October 2025 Liquidity & Funding Strategies for the Current Environment

So, for today’s webinar, my name is Andrew Paolillo.

This is Tyler, and we’re happy to have with us today Caroline Casavant, our most recent addition to our strategies team here at the bank. She joins us as a senior financial strategist.

We’re excited to have her and add her to the team. The plan for today is we’re going to go through a couple of different things. Caroline’s going to kick things off and talk about the broader economy in the market and what’s happening as the Fed is. I don’t know if everyone’s heard. Still, interest rates and short-term interest rates were lowered last month. So we’re going to take a look at what that means and what may be on deck. Looking forward, what may be some of the impacts on depository balance sheets as we think about liquidity and funding? Tyler is going to look at the loan and deposit growth. It’s an interesting presentation, looking at some broader economic data. Also, looking at a trip down memory lane and looking at what has happened in previous interest rate-cutting cycles. But then also wrapping it all together, certainly as we sit here in the fourth quarter and look at budget expectations and what next year may bring?

Where loan and deposit growth may be, and then I’ll pitch in a little bit here at the end, talking about a couple of different funding ideas, tying together some of those macro and micro forces, and some ideas that stand out to us that may be particularly interesting.

So with that, we’ll pass it over to Caroline, and she’s going to take us through the impact of the end of quantitative easing. Thanks Andrew.

Hi everybody, as Andrew mentioned, I’m new to the team. I’m Caroline. I’m very excited to get to know you guys better and work with you more.

And what I’m planning to do today, oops, sorry, getting the slides set up here.

Move towards the screen. Sorry. We told you she’s new.

I am new and apparently not very good at clicking buttons.

So you should be good now. Okay.

So what I’d like to do first, we’re talking about markets, is begin with an update on monetary policy and what the state of the yield curve is, and briefly talk through the major contributors to what the FOMC makes its decisions around, which are inflation and the labor market.

And then I’d like to talk a little bit more about quantitative tightening. So we spend a lot of time talking about interest rates.

I think another thing that’s important for managing balance sheets when you’re so dependent on the state of interest rates is thinking about volatility and interest rates.

And QT and QE are one of the major contributors to thinking about vol.

So I want to give you an update on where we are with QT, where we may be going, and what that should mean for how you’re thinking about your balance sheet.

And then lastly, I want to just walk through a few advanced options that are available at FHL Bank.

That might be a good solution for you, depending on your views on QT.

Okay, so just to get us kicked off, as an update on where we are with the FOMC, at the most recent FOMC meeting in September, as you all know, the FOMC cut interest rates by 25 basis points.

This was widely expected, and generally, the FOMC signaled that we’re going to have more interest rate cuts to come.

That message has been repeated in the FOMC minutes and also in Chair Powell’s remarks earlier this week.

If you dig a little bit deeper into the SCP, the Summary of Economic Projections, we had one descent, which was from the new joiner, Governor Moran, but we generally saw a move downward in the path of interest rates across the committee.

So the change in the medians that you see in the SCP cannot be explained by the composition of the committee.

We just saw generally more consensus expectations for lower rates.

And the table here shows the actual federal funds rate projection came down 30 basis points for this year, 20 basis points for next year, and 30 basis points for 2027.

We also saw some changes in expectations for growth, for the unemployment rate, and for inflation.

Generally, expectations for growth were a little bit higher.

Expectations for the unemployment rate came down a little bit despite elevated concern about the near-term outlook for unemployment, and expectations for inflation came up a little bit for next year. So let’s delve into a little bit more about inflation and unemployment.

If you look at, well, if you look at the Treasury curve, right, this is consistent with the idea that we’re going to get more cuts.

So right now, the cheapest point of funding on the Treasury curve is around the three-year point between the two and three-year points.

And over the course of this year, interest rates have generally come down, particularly at that two to three-year point in the curve.

So what this is telling you is the market is pricing an expectation for the Fed to deliver on the rate cuts that they’ve promised, and for us to see rates trough about two years from now and as you’re thinking about funding solutions you might consider whether or not it makes sense for you to extend funding a little bit further out the curve if you can and you’re able to able to extend your funding.

Okay, so turning to the labor market, and as I mentioned, Chair Powell spent a lot of time at the most recent press conference highlighting some greater risks to the labor market than the committee has flagged in recent months.

We don’t have the most recent employment report because of the government shutdown.

So what we’re looking at here is the September report.

The September report showed an uptick in the unemployment rate and a decrease in average hourly earnings.

So all of those things are consistent with a weaker labor market.

Perhaps most important, the top-line job gains were only 22,000, which is a lot lower than was expected.

Consistent with that, we’ve also seen an uptick in jobless claims.

But the chart that we’re showing here is actually not from a particular print.

It’s showing the BLS revision to the job gains from April to March from 2024 to 2025.

