Markets and Balance Sheet Strategies Update

Markets and Balance Sheet Strategies Update

0:05
Good morning, everyone. Hello and welcome. My name is Andrew Paolillo. I'm the Director of Member Strategies and Solutions here at the Bank. And thank you all for joining us today.
0:13 
So today the plan will be to cover three main areas.
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We're going to look at what's happening with interest rates in the mortgage markets and the economy through a lens that is mostly relevant to our members.
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We'll take a look at some key takeaways from first quarter 2021 call reports, and then we'll go through some particular strategies that members can be looking to deploy to shore up the balance sheet.
0:42 
So before we jump in, what is not on the agenda today, which seems to qualify for financial market news these days, are some of the things we see here. So unfortunately, or fortunately, no GameStop, cryptocurrency or NFT talk here. So sorry to disappoint.
1:02 
So, if along the way there are any questions, please feel free to submit in the chat box, and we'll address them as they come up or towards the end, so let's jump right in.
1:15 
So first, what's happening with the markets and the economy.
1:19 
So, looking at what is going on with short-term interest rates. And full disclosure, we update this table every quarter and the header there that you see talking about the trend of rates are low, but they keep going lower. We haven't had to change that the last three times out, because it continues to be true.
1:40 
So, the front end of the yield curve from Treasurys one year and in, but also to the overnight indices, as well as the term LIBOR rates, continue to grind lower and lower.
1:56 
So that short-term interest rates are often referred to as the plumbing of the financial system.
2:02 
So … when you think about what's going on with SOFR repo rates, as well as Fed Fund rates, Effective Fed Funds, it does bear some watching because of potential policy tweaks that could come into play.
2:17 
So, as you can see here, … the solid lines of Fed Funds and SOFR year to date are converging towards zero.
2:27 
SOFR more than Fed Funds, and in the case of other comparable instruments like T bills, they actually have gone negative in some cases.
2:36 
So, you know, simply put, the Fed probably doesn't want to see negative rates … from an optic standpoint.
2:44 
Most of our members don't participate in these markets. You know, our depositories utilize IOER at 10 basis points. So why should we care about what's happening in these other markets?
2:56 
But it's because of the interconnectedness and that the potential policy tweaks, as we mentioned. So, there's two things that are on the horizon that could happen.
3:03 
The first one would be the Fed pumping the IOER rate to 15 basis points from say, 10 basis points.
3:13 
The second thing would be raising the RRP, the reverse repo program. Raising that rate from zero to say five basis points. And what is the reverse repo?
3:23 
That is where market participants, like money market funds who don't have access to IOER, park excess cash at the Fed in exchange for Treasury collateral. And those volumes had exploded as T bill supply has dried up. So, you can see there back in March that the program was only used on an overnight basis for $11 billion. Most recently, it was almost a quarter of a trillion dollars. And even on Monday, I think, it hit $390 billion, so those volumes have exploded.
3:54 
So, you know, the caveat is the optics of raising rates, even if it's not the rate that is commonly referred to, makes this a very tricky line for the Fed to navigate. So, you know, honestly, I don't think they're going to do anything that they don't have to do.
4:14 
So, talking about when will short rates rise? Most folks, when they talk about short rates rising, they'll be referring to Fed Funds.
4:26 
So, we can look to the futures markets and get a feel for what markets are pricing in. So, we can see here is the path, the implied rate, for the December 2022 contract.
4:37 
And at the beginning of the chart you can see last summer that the expectations were awfully bearish. That the expectation wasn't that rates were not going to be rising anytime soon.
4:50 
But since then we've had the steepening of the yield curve, reopening of the economy, the vaccine rollouts, all positive things that have added optimism in a window that, a return to normal in the world and in the financial markets may be on the horizon. So that implied rate has been creeping up. So, right now, we're more or less around 25 basis points.
5:14 
So not fully expecting a full hike that is more into 2023, but it is trending in that direction. Moving beyond the short-term part of the curve and looking at the impact further out, the Feds monthly $120 billion purchasing of Treasury and mortgage-backed securities has had an impact on what's happening on the intermediate and the long- nd of the curve.
5:46 
And while there's been no official word yet from the Fed about when tapering will begin and what the process will be, there has been some public debate occurring between members of the of the Fed governors discussing whether it's too early to begin to remove support.
6:10 
Or, you know, the Kansas City Fed President was out yesterday talking about the mortgage market, the MBS market, … what it would be a natural place for the first look in terms of peeling back some of that support to the market.
