banking industry.

Tyler’s got a lot of great traits and things that he brings to the table, but one of the things is that he doesn’t make me feel bad for getting older and having my references has become dated and dated and give quizzical looks.

So the fact that he can reference a movie from the early 90s, I believe, makes me feel a little bit better about that.

And just for full disclosure here, this is a very 2026 moment when everybody knows this is Al Pacino, right?

In my brain, I read Al Pacino as AI Pacino.

So that tells you where you know what’s on our minds in my mind these days, you know He’s only one of the most famous actors who’s ever lived but In any event hire for longer, you’ll see you’ll see will be a theme as we progress through the webinar here So let’s kick things off Talking about the markets and the economy So in last month’s FOMC meeting We had something that hasn’t happened in nearly three decades, and that is we had four dissenters, folks who disagreed with parts of the components of the convening of the Fed governors.

And as you can see, relative to recent months, that was an uptick versus the one, two, or in one instance, three members who dissented.

And there was disagreement about the forward guidance, about the decision to cut rates or not, a couple of months ago, when they held the rate steady, there were dissenters on both sides.

There was someone calling for a cut, and there was someone calling for a hike.

So there’s certainly a lot of balls in the air right now.

And we have a new Fed chairman, Kevin Warsh, starting, and Governor Moran, who was the consistent dissenter going back, calling for more cuts and more easing, which was certainly swimming against the tide of a lot of the folks who were voting members who were recognizing the changing tides in the economic landscape and the impacts of inflation, which we’ll get to in a little bit.

So certainly a very cloudy picture and not a lot of the governors on the same page as relates to the things that they have to dictate in terms of the direction of the economy and most importantly to us, interest rates.

So now I’d like to take a look on this slide what we’re doing here is trying to isolate the impact of the actual rhetoric coming out of the FOMC, the press conference, and isolating the impact of that on the curve by looking at, so what we’re looking at is the change from the day before the FOMC meeting versus where the yield curve is on the day after in basis points to try and isolate out some of those impacts of economic data.

And so what we see is that in both the March and April FOMC meeting, the front end of the curve did not really move very much from before to after the meeting, which is in line with what we’ve seen.

But the Fed’s really not projecting many cuts, if any, cuts in the next year.

So not much change on the front of the curve.

But we did see the back end of the curve, mid to back end of the curve, kick up after both meetings, 11 basis points in the middle of the curve, that two- and three-year area of the curve in the March meeting, and then five to seven basis points in the April meeting.

So I think that speaks to the market having a little bit less confidence in the Fed’s ability to maintain its longer-term 2% inflation target.

So we are seeing the long end of the curve come up a little bit on yields.

So when we think about the shape of the curve, we can look at it in a number of different ways.

Many of you have probably heard me opine that certain parts of the curve are more relevant to the depository balance sheet management than others.

This is showing over the course of the first quarter, as Tyler alluded to, that the movement was more pronounced in that two- to three-year range than it was further out the yield curve.

I think back to the webinar that Tyler and Caroline did a fantastic New England and U.S. economic update.

And there was a slide there that looked at TIPS, Treasury Inflation-Protected Securities, and the change in the yields there and what we can suss out.

And what we saw there was that the energy and inflation discussion that is happening right now and the impact that it’s ultimately having on interest rates and the economy was much more pronounced on that two- to three-year range.

So It’s not necessarily structural like what we saw in 2021, 22, where there was this explosion in money supply and all the after effects that come with that.

That it may be more temporary in nature.

It doesn’t feel like temporary when we look at some of the phenomenal movements in interest rates.

And again, just sent a note to our team to take a look at what’s happening to long rates today.

a parabolic move in five, seven, 10-year rates.

But it’s really been on the front end of the curve, and as Tyler alluded to, when we look at projections for rate cuts, and at the beginning we say projections for rate cuts, rate movements, because there really are no rate cuts projected.

The most current probabilities, looking at it when we’re in the green room a little bit earlier here was that there’s greater odds of a hike than when talking about by the end of this year. There’s greater odds of a hike, not versus a cut, but of holding firm.

I think it’s something, it’s about 60-40 that odds are skewing in favor of a one or two basis point hike versus unchanged, which is pretty incredible considering the last 18 to 24 months.

So we’ll continue talking about the yield curve.

And now this marks four slides where we’re talking about the yield curve, but we actually haven’t shown you a yield curve, which I think is, you know, impressive and sad in its own way.

But this is an interesting chart where we’re looking at the path of Fed funds, the effect of Fed funds rate over the last 25 years.

But the green dots signify where on the yield curve was the lowest rate.

So when it’s along the bottom, like we see for most of the time here, that’s when the curve is positively sloped.

And then when the green dots are very high, that’s when the yield curve is inverted, more so as it gets the green dots go higher and higher.

A couple interesting things to think about here is that one, as quick as the rise in rates was in 21 and 22, the move down in rates has been much slower than in the previous cutting rate regimes.

Not to mention that the pause at the top, which we’re all familiar with, was longer than what we have seen in past interest rate cycles.