This print in September, but the reason that it’s so important is that it showed that what we had previously thought was a really material, almost 2 million job gains ticked down to 850,000.

So what that’s telling us is that if you believe the revisions, you have actually had a weaker labor market for the past year than we previously thought.

And that’s going to make the FOMC more concerned about the outlook for employment going forward and more likely to cut rates, all else equal.

But the tricky part of their job is that if you turn to CPI, CPI remains pretty elevated.

And so if you look at CPI, core CPI, sticky CPI, all of those things are still well above the Fed’s target.

And in many cases, some of them have ticked upwards, but what I really want to draw your attention to is the fact that it’s not just that inflation is above target and stuck there, the actual subcomponents of inflation are suggesting that the sources of inflation are more diversified.

So for a long time, the story that was being told, including by some members of the FOMC, was, okay, inflation is above target, but it’s okay because it’s really coming from services and even more specifically from shelter.

And if you look at that one print separately, you actually have a narrative for inflation that looks pretty good.

This chart here is showing you the CPI subcomponents over time, and I flagged food, shelter, goods, and services ex-shelter.

And the key thing to note is that for a long time, goods were actually a source of disinflation, meaning that it was either in negative territory or very low, and therefore offsetting some of the inflationary impacts of the other components of That is no longer the case. It’s trended upwards, which may or may not be related to tariffs.

For now, the committee’s talking about the impact of tariffs as probably a one-time price adjustment to CPI, but noting the risks to the upside.

What this means is that you’re not only going to have inflation potentially above target, but there’s some risk that you’re going to have more persistent and more diverse inflation, which is harder to get down over time.

So that leaves the FOMC in a real bind in terms of looking at the two sides of the dual main data.

Okay, we spent a lot of time talking about interest rates.

The other thing that I think is really important and going on behind the scenes is that we’re getting changes, potential changes in the coming months to the Fed’s quantitative tightening program.

So just to give you a big step back, if you’re not used to thinking about quantitative tightening, which most of us don’t, the Fed, as you know, bought many assets on their balance sheet as a result of various crises, first in 08 and then also in COVID.

The assets on the Fed’s balance sheet peaked at 8.9 trillion in 2022.

This is, after all, the COVID purchase programs.

And since then, they’ve been running off the balance sheet by doing this thing called reinvesting into the caps.

So what that means basically is that they take the securities that are maturing, and they reinvest them only to a certain limit.

So the net impact is that the holdings on the balance sheet decline over time.

And this chart’s just showing you treasury and MBS securities held by the Fed over time.

We have reason to believe that the current QT program, running down the balance sheet, might be ending in the coming months.

So right now, to implement monetary policy, the Fed has a framework where they use different interest rates outside of the effective Fed funds, Fed’s rate, to control the Fed funds rate.

So, for example, ONRP and IOER are both tools that are part of this corridor framework to control the implementation of monetary policy.

In order for that to work, they need to have what they call ample reserves.

So right now, they talk about the reserve regime as being abundant, right?

Banks have tons of reserves; there’s no incremental demand for reserves, and that allows them to very effectively implement monetary policy.

If you reduce the balance sheet too much or too quickly, you can have basically outsized demand for Fed funds, which can make it really hard to implement monetary policy.

So the Fed’s trying to do this job where they want to reduce their holdings, particularly their MBS holdings, but they don’t want to reduce them so much that it becomes difficult to technically implement monetary policy.

So the question then is, okay, when do we get to a regime where we have ample reserves, and we start worrying about implementing monetary policy enough that you need to stop QT?

This data here is from the survey of market expectations, which the New York Fed conducts before every FOMC meeting, and it asks primary dealers and then also large market participants to forecast when they think QT might end.

And what you’re seeing here is that the median participant is talking about January of next year as a time when QT might stop.

Similarly, in the most recent FOMC minutes, the Fed started talking about reserve levels with the framework of talking about Q1 2026.

So there’s been no formal forward guidance; we’re not sure, but this might be changing sometime in the near future.

Okay, so another thing I want to flag as we’re talking about this is that I mentioned that the Fed’s reinvesting up to a cap.

The cap for treasuries is 60 billion a month, and the cap for MBS is 35 billion a month.

But in practice, the Fed’s actually only been able to reduce its mortgage holdings by something closer to 20 billion a month rather than 35 cap.

This graph shows the 35-cap relative to the actual change in MBS holdings over time.

And this is mostly a function of the composition of mortgages that the Fed holds.

So those of you who hold a bunch of mortgages or have issued mortgages know that if you’ve issued a mortgage with a two or two and a half percent coupon, that’s not prepaying right now, right?

Because the move in interest rates has made those securities much longer.

Similarly, the Fed holds a bunch of mortgage coupons that are in the 2.5% to 3% range.

Those things have extended in duration, and therefore, the Fed’s not getting enough prepayments to even hit the cap.

