March 2025 Liquidity & Funding Strategies for the Current Environment

March 27 Webinar 

0:05
Hello, everyone. Thank you for joining us today. Happy to have you here for our latest webinar.
0:11
My name is Andrew Paolillo, and happy to have joined with us today is Tyler.
0:16
Tyler joined us a few months back.
0:19
You've probably seen some of the things behind the scenes that he's done so far. He's done an article and case study.
0:28
Happy to have him in front of the camera today with us. So as we move through here, you know, here's us
.0:41
The plan for today is I'll start things off, and we'll talk a little bit about what's happening with the yield curve, all the ebbs and flows there, and what the implications are for us in terms of balance sheet management
.0:55
After that, Tyler, we'll talk a little bit about some of our housing and investment programs and some key dates and things that are good to be aware of as you look at all the opportunities to take advantage of all the good things that we have to offer there.
1:10
I'll come back and we'll talk about interest rate risk and earnings and a couple things that we can think about thinking about there.
1:19
Tyler will talk a little bit about the deposit side of the house and some analytics and approaches that we can take over there, and then I'll wrap things up, and we'll talk about liquidity risk, everyone's favorite topic.
1:33
So, let's just jump right in and ask that question.
1:37
What is the yield curve telling us?
1:41
So we are, to bring you behind the curtain a little bit here, we're forever in search of things that can make the complex appear simple.
1:51
Some here may argue that we have a talent for making the simple complex, but, you know, we won't debate that here on this webinar.
2:02
But we try to make the complex simple.
2:04
So when we think about the yield curve, whether it's the level of rates or the steepness, right, the slope or the shape of the yield curve, it can be tricky to find one catchall metric.
2:18
Because when we look at the steepness of the curve, for example, we're taking arbitrary points, the one year versus the three year, the two year versus the five year, two-year versus 10-year. So it doesn't give you the whole picture of the yield curve.
2:34
So this was something that we've been noodling over for a while and wanted to put out there in terms of looking at what maturity on the yield curve from zero to 10 years was the lowest at any given point in time. And we also overlaid the Fed funds rate as well.
2:53
And this is interesting because I think, simply put, it can be a barometer of how optimistic or pessimistic the yield curve is for the future prospect of rates.
3:07
​So when we see longer tenors, five, 10 years, be the lowest point on the yield curve, that's really peak bearishness in terms of interest rates expectations for where things are going.
3:25
And when the lowest point on the curve is inside of one year, that's that positively sloped yield curve that we all know and love and want to see from a balance sheet management perspective.
3:40
So, we've mentioned this before, we love to look at historical precedent and learn what we can there.
3:48
But the tricky thing about the last two times before this most recent cycle when interest rates went down is that they were really 100-year storm-type scenarios.
4:00
When we think about the great financial crisis in ‘07 to ‘09 or COVID in 2020, those are situations that we don't often see; they weren't, quote-unquote, normal- well, what is normal these days anyway?- movements in the yield curve.
4:21
And we've always posited that when interest rates go down, they don't always have to go down to zero in the front end, that there are scenarios, plausible scenarios, where 3% to 4% is the range that it's going to get to.
4:36
So when we look at 25 years of data on the top chart but then zoom into what's happening right now on the bottom chart, it paints an interesting picture.
4:49
So in the beginning of 2024, that was peak bearishness.
4:52
That's where we saw the lowest point in the curve was seven or 10 years.
4:57
But then that's so slowly started to soften and come down through the course of the summer into the fall. And then in September, when we saw the first rate cut, it continued on that path
.5:12
And then, at the beginning of this year, things were looking great.
5:15
We have the good fortune of talking to a lot of banks and credit unions out there.
5:19
And the idea of a flat yield curve, or even just a few single digit basis points of slope, everyone was excited because, not to say doubt is a super sloped yield curve and with some great opportunities and great economics, the simple fact that it wasn't deeply inverted, which we all know the challenge that that creates, was in that play. So that all being said, the last month or so conditions have changed.
5:51
We have seen more expectations for rate cuts come into play
5:56
Tyler, we were looking at it yesterday. Was it now closer to three cuts priced in by the end of this year, where really there was zero to one? We rewind back to January.
6:08
And again, looking at past cycles, but with the caveat that history doesn't repeat it rhymes, we have seen this scenario in '07 and '08 and in '19 and '20, where the curve ceases to be inverted anymore, and we see that the lowest point is very, very short.
6:34
But then we do see the inversion come back, which is what we see if we look to the bottom right of the bottom chart there.
6:42
So at present, the two and three-year part of the curve is where the lowest point is.
6:46
And what's interesting is that in the past cycles, that happened that same way.
6:52
And there was that perception for a period of time, okay, rate cuts started, maybe the market gets ahead of itself, cuts are going to start happening, all right, maybe the Fed's done, but then, uh-oh, we now, like a seesaw, we overestimate, we underestimate.