6:24 
So, there's a lot of variables when it comes to when the official word comes, what the timeline will be. Will they say something in the third quarter of this year, that tapering will begin in the first quarter of next year, or will begin a little bit beyond that, and what will be the pace?
6:42 
Will it be $10 billion a month or $20 billion a month of actually scaling down from that $120 (billion)?
6:50 
And, you know, the other thing to notice, you know, as the tapering goes away and then that brings the short-end hikes back into play.
7:00 
But if we look back to the coming out of the great financial crisis, the market tends to get ahead of the Fed in terms of what is being priced and what the expectations are.
7:13 
So those folks who were around in 2010 to 2011 and beyond remember that the expectation for the first hike was two years out for about the first five years of the recovery.
7:26 
So, the Fed does move at a slower pace, typically, then what the market expectations are.7:34 So, looking at what's happening with rates further out the curve, this has been a little bit of a glimmer of hope particularly for depositories.
7:42 
Because when you look at the belly of the curve, and this is looking at the change in rates from year end,
7:50
the belly of the curve, the five- and 10-year rates, where, that are typically more associated with asset pricing, has steepened materially from 50 to 75 basis points.
8:01 
Well, shorter rates really haven't budged much at all.
8:06 
So, when you think about, when you open up your doors every morning, and a deposit comes in and you could look to deploy that in loans or investments, incrementally, there's a little bit more spread occurring at every turn.
8:21 
Turning to mortgage rates,
8:23 
You know, it's fascinating, 30-year fixed-rate mortgage rates and 10-year Treasurys historically normally tend to move in tandem.
8:32 
But this past year and a half or so with the pandemic and the refi wave, it has certainly been a wild ride and some of those historical correlations haven't typically held.
8:44 
So more specifically in the last three to six to nine months, what we've seen is that mortgage rates have outperformed Treasury rates in two different types of market environments. The first part of that is that as Treasury rates were rising, mortgage rates didn't rise as much. That was that period from last summer up until the spring of this year where 10-year Treasury rates went up by over 100 basis points, mortgage rates were a fraction of that.
9:13 
The second part has been in the last two months or so where
9:18 
Treasurys have stabilized a little bit, but mortgage rates have actually come down a little bit in that period.
9:26 So ultimately, what does that mean for mortgage spreads? I think this is the key takeaway here.
9:32 
You look at this chart on the left, and this is looking at the spread of mortgage rates versus 10-year Treasuries, and it's been more or less a straight shot down.
9:40 
And it's blasted through the 2019 levels that we have there with the three bars.
9:47 
We're using that as a proxy for normal market conditions, and you can see, that we’re now just 133 basis points for mortgage rates over Treasurys, which is awfully tight, and 100 basis points tighter than where they've been.
10:05 
And if you think about, and those of you who are seeing some of our articles and webinars that we put out at the end of last fall last year, or had conversations with us, you knew we’re adamant about retaining fixed-rate mortgages as an opportunity. Because the spreads were historically attractive, but it also solved some of the excess liquidity and asset sensitivity issues and challenges that were out there. So, as we look at the landscape today, and we'll get to in a little bit, the liquidity in interest-rate risk challenges haven't gotten away and in fact, they may be amplified.
10:44 
But the spread prospects aren't as attractive as they once were. Similar dynamics in mortgage-backed securities but, as we'll get to a little bit in the third section, you know, the structural differences between MBS and loans, you know, cast those in a little bit of a better light.
11:07 
Now, for a while, I've been in the camp where talking certainly as the interest-rate volatility of the first quarter pushed interest rates up high, that the Fed was going to be OK with higher rates, as long as there was an orderly process.
11:25 
So, to define what orderly means, we want to look to see for signs of systemic stress in different market metrics. So here, we're looking at the credit and funding markets, so the TED spread is a three-month LIBOR versus three-month bills, and that it's all very narrow spreads, versus the long-term historical averages.
11:50 
Corporate credit spreads, same story.
11:53 
Pushing historical lows on triple B, corporate bond spreads. Equities are undeterred by any short-term noise and continue to progress towards or through new all-time highs.
12:10 
The one difference where there is an inkling of a possibility of some stress is in looking at interest-rate volatility.
12:19 
Now, part of higher volatility comes with the bond math of our steeper yield curve, so it's expected.