So if you look at this slide, we know that the Fed has about $2 trillion in MBS holdings.

If you’re actually running that down at $20 billion a month, you’re talking about basically eight years until you get rid of these MBS holdings, which is not ideal because we know that the Fed wants, ultimately, to hold mostly Treasuries.

What this means is that you could see a world where you see QT end for Treasuries, but you see an extension in the mortgage part of QT, or you see some reinvestment of mortgage prepayments into Treasuries to change the balance sheet composition. Okay, so why does this matter to you?

This all sounds very technical and economic.

One thing that I think is really important is that there may be a relationship between QE and QT and the volatility of interest rates.

So anytime I talk about something like this, I want to have a lot of humility because the data is not super clear, right?

We’ve only had QE and QT for 20 years now, and they are always occurring amid really unusual economic circumstances with a lot of confounded variables.

So any statistics professor out there would be horrified if I told you with certainty that there’s a relationship here, but both theoretically and in practice, we do see a relationship between interest rate volatility and periods of QE and QT.

So the way that this is supposed to work in theory is that when the Fed’s doing QE and buying things, the volatility comes down because there’s an incremental buyer, right?

When the Fed’s doing QT and reducing the balance sheet, all else equal, you’ve lost that incremental buyer, and therefore volatility is higher.

And we do see this play out in practice.

So what I’m showing here as a proxy for vol is the rolling 30-day standard deviation of a 10-year treasury yield.

And it is generally the case that volatility is higher in periods of QT than in periods of QE.

Again, not certain causation, but that fact is true.

So what might that mean for you?

As you’re thinking about managing your balance sheet, you’re probably concerned not just about what the level of rates is, but also what interest rate volatility is going to be.

Because that matters, for among other things, the extension of loans that you might have, but also for thinking about managing your own risks.

What I would suggest is you might consider, if I were managing a portfolio that had a lot of exposure to volatility, I’d be thinking about whether or not the end of QT might result in a period where you’re actually going to have a decrease in volatility.

So if you think that the impact is going to be real, you could consider an HL Bank option advance that allows you to either buy or sell volatility, depending on your view on how this is going to impact the market.

So if you think that the changes to QT will have no impact on volatility beyond what’s already in the price, you might consider a member option advance where you then hold the option, and you’re effectively in a position to continue retaining the loan even if you think that QT doesn’t actually matter.

If you believe that the end of QT will actually depress volatility, you might consider an HLB option advance.

And I’m going to spend the next slide walking through how each of those works and what it might mean for your portfolio and the risks.

And the last thing I want to flag is that if you have a lot of mortgage exposure and you think that MBS QT will stop with Treasury QT, you might want to consider MPF.

These things aren’t exactly apples to apples because where the Fed is buying mortgage-backed securities, FHL Bank Boston buys the actual mortgage itself, so the underlying loan.

But if you are thinking about what to do with new mortgage origination, you might want to bear in mind that we do have a program here for buying mortgages.

So, just getting into these option structures in a bit more detail so that you understand what they are and the risks around them.

The biggest thing that I want to flag for you is that if you take an HLB option advance, there’s less cost upfront, but it’s important to understand that you’re only locking in funding for the agreed-upon lockout period.

So, with both a member option advance and an HLB option advance, you can make the terms bespoke, but basically, you’re going to have a lockout period where the funding is guaranteed, and then after that lockout period, for the duration of that advance, the loan can be called, or the advance can be called by whoever holds the option.

So what I’ve mocked up here is if you have a three-year advance with a one-year lockout period, and I’m showing you an HLB option advance, which is the green line, a member option advance, which is the blue line, the current shape of the treasury curve, what a fixed rate advance looks like, and then the periods where it’s exercisable.

So what I really want to flag for you is that this is pricing as of October 1st.

The fixed rate advance, as you can see, pretty closely follows what a treasury curve looks like.

And you can see, you know, what the cost of funding is going to be for the duration of this period is really closely predicted by what the treasury curve looks like, plus the spread.

If you take a look at the HLB option advance, it’s the cheapest source of funds, right?

It’s materially less expensive than the fixed-rate advance.

But the problem is that that is because the bank, the FHLBank, has the option to call that advance if interest rates move higher in a way that it’s advantageous for the bank to call the advance.

The opposite is true for the member option advance.

It’s more expensive, right?

But if interest rates move in a way that would be advantageous for you to call the advance, you can do that.

So, you might want to consider if you’re running a balance sheet, do you have the capacity to have uncertainty about funding for these terms, and do you have a strong view on where volatility might go?

Does it make sense for you to sell or buy options at this point, given what might happen with the Fed’s balance sheet?

And with that, I’m going to turn it over to Tyler, who will go into a little bit more detail.

Thank you, Caroline, for those economic insights.

So, with us entering budgeting season, I think many of you may wish that you had a crystal ball first to predict the next Powerball combination, but then also to predict where loan and deposit growth go from here.