7:11
And now, at that period where the curve inverted, it wasn't just the one or three cuts that materialized, it was four, five, six, seven, all the way down to the floor.
7:22
So again, I put that asterisk on it to say, look at the conditions that drove what happened in the market in '07, '08, '09, and '19 and '20 versus right now.
7:32
They were far from normal.
7:34
But I would really, really emphasize the point that opportunity comes from when what actually happens deviates from what is priced in.
7:47
You know, we go back to January and February of 2024, where there were seven cuts priced in over the next year.
7:56
And a lot of times, people were saying, well, we're going to stay short because rates are expected to go down.
8:03
But we all know the yield curve is a pricing mechanism.
8:08
And ironically, the one and two and three are part of the curve.
8:11
That's where there was opportunity.
8:12
We did see some folks who had some well-timed activity on both sides of the balance sheet.
8:17
there.
8:19
So really, it's about being nimble and responsive and not being overly leveraged to one path of interest rates because, at the end of the day, we really, Tyler can a little bit, control the level and direction of interest rates.
8:33
So that's a little bit of a backdrop before we get into some of the nitty-gritty balance sheet components and strategies. I'm just talking about, at a high macro level, what's happening with the yield curve.
8:49
And so as Andrew said, my name is Tyler Buckeridge, sales and strategy specialist.
8:52
I'd like to start by giving a brief overview of our housing and community investment programs and some upcoming key dates.
8:59
And so now I know it may seem like a lot of acronyms, but there's a lot of free money behind these programs, which provide grants and subsidized funding that support a wide variety of projects that benefit your communities.
9:11
In 2024, the FHL Bank of Boston gave away $35 million through our Affordable Housing Program, whose 40 initiatives helped support creating and preserving over 1,200 units across New England.
9:22
In addition, the bank allocated $24.9 million to programs that support home buyers, jobs, and community development, one of the results of which was 1,500 jobs created or preserved through the Jobs for New England program.
9:36
While the specifics aren't quite out yet, the bank is planning for a bigger allocation in 2025.
9:41
It's something we're very excited about, and it's something we look forward to working with you to put those funds to work in your communities.
9:47
With that being said, let's look into some specifics.
9:52
We have some key dates on the horizon that you might want to mark in your calendar. The next Jobs for New England funding drop is on May 7th.
9:59
The program is currently open, and there's still funding available from the March 5th drop, so make sure to apply and take advantage of those funds because they do go quickly.
10:06
The CDFI Advance funding caps increase on May 12th, making even more funding available on a per-member basis.
10:13
The affordable housing program opens on June 2nd, and there is a members-only webinar for that program on May 20th.
10:19
We do have some programs that are always available, including the Permanent Rate Buydown, which is part of our Mortgage Partnership Finance program, as well as the Community Development Advance and the New England fund.
10:30
Upcoming this year, we will have a second application program for Lift Up Homeownership, and the parameters for that program are changing. They're expanding, so you'll be able to benefit even more of your customers through the program.
10:42
And then, coming back in February of 2026, we'll have the Housing Our Workforce and Equity Builder programs. Those are some fantastic programs, so make sure to watch out for all of those.
10:51
And now I'd like to look at two of our programs in a little bit more detail that are currently open.
10:55
Before you get into that, just to point out the real uniqueness of having the down payment assistant or the subsidized funding or the permanent rate buy down, which is a mortgage purchase program.
11:05
So, the vehicle that we get those supportive funds into the market can vary ultimately because the members' needs and the customers' needs are going to vary as well. Absolutely.
11:20
So I'd like to take a look at the CDFI advance a little bit more closely and this advance is going to bring familiar for those of you who use the Jobs for New England advance because you essentially act as a conduit between the FHL bank and the CDFI that you with.
11:33
The way it works is that we provide 0% advance to you, and then you extend a loan to the CDFI at 0% plus your spread, which can be up to 300 basis points.
11:43
The advance needs to be match-funded to the loan that you extend to the CDFI, and keep in mind that if you consider the dividend that we pay on activity stock, we're actually paying you to take down 0% funding.
11:54
​The program opened for applications and funding released on March 17th, and on May 12th, the caps increase, and the state allocation ends, and then on July 4th, all the caps come off, so make sure to get in and get your app or get your application in before the December 15th deadline.
12:12
Another really fantastic program I'd like to zoom in on is the Community Development Advance, which consists of discounted advances for projects that support affordable housing and community development in your communities. There are two buckets here for the CDA.
12:26
The CDA bucket, which is $35 million in grants and subsidies, and CDA Extra, which is even more deeply discounted than CDA, but it is only up to $15 million from that bucket.
12:36
You can take advantage of the discount on a wide variety of advanced products, including the Classic Advance, Advance, and the Member Option Advance.
12:45
There's a webinar coming up for the CDA program on June 11th at 10 a.m., so make sure to mark that in your calendar.