12:31 
But you know as an old, cynical fixed-income person, you know, the bond market has a pretty good track record for being the first to sniff out trouble and challenges in the markets. So certainly, you know, looking at the level of volatility and keeping an eye on that is worth watching.
12:57 
So, on the economy, you know, inflation talk is all the rage today.
13:05 
So, you know, we won’t go too deep into that because I'm sure everyone's inundated and they've heard the word transitory plenty of times watching the financial news or reading.
13:15 
But, you know, looking at something a little bit closer to home for, you know, those involved in the real estate markets, is looking at some of the things that are happening in the commodities inputs for housing, and looking at the price of lumber, and just astonishing parabolic moves at the end of last year that were erased.
13:37 
But then also, again, more recently, just in the last month or two, you know, to the multiple of two X, or three X. So, by any definition of the word, you know, that is not a normal move.
13:55 
Sticking with the economic theme and looking at the health of the consumer, personal savings rates are still extraordinarily elevated, and part of that is the stimulus that rolled out over the last few months.
14:12 
But then, even looking at things like the consumer sentiment index, we can see while there's been some recovery from the depths of the pandemic, still well below the pre-pandemic baseline.
14:23 
So, there's still that measure of cautiousness from the consumer.
14:30 
Then lastly on the economic side is the progress of the vaccination, and I think it's great to see here most especially in New England, that the rollout has been well in advance of what we've seen on the national level.
14:46 
And in fact, if not for Hawaii, all six New England states would occupy the top six spots for the percentage of people who have received at least one dose of the COVID-19 vaccine. So that is certainly supportive of the recovering economic landscape.
15:09 
So now, switching over to what we saw from call reports in the first quarter.
15:16 
So, again, unsurprisingly, we'll start with the obvious. Many of the folks on this call will know and recognize that we're running out of adjectives to describe the level of cash that is on … many depository balance sheets right now.
15:35 
So, to put that in perspective of how high the cash levels are, you know, one of the metrics that we'll look at is how many -- what percentage of our members -- are above 5% or even 10% in cash on hand.
15:50 
So you can see here if you look to the right of the bar chart in fourth quarter of 19, the last pre-pandemic quarter that it was just slightly over 10% of banks and credit unions who had more than 10% cash on hand, which is an extraordinarily high number. So, it makes sense, only at 10. 
16:11 
In the most recent quarter, those numbers were around 50%, so one of two members had over 10% cash, so truly an incredible move.
16:24 
Where's that cash coming from? You know, simply put, there's challenges on the asset side. But first and foremost, it’s coming from the inflows of deposits.
16:33 
So, what we're looking at here is all of our depository members ranked by asset size, smallest to largest, with banks in blue and credit unions in green.
16:44 
And what we see here is that the median growth in non-maturity deposits, quarter over quarter, was little more than 8.5%.
16:53 
So, 8.5% is a huge number and it's even huger when you think about (how) it was 8.5% growth off of an already elevated level that we saw coming out of 2020.
17:10 
So, again, running out of adjectives -- huge, extraordinary, incredible -- you name it. One interesting thing to notice here when you look at this chart, is that if you look towards the left-hand side, so our smaller members, you see a lot of the green dots, the smaller credit unions, with above-average growth.
17:31 
Alternatively, you look to the right-hand side, and you see a lot of those blue dots below the median. Those are some of our larger banks.
17:39 
So I think what we can attribute that to is the impact of the stimulus sent out to the consumer in the first quarter, and in that, relatively speaking, it was our smaller credit unions who saw the above-average deposit growth.
17:57 
So, we highlighted the growth in non-maturity deposits, and it really hasn't bucked the trend that's occurring in term deposits.
18:09 
And the customer, the consumer preference for CDs, which really has been declining going all the way back to 2010. And even in 2015 and 18 when we were in the midst of the hiking cycle, CDs really didn't explode higher. At best you could say they kind of muddled alongside. So right now, for banks and credit unions, that’s about 16% in terms of term deposits making up the percentage of total deposits. And I think the longer that we stay in this environment where we're talking about 0% handles on deposit rates, I think we'll continue to see that natural flow from customers to seeking out the optionality and the flexibility of non-maturity deposits.
19:00 
So, this is interesting, some data coming from a report that the OCC puts out, their interest-rate risk statistics report. So, when you look at on the left-hand side, this is the median bank, the OCC bank, and their income simulation. So, they’re 12-month earnings at risk.