I think we’re entering into an easing cycle that we’ve been expecting since just about January of 2024, and it finally looks like it really is going to come to fruition.

And so, with that being said, I think a lot of people are expecting loan growth to start picking up, pricing pressure on deposits to start easing.

And so with that said, let’s look at some structural dynamics and some historic analogs to see where things may go from here.

So I’d first like to look at a couple of measures of affordability.

I think many of us know anecdotally that New England, the housing stock is just exorbitantly expensive, but let’s put some numbers behind that trend.

I think some of the reasons behind the affordability that we’re going to take a look at are just 400 years of buildup in New England, not my backyard zoning laws, and really a red-hot jobs market between the biotech, tech, and education.

This confluence of intense supply constraints and competition for that supply has driven up prices in a way that’s really notable.

And so we’ll first take a look at the top left panel.

So this is the affordability index for New England.

And this is a HUD measure where being below 100 on the index is considered unaffordable and being above 100 is affordable.

And so what we see is that over the past 20 years, New England has essentially never been affordable.

There was a very brief period when rates got really low during COVID that it touched affordability.

But other than that, it’s been out of reach for most people.

And then, looking at ex-New England, so the rest of the country without New England, it’s largely been affordable.

And it’s only been since COVID that we’ve seen that housing stock fall out of affordability.

And then looking at another HUD measure, the median, a share of income needed to buy the median home in that area, and so for New England, we see that it’s actually never been below the 30% benchmark for affordability over the last 20 years. But then nationally, it largely has been affordable.

It was only during the housing boom during the great financial, lead up to the great financial crisis, and then since COVID that nationally things have become unaffordable.

And just some added color that we didn’t have time to look at, as far as it’s sharp, but rent-to-own ratios are really difficult in New England.

So not only is the housing stock incredibly unaffordable, but say in Boston, to buy the median home, you need $190,000 of yearly income, assuming 20% down and 30% income going to the mortgage, versus only $120,000 to rent.

As you get further away from the metros in New England, it gets a little bit more affordable.

There are actually some main counties like Waldo and Penobscot where renting is more affordable, but these are some real structural barriers to people jumping into the housing market.

And I’d like to take a look at another couple of trends.

I’ve heard this being talked about in Bloomberg and some other places, kind of an in-vogue subject, is that younger generations really aren’t getting into the housing market in the same way, but they are getting into the stock market in a much more meaningful way

And so what we’re looking at is on the top left, sorry, on the left side, looking at homeownership by age across the northeast, what we see is except for the above 65 age group, every single age group has seen their share of homeownership across their age group decline, especially those younger groups, the up to 35 and the 35 to 40.

And this is across this entire period; the average mortgage rate has declined.

So this really speaks to the incredible unaffordability that we see, especially in New England, not only is the housing stock unaffordable. But say, for example, if you need to put a new roof on, that’s probably half of median area income in most places. So with that being said, many people are getting into the stock market in a much larger way. One of the kind of implications of this is for deposits.

You know, a lot of young people are less akin to go into say CDs and invest with the local bank, they’re looking towards, you know, to make for some of those gains that they’re losing out in the housing market, in the stock market.

And so I think despite the rates dropping, we might see some funds come out of bonds and other fixed income.

I do think this younger generation, that propensity for stock does kind of lend itself against deposits really becoming easy.

And one other point on that is that if young people aren’t coming into their local bank for a mortgage, often that’s the first time that they interface with a regional bank, which makes it a lot harder to cross-sell them on those deposit products.

I can’t help but notice, Tyler, the relationship between the youngest demographic there and the oldest demographic really taking off to the moon there, so the less than 35 and the 65.

So kind of chuckled at that one to see that the youngest folks and the oldest folks are really diving both feet into the stock market over the course of decades, not even just a recent phenomenon. Absolutely.

I thought you had a good point too, after watching the community banking from the Fed, where you were talking about the fact that young people actually might find affordability better working with regional banks, right, too?

That was an interesting point that you made. Yeah, exactly.

So hopefully we can see them get back into the housing market, especially with their regional lenders.

And so now we’re going to take a look at the distribution of mortgage coupons within mortgage books over the last 10, 12 years across America, American regional banks.

What we see is that the share of mortgages above 5% was 80% going back to 2013.

And then that kind of ticked down, well not ticked, it kind of rapidly decreased to the point where in 2021, mortgages below 4% were 80% of mortgages.

And so since then, while we’ve seen the 6% coupon bucket increase, we’ve really seen no movement in those lower coupon buckets.

And I think the reason for that is this lock-in effect.

The idea that the present value of those lower coupon mortgage rates is such that it doesn’t make any sense for anyone to give that up, despite the incredible equity that’s been built up in those houses over the last few years.

If they give that up, they can’t afford to buy anything because they’d be giving up that low rate.