12:51
And if this program or any of our other housing programs pique your interest, please do not hesitate to reach out to your relationship manager or myself, or Andrew, and we'd be happy to answer any questions and connect you with a program specialist.
13:05
Well, thank you, Tyler, for that overview of the housing program.
13:10
So, let's jump into interest rate risk and earnings. I'll take the clicker there.
13:18
So I keep asking questions in the subject. What is the yield curve telling us?
13:23
Higher for longer, hard pivot or soft landing.
13:30
So, despite the fact that it's nobody's good idea to manage the balance sheets using interest rate risk predictions, I think it's beneficial to have a view or a leaning for what is the most plausible scenario.
13:47
But more important than that, where is the balance sheet exposed? And what could happen in an adverse manner?
13:58
And even if it's a low probability outcome, so I think at this point in the cycle, maybe if rates moving higher is something that is probably not on the high probability scenario list, but that could be a pain point for folks.
14:17
So it comes down to what risks are we comfortable taking and what risks do we want to be hedging out?
14:26
So, we'll talk a little bit more in this section about the asset side of the balance sheet, as well as the wholesale funding, and Tyler will talk about the deposits.
14:39
But one point of color is that over the last six months, as short-term rates have come down, we've sensed a lot of excitement from members in terms of talking about the relief on the funding side.
14:52
But the opportunity really is with the asset side repricing.
15:01
And when you think about, and we'll get into it in more detail on investments and loans, when you think about five-and-a-half, six percent type investments, where over the last couple decades, the highest in yielding investment portfolio for banks and credit units has been in the mid threes.
15:20
So to be able to replenish the investment portfolio at such high rates and the same thing on the lending side.
15:29
And we are starting to see, we talked about this in our peer analytics webinar in February, that we saw some plateauing in funding costs, both deposit and advance, but it's that slowly but surely repricing of the asset portfolio.
15:45
Even those really liability-sensitive folks who still have the overhang of a lot of fixed-rate loans, we're starting to see a lot of repricing and activity there.
15:56
So, let's go into three specific things.
15:59
So if it's really a concern for your institution, your balance sheet, to hedge against the prospect of rates not plummeting down.
16:08
And really, again, we're fighting our own memories and saying, uh-oh, here it comes.
16:14
Rates are going to fall considerably just because that happened the last two times.
16:19
Maybe, maybe not.
16:22
So as we talk with folks, there's a lot of interest rate risk still inherent in the balance sheet.
16:31
And that's because of the extension risk the loading up of fixed rate assets when we all had so much liquidity at the end of 2020 and into 2021, but then also the remixing on the balance sheet.
16:43
Tyler talked a little bit about that in the case study webinar that he did, talking about the shift into a greater reliance on CD.
16:53
So there's a lot of folks in a rock and a hard place right now where our interest rate risk metrics are not in a place that we particularly love, but so we want to remediate that, but we also want the flexibility to, if we do see rate shift lower, to be able to reprice that funding side that much more and get back to some margin expansion where margin has been on the pressure for a number of years there.
17:22
So certainly, if you're still sensitive to EVE metrics for banks or NEV, the net economic value test for credit unions, which all our credit unions probably know all too well, is the pain being caused by that test.
17:37
Well then, let's talk about the member option advance.
17:42
So it's an advance where you get the ability to get the benefit of long-term maturities but still retain the flexibility to pay off in advance and is not subject to prepayment fees at earlier dates.
17:55
So you can see the chart above shows a current yield curve that is flat to slightly inverted and then starts to tick up as we get to the long, long maturities. And we have three different flavors of the advance.
18:09
One where there's a three-year maturity, a five-year maturity, and 10-year maturity.
18:13
All of them with one year of lockout and one-time member-owned call options.
18:19
And so you can see because you're buying the option, as we all know, that that comes at a higher cost versus the bullet security.
18:27
So, excuse me, alternative. But the way to think about this is not the sticker shock of the high rate.
18:35
Think about it in terms of the incremental interest expense versus the one-year advance, a part of the curve that has an awful lot of value, both from a rate risk and a liquidity risk perspective.
18:49
So when you think about it, it's about 140 basis points to do the 10-year, one-year structure, as opposed to just taking a plain old one-year bullet.
19:00
But we're adding a very, very long liability, not being locked into it, right?
19:06
Because that's the Well, what happens if we take off seven and a half years of asset duration, i.e., sell a security or sell a loan?
19:19
That gets the EVE or the NEV calculation to the same place, right?
19:24
Take off seven and a half years of asset duration or add seven and a half years of liability duration.
19:31
Well, the cost to change the asset or, excuse me, to reduce the asset duration, that is going to be a real cash cost.
19:44
You can see, you know, those underwater bonds, 10 to 15%.
19:47
Now, there may be opportunities.