19:22 
And when you look at that shape of the curve, you know, many of you folks who come across the ALM process, you know, that that looks like an asset sensitive institution.
19:32 
So, the prospect of the bogeyman of rates moving higher isn't necessarily a bad thing and, in fact, it improves the earnings profile (of the) institution. And one of the main drivers of that is what you see along the right-hand side
19:49  
is the assumed average lives for some of the non-maturity deposit buckets, and19:58 that's before getting into the ability to lag pricing in a rising-rate environment.
20:03 
So, you know, your specific mileage will vary, in terms of what balance sheet levers you can pull.
20:12
It may seem counter-intuitive, but if your profile reflects anything resembling this, you know, then the hedge or the risk-reducing move is not necessarily to be accumulating cash but rather extending as a duration and moving towards a more neutral position.
20:33 
We'll get into a little bit more of that in a bit.
20:38 
Looking at what's going on with loan growth and, you know, these charts may be difficult to see, but these are some of my favorite charts here.
20:49 
You'll see, you can see that the PDFs after, we’ll send it to everybody, but at the top left, just go around the horn. Top left is looking at loan growth across all our depositories and looking at it two ways – one total loan growth and then the other removing PPP activity. And when we strip out PPP activity, we can see that quarter over quarter, in fact, loan growth was negative. And it has to be frustrating to those on the call that that is the case, and that is the condition, especially when you see the historic levels of the inflows of cheap non-maturity deposits with the challenge in deploying them into the preferred asset class.
21:37 
The top right, and then some of the others … is where we take a little more granular look at loan growth activity broken out by geography across our footprint.
21:49 
So, on the top right, it was kind of interesting in terms of looking at one- to four-family loan growth.
21:54 
And this is something that reconciles with the anecdotal evidence that we've seen and heard from conversations with members, is that the most growth has been coming from our northern New England members, specifically Vermont, New Hampshire, and Maine.
22:09 
And that's, you know, that the common theme of out-of-state buyers, you know, moving out of the cities and moving to those locations.
22:19
And, in fact, the softest growth was in Greater Boston and Metro West. The bottom left looks at commercial real estate growth for banks.
22:30 
And again, aligning with the anecdotal evidence, I think pretty consistently, our New Hampshire members, and specifically Southern New Hampshire members, have tended to be the most optimistic,
22:42 
not just building back up of loan pipelines, but actually activity that has been flowing through to first and second quarter of loan activity. So, that bears out, with looking at New Hampshire leading the way on commercial real estate growth.
22:57 
Then the bottom right is auto loan growth for credit unions.
23:02 
And, you know, the auto portfolios are challenging to grow in normal times because they tend to be short in average life. So, the originations really have to be clicking on all cylinders in order to grow. But I think we do see some of the aftereffects of the pandemic and the work-from-home environment with the negative loan growth on the auto loan side across the region.
23:30 
So, moving to yields and margin and, you know, what's happening with asset yields,
23:37 
you know, it doesn't appear that we've hit a bottom by any stretch. There continues to be the bleed on investment and loan yields and there's a rather large drop in commercial real estate, non-resi real estate for banks -- 21 basis points quarter over quarter. I think that part of that is  refi volume and the strongest borrowers being able to have a little bit of leverage with so much liquidity out there in the markets.
24:12 
Investment portfolios, as to be expected, have repriced faster than the loan portfolios, but at least a glass half full perspective for credit unions, would be that yields have come down so much where now the median yield for credit union investment portfolios is at 65 basis points.
24:37 
So when you think about the potential for margin expansion, you not only have the cash on hand at 10 basis points and being able to invest that in that as incremental income, but also the marginal dollar flowing off is, very back of the napkin, is coming off at 65 basis points.
24:57 
And in this current environment, that is not an unsurmountable hurdle to clear in terms of re-investing cash flows into the portfolio.
25:09 
So, just mentioning the more to go on the bottom of yields here, you look at non-resi real estate yields for banks at 437.
25:22 
Many members use our five-year Home Loan Bank rate as the pricing index, 437 would be about advances plus 310 basis points on that yield. And that spread level is way above current market rates from every conversation we've been hearing, so there's more room for contraction there.
25:48 
So, looking at deposit pricing – so this is a collection, again, another neat chart.
25:54 
Looking at deposit pricing over the last few quarters across all our membership for money market rates with the percentiles, the median, and then the outliers in both directions.