And so what this suggests is that while we might see more growth, we’ll continue to see growth in that higher rate bucket, and that will increase as a percentage of the total book.

Those lower-rate buckets, those vintages from years ago when rates were lower, they’re not going anywhere.

Unless rates really materially come down, those aren’t going to come off the books.

So, something to consider is maybe selling some of those high-coupon ones that you’re adding to the books right now, sell those into MPF, get that non-interest income locked in before they start to prepay, and also consider maybe selling some of those lower-coupon ones before they fall into that prepay area.

But so now with those kind of structural dynamics that we’ve looked at, let’s look at some historical cases and see what that tells us about where loan growth might go.

So what we’re looking at here is some analogs of falling rate environments.

So we’re looking at the 30-year mortgage rate and then one to four family loan growth. And this is looking at all member banks.

So we’re looking at median growth for members for the one to four family category of loans.

And the chart starts, each of these charts starts on the left with the peak in mortgage rates, and then they end with the following peak in loan growth.

And so what we see is actually that as rates fall, there is a little bit of an uptick in that initial falling period where growth is strong, but as rates fall, growth actually falls off. And the reason for this is prepayments.

For everything that you’re putting on, it’s just going right back out the door in prepayments.

And so we really only get a real accretion in the size of the loan book and real material growth after the 30-year mortgage rate has bottomed out.

Generally about five to eight quarters after that, after the bottom in mortgage rates, just where once mortgage rates have bottomed out, you don’t actually have to see that heavy of origination volume to see loan growth is because prepays essentially go to zero once rates start to rise.

And then we’re going to take a look at the next slide.

similar look but just for the credit union and same thing as rates drop you really see that kind of initially that growth stays strong and then it really falls off and then it’s only once the 30-year mortgage rate is bottomed out the reason for the fewer of nets on this side is just that there’s a the data does not go back as far on the credit union side on those call reports but the difference we do see here is it’s actually even an even tighter period between where when mortgage rates bottomed out it’s actually about three to four quarters later on the credit union side that we see those a big jump in, in loan growth.

And then we see, you know, since then on the right side, that one goes out all the way to 2025.

We’ve actually seen some negative growth in this really high-rate environment.

So now we’re going to take a look at the commercial real estate side.

And what this chart is looking at is essentially if we were to combine all the member banks for the Federal Loan Bank of Boston and combine their commercial real estate book and look at it as one big bank, and then look at the quarterly growth in that book, but annualized.

And so what we see is that there was a relatively normal growth period that kind of ramped up through 2021 Q2.

We ran about 5% combined annual growth rate in the commercial real estate book.

And then we saw this, frankly, parabolic growth takes place, especially in 2022.

And that was, if you notice, that’s when, or if you recall, that’s when rates really started to rise.

I think that first hike was maybe July 2022.

And I think what happened here is real estate developers, the commercial real estate saw the train leaving the station, and they hopped on in a big way.

I mean, I think what we saw here is maybe three years of growth combined into three quarters. I mean, there was 50% quarterly annualized growth in Q2 2022.

I mean, just shocking levels of growth.

But what’s the implication of that for future growth?

Well, most of these are five-year balloon, sometimes seven, ten-year, with much longer amortizations, with a bullet at the end of that structure.

And so what tells us is that we’re really not going to see much growth until late 2026 and then really into 2027 and 2028 is when it’s going to really pick up as those all come due, because rates likely aren’t going to get low enough before now and then for any prepayment to occur.

So there’s a couple implications for this as far as where rates are when we hit that, when that wave hits the beach, so to speak, in 2027 and 2028.

If we have, say, a hard landing, well, it’s going to be a little bit less secretive to NIM.

Those rates are going to reprice a little bit closer to where they were when those loans were initially written in that low-rate environment.

So less secretive to NIM.

And also, we’re probably in a lower-growth environment, if that’s the case.

And economic conditions might be a little bit weaker if the Fed eases.

And so, but one upside to that, if it’s lower rates, is that debt service coverage ratios will be under a little bit less pressure versus, so if we get a soft landing, much more creative to NIM, at least you’re going to reprice at a much higher rate, and in that case, it should be that credit’s relatively strong, economic conditions are strong, but something to keep in mind is that as these loans that were written in this very low rate environment are now repricing potentially much higher, it’s going to put a lot of stress on debt service coverage ratios, something to kind of proactively watch as we get into this repricing wave.

So now let’s take a look at the deposit side, kind of see what historically has happened there.

I think the story on the deposit side is a little bit simpler.

So as rates fall, we see growth pick up, you know, pretty much in block steps to some extent, but where it really takes off is generally when we get towards a zero lower bound. You see that, just also, you know, parabolic growth that can happen when rates get near zero.

And so, as we covered in our last webinar, the chances of approaching zero lower bound are not great at the moment.