19:48
We'll get to that in the next couple of slides here, where that, depending on your circumstances, may make sense.
19:55
But the incremental interest cost is really, really a fraction of that.
20:00
So, you can see how the NEV benefits translate on the bottom.
20:05
So, you can see in a plus 300 rate shock, a 23% decline in the value of that advance.
20:12
And remember, as a liability, negative numbers are good things, right?
20:15
Our brains are wired to think in terms of assets, but minus 23% is a good thing when you're talking about the funding side.
20:22
​And that is far and away better than the long-term bullet alternatives that, again, gets you locked in because we're at a little north of 4% right now on the bulk of the yield curve.
20:35
What if rates go down to 2%?
20:37
Well, you have the flexibility to give the advance back at that one-year mark, and that's automatic margin expansion right there, right?
20:45
Pay back the 5% advance and replace it with either 1% or 2% deposits, hopefully 0% deposits, or 2% or 3% funding.
20:55
And that may be a period where we need that margin expansion because we still have locked-in fixed-rated assets, loans or securities, and any floating rate assets are going to be declining in yield there as well.
21:16
So, let's talk about that idea of what happens if rates go down.
21:22
You know, we talked about at the top, the idea that or we've looked at the last two cycles where rates really did come down hard. So, let's think about if we could get in the time machine.
21:33
What types of characteristics would we have wanted going into a turn in the economic cycle?
21:40
We won't talk about tariffs and things like that right now We just know that there's a lot of uncertainty and we also know that this economic expansion has gotten long in the two So we don't we don't know if we're in the sixth inning or the eighth inning or the or an extra inning here in terms of the economy and the credit cycle.
22:00
But we do know the types of things that would do well in a deteriorating economic situation. So, we would want to have asset duration.
22:09
We would want to have forms of prepayment protection.
22:12
We would want investments over loans because of the risk-weighting characteristics.
22:18
We want our wholesale funding to be short and to have some of that flexibility. And we'd also want high beta funding.
22:25
Again, that goes into what we'll talk about in the third section: some opportunities right now in floating rate funding.
22:32
Because if you think about a floating rate advance, that's 100% beta.
22:35
Normally, beta is a bad word, right?
22:37
100% beta is a bad thing because we're always thinking about it in the context of what happened in 22 into 24 and our deposits repricing higher.
22:47
Well, if we get into a down environment, well, then beta becomes our friend again.
22:53
So, you know, you combine all these things, and it creates a scenario where you have the capital and the flexibility on your balance sheet to resist the temptation to not redeploy assets into the investment portfolio right now.
23:14
So, from a purely repricing standpoint, that is going to help if you can withstand it.
23:19
But also, and this is a strategy that we've liked for a while, investment leverage where you can put on assets in the intermediate part of the curve, three, five, seven years, whatever your tolerance and where you see the opportunity to be.
23:35
And with funding a little bit shorter than that, six to 18 months, right around that 12-month mark, which has an awful lot of for a number of different reasons.
23:47
So what that does, it produces earnings and stable spreads right now in the short term when pretty much everybody needs earnings support.
23:59
But then, when the funding rolls off, ideally, we want that funding to be rolling off in a period where we may be in a better liquidity position than we are right now, right?
24:07
We're not as stretched thin on wholesale funding.
24:11
We slowly but surely start to get some asset cash flows, maybe prepays aren't going to come back in huge waves just because it's going to take a heck of a lot more than just 100, 200 basis points of decline in rates to see material prepayment speeds in a lot of those 3% mortgages.
24:30
But that's the beauty of fixed income, and the yield curve is that things naturally get less risky over time.
24:38
Think about if you added long commercial real estate loans in the end of 2021 with a five-year balloon.
24:48
Well, you're probably not too happy about it, and you've had a lot of pain caused by those 3% coupons on the asset, but the end is near. The repricing is near.
25:01
2026 is relatively around corner. So, there's a repricing event that is working for you.
25:11
So we talked about the balance between what to do with the asset side. Do we let it run and hedge with the liability side?
25:20
Or do we think about ripping the Band-Aid off on the asset side as well?
25:26
So, a lot of talk about securities, lost trades, and things of that nature.
25:30
I've mentioned this before on webinars, but I've also, you know, in one-on-one conversations we have with members. I'll just remind you and reiterate that there's no free lunch when we talk about the earned back periods that the appeal depends on what you're doing.
25:48
If you're changing a risk profile, if you're going into a different part of the curve where there's more yield, or you're adding a wider spread, that is going to be an advantageous move.
25:59
And if you have the capacity to take that different risk profile.
26:03
Okay, now you're in now you're working with something in a positive way.
26:09
So I think what is worth kicking the tires on right now and we can do this through and we do this through our  MPF program I'm more good Mortgage Partnership Finance program is where and aside from buying current flow activity of mortgage loans, which currently now north of 6% and you're getting 102, 103, whatever the price may be, given the characteristics, we'll also buy bulk loans that are well-seasoned.