26:08 
And what you can see unsurprisingly that the difference between the high payers and the lowest rate offers has contracted pretty significantly over the last few quarters.
26:21 
And, one common refrain that we hear from all kinds of conversations is that folks have ratcheted down deposit rates, you know, with the expectation or thought that it may lead to some liquidity outflows.
26:35 
But that generally has not been the case that rates get cut, deposits stick around, and in fact, as we saw a couple of slides ago, deposits continue to come in.
26:48 
So, you know, this is one of the most difficult questions out there right now: is how do you balance something that is so hard to quantify and analyze, right?
26:56 
Truly, how sensitive and sticky are my deposits today, three months from now, one year from now.
27:02 
And then how do we set rates to tackle the biggest problem that is staring us in the face right now is all this liquidity in a challenging landscape on the asset side?
27:16 
So, we have deposits falling out of the sky. Loans are hard to come by.
27:22 
Well, then, naturally, there must be investment activity through the roof.
27:27 
The short answer is yes.
27:29 
We saw a sea change in the activity patterns for bank and credit union investment portfolios in the last quarter. So, what we're looking at here is the quarter-over-quarter growth for investment portfolio broken out by certain bands. And you can see highlighted along the right-hand side, nearly half of all members experienced more than 10% growth in the investment portfolio and that 50% or 47% compares to between 20% and 30% that we've seen in previous quarters.
28:13 
So, investment activity has been exceptional, and we capped that last chart at anything above 10%, and we've seen a lot of numbers where the growth has been 20% or 30%.
28:29 
Putting that together with how phenomenal the deposit growth has been shows us that while investment activity has been robust, it hasn't made much of a dent in the already high levels of cash.
28:44 
So, what we're looking at here is where was there more growth, investment, plus loans, or in deposits?
28:52 
So, you can see 81% in the most recent quarter saw deposit growth that was greater in investment and loans.
29:04 
So, I can tell you how many call reports that I've seen where investments may have grown by 20-25%, which seems like an aggressive bond-buying program, but, it didn't do anything to pare down the cash levels because deposits almost dollar for dollar matched what the investment activity was.
29:31 
So, here's a positive sign and takeaway when thinking about loan credit.
29:40 
So, we went back to the first quarter of last year, to the present, and looked at what percentage of members were taking quarterly provisions greater than 25 basis points, and there's that dark gray line. You can see (during) the onset of the pandemic, it was about a third of members who are taking those high levels, above average levels, of provisions.
30:06 
And that has steadily come down over the last few quarters, to where it's just 6% of our members were aggressively provisioning.
30:15 
At the same time, you can see the two ships passing in the night,
30:18 
the percentage of members in green there, who have begun to release some of the reserves that they have previously built up because, thankfully, and fortunately, it doesn't seem that the level of the storm that we thought could occur this time last year, is going to come to fruition.
30:39 
So, you know, the release of the reserves is a positive sign.
30:49 
So, looking at the performance of public bank stocks, and I've mentioned this before, that, even if you're a mutual or credit union,
30:56 
I think it is instructive and worthwhile to look at how the capital markets are valuing public banks because it gives you a window into the health and the prospects for the industry. So, what we're looking at here is all the public banks (in) New England, we constructed an index.
31:19 
And we can see in the green line, the price has recovered fantastically - doubling, in fact, from the lows that we saw in March and April of 2020.
31:30 
And, really, the two drivers of that has been, like we just talked about, that the passing of the potential credit storm, but also the steepening yield curve that makes the potential for spread income and core margin.
31:50
It's, as everybody knows, it's easier to make money with a steep yield curve than a flat yield curve. So, while there are certainly challenges ahead for the industry, I think this is a glass half full sign because the stock market is nothing else but a forward-pricing mechanism.
32:14 
So, you'd rather see this level of optimism than the alternative.
32:22 
So, talking about balance sheet trackage, what can, so, this is fantastic. We've talked about what's happening in the markets, what's happening on balance sheets, you know, with a little bit of a look in the rear-view mirror, but what can we do going forward?
32:38 
Right to position the balance sheets and best way possible, managing both risk levels, but also, return objective. So, I think, you know, I don't think this is going out on a limb too much here, but for many, it's about right sizing the liquidity levels first and foremost.
32:58 
So, and the asset side is going to take precedence over what's happening on the liability side in terms of the first steps that can be taken. So, we'll go through some of these key questions, as you can see here the things that we're seeing, things that we're hearing, and some of the ways you can tackle that.