I think generally the historic trends that we see here, this being, sorry, the daily Fed funds rate compared to a deposit rate across member banks.

And what it suggests is, yeah, it’s going to, you know, pressure is going to be a lot lighter as far as fighting for deposits.

Growth, as we see here, suggests that it’s going to pick up.

But then also, just the trends that we’ve covered as far as loan growth probably not taking off anytime soon.

The type of growth that we’re expecting in the next few quarters suggests that that fight for deposits to fuel loan growth is going to be a lot less salient or a lot easier because it’s not going to be like 2023 and 2024 where banks are going well above market to fund that loan growth that they did in 2022.

So it should be a little bit easier on that front.

And that segues us into the deposit mix.

Well, actually, sorry, can’t forget the credit unions.

And so we’re going to take a look at the same measures on the credit union side, very similar story.

Loan growth and deposit growth really pick up as the Fed funds rate drops.

And we see that, so in the bottom slide, we go all the way out to the current most recent quarter, Q2 2025, and we’re starting to see that growth pick up.

So we’ll see as rates kind of continue to come down if that continues to materialize.

And then finally, as I mentioned, take a look at the mix between term deposits and regular non-term deposits.

And so there are kind of two trends at play here, both a cyclical and a secular trend.

And so we see, going back to the early 90s, it was actually almost 50% of bank deposit books were made up of CDs.

And that has, over the past 30 years, just kind of consistently declined.

We have longer-running data on the bank side versus the credit union side, but a very similar trend there.

It’s declined pretty much throughout the period.

That one spike there on the bank side during 2010, the classification for jumbo CDs went from 100,000 to 250,000, so the bucket increased, but that’s all that happened there.

So as we see, the preference for CDs is going away, but when rates rise, they become more attractive.

So we’ve seen that play out the past few cycles, and we’ve seen it play out in this cycle, where, and I’m sure many of you have experienced this, CDs have become a much larger percentage of your deposit books, cannibalizing many of your lower-cost deposit products.

And so while there is a lag on that, and it will probably continue for a little bit longer, as far as consumer preference, we should see a lot of the pressure as far as people cutting out that the highest rate CDO that the new taper clipping and bringing that to the branch, that kind of activity will probably subside as we get into lower rates, which just becomes less salient to fight for a higher rate when the overall rates are so much lower, or your only incremental spread that you’re getting by shopping around for CDs becomes much more limited.

And so what are the takeaways of both the structural and historical trends that we’ve looked at?

So residential loan growth likely stays constrained in the near term, just based on what we’ve looked at historically, and then also the New England-specific structural factors that really are going to keep a lot of people, especially young folks, on the sidelines.

I mean, the average first-time homebuyer is now up to 38 years old, so while we might see some pickup and origination volume as we see loan rates tick down, we’re not going to likely see material uptick in the size of one to four family loan books anytime in the near term.

And on the CRE side, commercial real estate, as we covered, it’s really going to be that 2026 last quarter and through 2027 and on to 2028 when we see things pick up, and we’ll be good to keep in mind credit and NIM and the implications of that based on where things land. On the deposit side, things are looking for a little bit rosier there.

Pressure is going to come off, especially if loan growth is really weak.

Well, that helps on the deposit side.

So you can look forward to some, you know, creative NIM trends on the deposit side.

And then finally as we just covered in that last slide the deposit mix is favorable both the cyclical and secular long-term trend and the short-term trend is in the favor of deposits moving back into those low-cost those deposits that you really count on and we’re going to move on to Andrew for some strategies help manage all those trends well thank you Tyler cyclical and secular that’s a we’re not going to ask you to say that ten times fast but you landed the plane on that one so you know Tyler said he doesn’t have a crystal ball but we do have the benefit of So, when we think about, we wake up every morning, you know, what risk are we thinking about for our balance sheets?

And when we go back over the last couple of years, at various points, with this simple matrix of short and long-term rates and rates increasing or decreasing, we’ve been in, I think most People have been in a different quadrant in terms of what is the pressing risk.

So for a period of time, we didn’t realize it, but long rates were higher.

The velocity at which rates rose when they began to rise really took folks by surprise.

And then as long rates started to settle in, it was short rates higher, which was the front and center risk as the deposit lag, pricing lag started to wane a little bit.

But as we sit here in the fourth quarter of 2025, both as we look at things quantitatively for the First National Bank of Andrew Tyler and Caroline, it used to be Andrew and Tyler, but we had some merger and acquisition activity, rebranding.

So I think, and then qualitatively from discussions with members all across the district, it’s lower rates.

That is the big risk right now.

Because we have started to see, and we looked at this in our peer analytics webinars in the last couple of quarters, the margin trends have been positive.

We have tailwinds there, and that’s really driven by the deposit book, the deposit cost; we’re not feeling the same pain that we had one to two years ago in terms of the pricing catching up.