26:39
Some of those 3%, 3.25 mortgages that are on the books that are probably priced in the mid-80s thereabouts right now.

26:48
So a lot of the mechanics are the same.
26:50
If you're kicking the tires on lost trades on the investment side, but there can be some appeal to sell those and we use some five-year classic plus 225 as a proxy for commercial real estate activity and the 30-year mortgage less 75 basis points as a proxy for where those underwater mortgages may be priced right now.
27:17
And you might ask, well, why is it less 75 basis points?
27:21
Because there's not the same level of prepayment risk.
27:24
So those cash flows are much more bullet-like.
27:26
Everyone on this call knows that for those deeply underwater mortgages versus something that's closer to current coupon that if we do see rates move down would be at risk of prepay.
27:39
So those have narrower spreads.
27:44
So we think from a holistic balance sheet management perspective, we always want to out wide spreads and, within reason, avoiding narrow spreads.
27:56
So here's an opportunity where if your capital supports it, both in terms of dollars but in percentages and consistent with your anticipated growth plans and patterns, there could be opportunity to move out of narrower spread, but credit strong residential mortgages and redeploy into CRA or auto loans, those core type assets that have wider spreads and is the community bank or credit union edge, your ability to underwrite your customer's credit.
28:39
That's probably where we want to be focusing on the most.
28:43
There could be some opportunities there.
28:44
So, you know, if you have these low coupon mortgages that are not giving you the interest rate risk and liquidity risk profile that you need or want, you know, we're happy to run some numbers for you and see if it may fit, you know, as you, you know, look at all your options in this very uncertain time.
29:09
Wrong direction.
29:10
Okay, back to Tyler.
29:11
He's going to talk about some things that we should be thinking about on the deposit side.
29:15
Thank you, Andrew.
29:17
And I would like to take a look at marginal cost of funds and some deposit strategies for our current environment.
29:26
So I'm going to go out on a limb here and say that this deposit cycle has not been the easiest as far as deposit pricing.
29:32
While the Fed easing has taken some pressure off of deposit pricing, we're hearing from some members that they're actually having to go back up on rates because the environment is staying so competitive.
29:42
​With this in mind, let's consider some deposit pricing strategies.
29:45
I think one of the most salient questions right now in ALCO meetings is how competitive to be on pricing.
29:51
To answer this question, it's worth considering what you really anticipate for loan origination and pay down or prepay activity this year.
29:59
While your VPA of retail might be pushing for a top of market CD rate to help meet their deposit goals this year, listen to your chief lender and if they're saying the pipeline is dry, maybe now is a good time to see what kind of pricing you can get away with before seeing an uptick in runoff.
30:14
Another question you might be asking is what kind of product to use to raise funds this year.
30:19
One of the foremost considerations is matching funding to the assets that you're putting on the books.
30:24
So, if your loan pipeline or investment officer is delivering a lot of floating rate assets, it might be a good time to try a money market or a floating rate term deposit.
30:33
Whereas, if you're seeing demand in your fixed book, you might think about running a CD special and even dialing back your money market rate.
30:40
You can even tailor for duration as well.
30:41
For example, if you're adding a lot of long fixed residential loans, it might make sense to see it as an appetite for some longer CD specials and add some prepaid protections on those.
30:54
And that leads to the last point, which is offering a more normalized CD curve versus emphasizing a certain point on the curve.
31:00
A common strategy during this cycle has been to offer above-market, short-duration CDs, especially five-month specials, and then set rates well below the market on the longer end of the curve.
31:09
And this made sense with 5% plus rates and multiple cuts priced in in the near future.
31:16
But with CDs in the 3-4% range and rate cuts much less certain, it could be a good time to reward duration in your CD offerings.
31:23
By going further out in the curve, you can benefit from priced in rate cuts and protect against the potential of the Fed either not cutting or even hiking again, which comes back on the table.
31:34
Your customers may also appreciate a return to a more normalized CD curve that looks more like they're used to seeing.
31:40
And in general, you can try to test the water and see at various points in the curve, where is demand strong and where is there competitive pricing?
31:49
And if you expect high loan growth this year, or you're trying to do investment leverage with some deposits, you might not have that same flexibility to test the water, but in that case, you might be forced to go to the more high demand areas of the curve, that five to 12 month range.
32:05
But, if you do see low loan growth in the future, maybe you can be more opportunistic on deposit pricing.
32:13
There we go.
32:14
That's the toughest part here, which way is up, and which way is down on the clicker.
32:18
Absolutely the basics.
32:20
And now, back to basics here, I know this isn't groundbreaking stuff, but I wanted to talk about matching funding to assets in a little bit more detail.
​32:28
With advances, you're able to tailor funding directly to the rate sensitivity and amortization in terms of your loans and investments.