But now we’re in this situation where even though a soft landing is more or less priced into the market, the asset repricing is really, we have this generational opportunity to add loans and investments at rates that we haven’t seen for this sustained period of time, really, since the turn of the century.

So here’s a look at some peer data looking at investment yields.

And we can see, looking at the median as well as the 90th percentile for the bank and credit union sides. And we’re starting to see things plateau out now.

And that’s the beautiful thing about fixed income insurance, and I’d include everything that’s on the balance sheet under that umbrella of fixed income, is that every day that the calendar flips, all our SQL gets a little less risky because we get one day closer to maturity.

So Tyler talked about the CRE that we pulled forward three years’ worth of growth into a couple of quarters.

Certainly, there were a lot of similar stories on the investment side, a lot of zero handle and 1% assets that came on board, the passage of time is allowing that to naturally and organically roll over, which is a big relief.

But we can’t lose sight of the fact that if things start to drift lower, and we have, as Caroline showed with the treasury yield curve chart, the long end of the curve has come down, and the intermediate part of the curve has come down.

So, we’re seeing lower reinvestment and redeployment rates than we had been able to capture earlier in the year.

But I think in the aggregate, things are still relatively appealing and attractive.

So the slope of the curve is arguably the key thing when we think about balance sheet management.

So, here’s a look at three different combinations of the slope of the curve.

If you’ve been with us before, you’ve heard me up on the soapbox talking about, you know, you listen to the financial press and they say, oh, the slope of the yield curve or the steepness, and they look at two tens.

Well, that means nothing for a depository institution.

It’s a much more nuanced discussion.

So when we look at the three months to one year, that’s a decent enough proxy for what the near-term expectation is for what is going to happen with short-term rates.

Will the Fed cut? How much will they cut by?

And as you incrementally move out the yield curve, it’s less about using the crystal ball about what the Fed is going to do.

And there are other things, there’s supply and demand, and then the long-term inflation that comes into play.

But we have seen a deepening inversion at the front end of the curve.

More cuts are getting priced in. We’ll talk about that a little bit more in a little bit.

The one to five year started to maybe move from inversion to a positively sloped yield curve.

Most depository balance sheets probably love a little bit of a positive slope between one to five here because that’s that age old fund short, lend long, and we can earn our spread on top of that and you can do some arithmetic and when we’re not in negative numbers there on the one to five here, what’s going to flow through to NIM is going to be essentially the spread on the loan that you’re getting.

The interesting thing here, in terms of you know, skidding where the puck is going or what risk is?

Front and center is what’s happening all the way up top in the dark blue of the five to ten year, and I think that is in line with the persistence.

I’m not going to say Non-transitory to use a throwback word, but the persistence of inflation that is continuing to remain in the economy.

And again, as we said, as we look at the longer ends of the yield curve, it’s less about predicting what the Fed is going to do, that to the extent that market participants think that inflation is going to be sticky or future treasury issuance is going to be heavy on the long end that may keep rates elevated, it creates some opportunity for asset extension.

So let’s look at three ideas.

So long story short, I think we have this opportunity if your liquidity, interest rate risk, and capital profile allow you to extend your assets, extend your assets with prepayment protection.

Tyler talked about those current coupon mortgages.

Great in theory, high rates, we didn’t look at the spreads, but even that spread has been widening between the mortgage rate and the long-term treasury rate.

So as spread managers, we’d like that idea.

But we all know, here today, gone tomorrow, in terms of the mortgage and the ability for the borrowers to prepay.

So, looking for assets that provide prepayment protection is invaluable.

So we’ll go through three different ideas that I think are interesting to us.

Again, if you have the interest rate risk, liquidity, and capital risk profile to support that.

So one thing that we are looking at here is the idea of adding a longer-term asset, you know, let’s call it a seven-year average life, assume it’s a mortgage-backed security where it’s going to prepay.

And we build the simplest of all simple ladders, where we have some bullet funding at 6, 9, and 12 months. And then we also have a component of short-term funding.

We can call that overnight funding or one or three months. It’s really not super important.

So, back of the napkin, that gets us to about 4% right now.

So if you’re thinking about investment opportunities in the high fours.

Not quite to that magic hundred basis points of spread, but there’s some opportunity there to earn some spreads.

But it’s less about the spread that we can earn on day one, but it’s what the spread may be in the future state, especially if that future state involves rates going down, right?

Even to the extent that what is priced into the curve, but even more of a hard landing.

So the reason we want to tilt our funding short is because, and I chuckle when I say this, because you know what?

The best thing that you want to have happen is to be one of those six, nine, or 12-month advances that mature, so you give it right back to us, and you don’t need to fund it.

And I hope it’s because you have deposit growth exploding, not because loan growth is driving to a halt, but that is a consideration as well, right?