32:34
And as mentioned on the last slide, CDs and money markets do allow for some degree of matching to assets, but there is less flexibility as far as term, as well as the unpredictability of runoff, and you have to navigate market demand.
32:48
Checking and savings products, however, well, they do offer the least degree of duration and therefore the least degree of ability to match.
32:59
And this is due to how unpredictable the rate sensitivity is in runoff and the fact that they're relationship based.
33:05
Now, I know what you might be saying.
33:06
Are you trying to denigrate our 0% checking?
33:09
I mean, this is our core.
33:11
And I'm not.
33:11
These are actually your best funding sources, the non-interest-bearing savings and checking accounts.
33:17
And that's why it's so important to protect those funds.
33:20
And we're going to talk about that on this next slide.
33:25
So one approach that we can take is splitting up our deposit pricing and using rates more as a tool to attract and retain full relationships, which include checking accounts.
33:39
Prior to the cycle, rate was largely an afterthought.
33:42
Consumers were choosing their bank based on convenience, customer service, and the variety of offerings.
33:47
As CD and money markets rates rose over the cycle, rate became the driving factor in bank decision making for customers.
33:56
And while that does present a challenge, you can make this dynamic and take it so that it is to your advantage.
34:03
What you can do is set your public deposit rates at or below market and then be willing to negotiate with customers who are highly rate sensitive or who are looking for a rate bump.
34:14
Bringing in new customers is really expensive and difficult.
34:17
So, having a backstop rate that you can offer before someone walks out the door might make a lot of sense.
34:23
And what you really want to do though is save your highest rate for your full relationship customers.
34:27
You could offer deposit covenants to from…..You can offer promotions for a deposits that include covenants on checking and adding further to the relationship and that way you can expand the relationship and not just you so relying on rate and In general those full relationship customers order you want to be really willing to go above market and stretch and we'll see on the next that might not actually be as painful as you might think.
35:00
And so what I'd like to do is take a look at this concept of managing cost of funds holistically.
35:05
And this includes looking at the blended cost of funds across the entire relationship that a customer has with your bank or credit union.
35:12
What I'd like to do to demonstrate this is look at a scenario where you have two customers asking for a rate exception on their one-year $ 100,000 CD.
35:20
Customer one has a $50,000 checking account and a $50,000 money market at 2%.
35:26
in addition to their CD.
35:28
And then customer two just has that $100,000 CD.
35:33
And they both say they want as high of a rate as possible.
35:35
And if they don't get that satisfactory rate, well, they're going to go down the street.
35:39
Sound familiar?
35:41
For customer two, it doesn't really make a lot of sense to offer more than 4.2% as that's what you could get on a classic advance for one year, and that sort of acts as a discount rate, right?
35:50
But for customer one, you could go as high as 5%, and the blended cost of funds for them is still only 3%.
35:58
And you can even go as high as 7.2%.36:00I know you wouldn't or couldn't.
36:02
But if you did, theoretically, the total cost of funds would still be 4.2% for that customer, which really goes to show how much checking accounts give you the ability to stretch on rate for your customers.
36:14
And one way to present this to your customers is to say, let's help each other.
36:17
The more business you can bring to me by way of checking and other relationships that you value, the more that you can help them on the rate side.
36:26
Another good reason to consider being less aggressive with your public deposit rates is deposit cannibalization.
36:33
A significant consideration for any alcohol thinking about operating a deposit special should probably be the extent to which that special may cannibalize deposits from your existing lower-cost deposit base.
36:45
In this scenario on this slide, we have a depository with a 2% existing cost of funds who is considering offering a deposit special, 12-month deposit special at 4% or taking down a 12-month classic advance at 4.2%.
36:57
While the choice may seem obvious at first glance, if just 33% of the deposits you bring into the 12-month special come from your existing 2% deposit base, the marginal cost of that CD special is 5%.
37:09
And this is because to raise those new deposits, you need to not only pay the 4% on the new special CD funds, but you're also now paying 4% instead of 2% on all the cannibalized deposits.
37:21
And another thing to keep in mind is if those cannibalized deposits came from non-interest-bearing deposits as opposed to your 2% average cost funds, the marginal cost of funds on that CD special jumps up to 6%.
37:35
So what this speaks to is not only how destructive marginal cost of funds is, but how important your non-interest-bearing funds are and how it is to protect them. And so with that in mind, I would like to look, take a look at deposit.
37:53
We know what we have in mind about deposit cannibalization and marginal cost of funds.
37:58
I think it does make sense to offer a more normalized great book in your CD offering and focus on rewarding your high quality, full relationship customers instead of going above market to retain rate shoppers.
38:11
You can still have CD specials and money market specials, but think about keeping your rates just high enough to retain the high-quality customers and then negotiate rates as needed.

38:21
Let those rate shoppers walk and then back fill with advanced funding that complements your balance sheet needs.
38:26
By doing so, you can actually improve the overall stickiness and quality of your deposit book while reducing funding cost.
38:34
And now, not only do all of our advanced products offer term liquidity, term and liquidity protection, they also have features to match your economic outlook and anticipated future funding needs.
38:44
If you anticipate higher for longer environment, you could take down a fixed rate advance like the classic advance or member option advance to protect against rising funding costs.
38:52
If you anticipate more Fed easing than is currently implied by the yield curve, you can take down a SOFR index advance to benefit from rate cuts as they happen.
38:59
With CD and money markets, your customer holds the option to call their funds back, but with the member option advance, you do hold the option, and you can cancel the advance at preset intervals, meaning if loan demand does drop off, you have the flexibility to put back those funds.
39:16
So not only can you add funds without deposit cannibalization with advances, puttable advances allow you to put back the funding just as painlessly.
39:24
Now I'll pass it back to Andrew who will take us home with some liquidity strategies.
39:28
​Thank you, Tyler.

39:30
So, you know, relative to building a strong and durable and well-priced deposit portfolio and moving and shaking on the asset side.
39:41
Liquidity strategies can be a little amorphous and plain vanilla, but important, nonetheless.
39:51
So there's many different ways that we can think about liquidity on and off-balance sheet.
​39:57
So we'll just go through three things here that are worth pointing out and making sure we're doing all the things that we can and should be thinking about.
40:09
So, in terms of the barring capacity that you gain from working with the Federal Home Loan Bank of Boston, before I jump into some of the specific things, the sub header there, reach out to your relationship manager.
40:22
I can tell you how many times they have had conversations about the collateral process, moving back and forth between the Fed, all kinds of tips and tricks there.
40:37
So, if you have any questions or you're thinking about pulling any levers, you know, let them be a resource for you.
40:46
So, we'll go down the list here of things from small to large that we can be dealing.
40:54
If you're currently using the QCR method, a switch to listing the collateral could lead to improved haircuts, and that's going to increase your barren capacity.
41:05
A lot of discussion, as I mentioned, about the collateral that you have with us versus at the Federal Reserve.
41:13
So the Fed takes a wider range of collateral types.

41:15
They don't have the narrow housing emphasis that we do.
41:20
So they'll have things like auto loans and different types of non-MBS securities and things like that.
41:25
So, just from an optimization standpoint, if we take it, if we don't take it, that's probably it should go over to the Fed and if we take it, then that's a way for you to get excess capacity with us up to your advances to asset limit.
41:40
In that same vein, when you think about things like CRE, HELOC, and Munis, you'd be surprised sometimes that members who have those types of assets and aren't set up to pledge them.
41:52
you know, oftentimes relying on the residential loan portfolio alone can get you where you need to go.
41:59
But certainly as liquidity has been that much more stressed recently than it has been in past years, maybe you're using more of that capacity and you want to maintain that level of dry powder or excess that you want to be at, then looking under every rock and making sure you're pledging the things that you can do.
42:21
In that same vein, securities, some, it's not the majority of depository members who pledge securities to us.
42:29
To that point, because of the reliance on one to four family and to a lesser extent, CRE and HELOC, you can get to a pretty good level of capacity.
42:39
But when you think about underwater securities, if you have held to maturity securities, those on helping the liquidity metrics, those are certainly candidates to be pledged to gain some off-balance sheet liquidity.
42:52
But then it's also an opportunity to move the collateral around, understand the product process for securities collateral that you can pat yourself in the back and say you know how to do it and you can show the regulators, say if and when we do need to move over a large slug of securities and in a situation where we need to borrow, we're not scrambling day off.
43:14
And then we talked about earlier, balance sheet dependent, the appeal of investment leverage.
43:21
So, but if you're thinking in terms of the liquidity ratios, putting on an investment leverage transaction, is liquidity ratio supportive?
43:31
Because you're using your off-balance sheet capacity to borrow, and you're adding liquidity-friendly assets in presumably mortgage-backed securities or the like.
43:44
So the numerator is going up and the liquidity ratio's going back.
43:50
So you're trading off balance sheet for on balance sheet.
43:53
So if you're sensitive to that liquidity ratio, then that's another consideration.
43:59
Again, earnings, capital, rate risk positioning dependent.
44:05
So in terms of wholesale funding solutions that are liquidity supportive.
44:10
The most liquidity supportive advance that we have, aside from just simply taking a 30-year advance, is our term floaters, where you can get the benefit of long-term liquidity, the maturity.
44:28
And like we had talked about previously, because you own the option, you get to count it as the full extent the term.
44:34
But your interest rate risk preference and also how long you may need that liquidity for is completely under your control because of the floating rate and the member-owned option.
44:52
So we've talked about this in a number of forums.
44:54
We have some stuff up on the website, but our Discount Note Auction-Floater Advance, where you can borrow, say, at a one-year maturity, and every four weeks, the advance resets on rate. So it's a floating rate.