If we do see an economic slowdown, naturally, we’d expect to see loan growth cooling off, and we’re going to be kicking ourselves and saying, Why didn’t we put on more assets when we could?

A couple of technical things here, our community development advance programs are easy to qualify for and allow you to save an additional eight to 10 basis points versus the rack rates that you may see.

Another idea that we talk about a lot with folks is again talking about some of those assets that we put on in 2020 and 2021.

You bought a five-year treasury bond in 2021 because you threw up your hands and you said, “I can’t deal with all this excess liquidity anymore. Well, congratulations, the end is near. So that’s 0% advance.

So maybe you think about, rather than just the six, nine, 12-month ladder, you look at your bond portfolio, and look at where you have maturities.

And that’s the beauty of advances.

You can get a seven-month, three-week, and two-day advance if you so desire.

So maybe pairing some of those chunky investment maturities with the investment ladder, and you’ll be in pretty good shape.

Well, the previous idea assumes that you’re tight-ish on liquidity, and you would need the funding in order to go out and buy the bonds and produce some spread.

Let’s just say you’ve been surprised by deposit growth in the last couple of months, so you’re sitting on some cash.

Or the loan pipeline has slowed down, whether it’s because of the supply side or the demand side.

And we have heard and seen both of those things, right?

members proactively slowing down the spigot a little bit because they think that we’re going to see some bumps in the road, but also in certain geographies and certain industries, the demand has really tapered off.

So maybe you do have some liquidity to go out there so you can buy the bond.

But you know what, taking asset duration, there are some scars from maybe two or three years ago, we want to mitigate that a little bit. And I don’t need funding.

Well, I think the forward starting advances, where you can delay the disbursement for a period of time, are very attractive, especially as we think about the idea that, as we talked about earlier, more cuts are priced into the market.

So we won’t go into how fixed income arithmetic works, but when the yield curve is inverted, the forward rate is going to be cheaper than the spot rate.

And we start to see a little bit of that here.

So you can hedge interest rate risk, and you can capture what’s priced into the yield curve today, but the funding can kick in at a future date.

We’ve also seen people use the forwards to pre-replace term funding.

So whether that is the increase of CDs and term deposits on the books, but it’s also advances.

Say you have an advance coming due in six or nine months.

And you’re saying, you know what?

I like where the levels are right now.

I want to pre-replace that.

Well, you can absolutely do that with forward starting advances as well.

Again, the Community Development Advanced Program is eligible to be used for forwards.

It’s another way to shave off 8 to 10 basis points, which is not bad, right?

So the last idea that we’ll talk about here, as Caroline mentioned, HLB options, where you sell the optionality.

Again, something we all should be familiar with because you sell optionality in the loan portfolio.

You sell optionality in the deposit portfolio.

So the cheaper funding gets you to where you can, again, you can cross over that arbitrary magic level of 100 basis points of spread.

So when you look at the green line there, seven-year final maturity structures in the low threes.

If you can get assets out of the high fours, you could get the 150 basis points of spread.

You gross that up to think about it in a return on equity context.

And that’s pretty darn good.

That’s mid to high single digits, depending on how much capital you have on your books there.

So that can be very, very supportive of earnings trends.

And then even if that extends and the funding extends because we do get the hard landing, well, that funding will stay on the books. But we don’t look at things in isolation, right?

We have assets and we have liabilities and the people on this call your job is to the juggle them both so You know that that captured spread will retain as long as we’re properly structured on the assets and the liabilities and we can Assist you in that and the other thing that I’ll point out is if you’re of the belief, and this is about marrying balance sheet strategies with economic expectations.

If you think that, put it all on the pod and we’re going to get to a soft landing, look at where the nominal rates are on some of the longer structures here, 3%.

So if you think we’re going to get to Fed funds at 3%, the economy is not going to be due for another one of these hundred-year storms that happen every six years, then where is the short-term alternative rate going to be?

Our short-term overnight rate is usually 15 to 20 basis points above where SOFR or Fed funds are.

So if you think we’re only going to get to three, you’re saving money right now with those low 3% coupons, and even in that future state, you’re still right on the mark there.

So you’ll have saved money all along the way, and you don’t technically get underwater. So that brings us to the end there. Only six minutes over.

Okay, I think that’s probably in the median in terms of the summary of strategies, webinars, and overages.

Six minutes over is not so bad. But thank you to all of you out there.

As always, these are great to do.

And if you have anything that we can be of assistance with, oh, on the public service announcement, you may have seen an email go out for the CEO CFO Roundtable coming in November, one of our most popular and well-attended events.

So if you found that in your inbox, if you saw that come through in the inbox, it’s here in Boston in a couple of weeks. It’s a great event.

You can connect with peers and discuss and vent about things that are going on in our industry. So check that out.

We would love to have you and love to see you. So with that, we’ll sign off and wish you all a great rest of the day.

Thank you. Bye.