45:09
And at each one of those intervals, you can pay off the advance and not be subject to a prepayment calculation.
45:15
So when you think about sources and uses, it's not ultra short-term wholesale funding that is not going to help any type of liquidity analysis, that you get the benefit of the long term.
45:28
And then if you do get a scenario where loan pipeline completely dries up, you get some prepayments, deposit growth outperforms, then, hey, we're not in a position to need wholesale funding anymore.
45:42
We have some very murky waters right now in terms of we need liquidity today.
45:47
We're not sure where it's going to be three to six months from now. And here is a pretty efficient way to do that.
45:52
So one other thing that many folks we've been hearing about is whether it's regulator driven, or management driven is looking to structurally hold higher levels of cash on the balance sheet, just as here we are talking about how there's many moving parts of liquidity and its complex formula.
46:13
Well, let's just take the shortcut and put cash on the cash on the balance sheet.
46:17
that has a cost, right?
46:19
There's a drag often involved when we have a lot of cash, not just for anticipated future needs, but just from a, hey, here's the base level we're going to hold relative to, we used to hold it down here.
46:36
So, you know, a couple of things you can consider here is how to do that and minimize that cash drag.
46:43
So, when you borrow from us, you have to purchase capital stock along with the proceeds of the borrowing.
46:50
It's a 3% capital stock purchase for overnight funding and for everything else, it's 4%.
46:56
So what that does, it enhances the value of the dividend.
47:00
So with the 4% capital stock, the dividend value is worth about 22, 23 basis points, depending on the assumption on SOFR and the dividend.
47:12
But with the overnight, it's about seven basis points less
.47:16
And so, right now, the curve is slightly inverted where I think it's two basis points cheaper to go out one week versus overnight.
47:23
So, you get two basis points from the inversion, seven basis points extra from the added dividend benefit, and one week versus one day.
47:34
It's not a huge change in the profile, right?
47:36
It's not like saying, go out five years, take advantage of the inversion.
47:40
Well, a lot can happen in 60 months.
47:42
So, that's a way to, again, not the most exciting thing in the world, but it's all about picking up pennies, which is what banking, credit union, balance sheet management is.
47:53
The other thing I'll point out is in a similar vein to the term floater that we just talked about is we have another version of that, the sulfur index advance and the callable sulfur index advance.
48:04
And you can see some pricing down below where we look at the traditional bullet advance where it's going to reprice at a spread, but also the callable version.
48:15
So if you look right there in the middle there, the six month, no call three months.
48:20
So that means you get a six-month maturity.
48:21
And then at the three-month mark, you're able to pay down the advance, not subject to any prepayment fees.
48:27
And again, it gives you that added flexibility of, hey, in this moment, I think I need, or the balance sheet needs six-month liquidity.
48:38
but we could have some level of uncertainty.
48:41
So something you can consider, and we've seen folks do this pretty effectively, is build a little bit of a staggered ladder and make sure that you always have some funds coming off.
48:51
The beauty is it's going to price on an ongoing basis the same way because it's just so for plus the spread so that if we do start to see some surprise cuts calling back to what we talked about in the beginning, that if this is that head fake movement where the curve inverts, and then all of a sudden, oh, no, we didn't properly price in all the bad things that can happen to the economy. This is 100% beta funding.
49:15
So this will be repricing down as fast as the Fed can cut rates, which is great if you did this instead of paying 4% fixed, you know, 3%, 2.5%, but the callability in control by the member gives you the option to say, well, I like this 2% wholesale funding, but you know what I like better?
49:39
I like 0% non-interest-bearing deposits.
49:42
And we're going to reduce our wholesale funding because as we talked about, what are the lessons we've learned from past downturns is that we want to be nimble and be flexible with our wholesale funding because short moves and down often leads to liquidity coming from the asset side and liquidity coming from the liability side as well.
50:04
But in terms of the yield curve inversion, pointed out that the one-year classic is minus 20 basis points to IORB.
50:15
And I teased that a couple of times talking about the appeal of the one-year mark. So that is certainly an option as well.
50:22
As you triangulate how much liquidity risk do, we need to guard against, how much interest rate risk protection do we need as well.
50:32
we can keep it pretty simple and straightforward and nudge out the curve on fixed rates.
50:39
That certainly looks better than it did six weeks ago when there wasn't the same level of expectations.
50:48
So that brings us to the end, getting better.
50:53
Tyler, only five minutes late, that was fully on my end.
50:58
He landed the plane exactly where he needed to get to.
51:03
But happy that you all got to meet Tyler, and you'll see plenty more of him as we go.
51:11
We appreciate your time and attendance here, and if there's ever anything that we can help out quantitatively or qualitatively to share some of our experiences and observations, very happy to do that.
51:25
So, without anything further, thank you very much and have a great rest of your day.
51:31
Thank you.