33:21 
And then, also, some of the specific and particular funding ideas that once liquidity gets the right size, then you can zero in a little bit more on the wholesale funding side, (and) take advantage of some of the opportunities there.
33:37 
So, you know, we've talked about the high cash levels and, you know, one challenge right now is how might, should we be holding all this cash to prepare for loan demand? So, what is the shape of this return of loan demand?
33:52 
We saw it was negative XPP last quarter, but is it going to come in droves like, deposits came just you know, 10% out of the blue? Or is it going to be more of … a resumption of a normal growth slope from here going forward without the catch up of what has or hasn't happened over the last 12 months.
34:15 
So, when you think about the dynamic nature of the depository balance sheet, you're getting cash flow every single day from the amortization prepays, both on the loan and the investment side.
34:28 
So, I think it's a worthwhile exercise to look at your balance sheet and say what do we have coming off?
34:34 
And then if we want to … take our 12% cash and get it back down to 3% over the next three quarters, how much do we need to really originate in loans? And is that possible,
34:48 
given that our loans and our investments are throwing off cash every day, that we have to replace that first and foremost, and then we have to originate more to get growth?
35:00 
So, you know, we've run some of these numbers and played around with it, and even building in some deposit stress testing assumption in terms of potential outflows, and as we saw the first quarter of this year, there were no outflows. It was more deposits coming into the equation.
35:19 
You know, we've seen some examples where you'd have to originate 25% of loans from your asset size just to grow loans by 10%, and that's not necessarily balance sheet growth;
35:32 
that's getting cash pared down from, again, from that 12% to 2%.
35:38 
So, in very rare instances, you may be surprised to find that the amount of cash that you have is not necessarily how much cash that you need.
35:54 
OK, great, we have excess liquidity but maybe we don't need that much excess liquidity.
35:59 
Well, our residential originators continue to be busy, maybe not as busy as they were eight months ago, but still busy by a normal definition. So, should we retain fixed-rate mortgages?
36:12 
So, in the first section we talked about … comparing the spreads versus Treasury.
36:18 
So, this is another way that we can look at sprints for how we might think about deploying excess liquidity. So, this is the primary secondary screen.
36:27 
So essentially, what this does is looks at spreads for mortgage loans, 30-year fixed rate mortgage loans,
36:33 
and spreads for mortgage-backed securities. And so when this spread is at the higher end of the range, there's some relative value in holding loans over bonds.
36:42 
So, you can see third, fourth quarter of last year, that spread was awfully hot -- plus 150 plus 175, at its peak.
36:54 
Now, with that spread tightening in mortgage loans, we've come back now to more of a historical level.
37:01 
So, as spreads get narrower, I think the flexibility and customization and the liquidity of mortgage-backed securities versus the one size fits all of here's a 30-year fixed-rate mortgage that we originate,
37:16 
there may be a little bit more relative value in buying bonds and selling loans, versus just holding your residential production.
37:32 
So, OK.
37:33 
So, investments may be the place to be. What should we do? So, as we showed a section or two ago, investment activity has been robust.
37:45 
And the average investment portfolio has gone up about 1% to 2% in the last quarter.
37:53
But, what we can see here: this is a graph of the investment, the asset ratio from banks and credit unions, going into and out of the last crisis, 10, 12 years ago.
38:05 
And we can see, at the current levels of 13% and 14% investment to assets, we really aren't near the peak in investment size that we saw last time.
38:17 
And now, you know, I've yet to meet a bank or credit union executive who would rather have a 25% investment-to-asset ratio than a 10% investment portfolio.
38:33 
But, you know, we are in atypical times.
38:38 
And I think that the nature of the composition of balance sheets, as well as the opportunities --  the markets, you know, present these opportunities where you have to deal with the market and conditions that, you know, we face.
38:52 
So, there's a number of strategies, as I mentioned before, if you're asset sensitive, that steeper yield curve is actually a risk mitigating move, so going out to that five year part of the curve in any number of structures, whether it's mortgage-backed securities or agency bonds, there's some more opportunity and value there than maybe there was a couple of months ago.
39:13 
And again, the flexibility with shorter securities, whether it's 10- or 15-year mortgage-backed securities, that if you are sensitive to duration risk or not having cash flow, then those are options at the expense of giving up some of the yield, but still incremental yield versus what you're earning in cash, that are going to put you in a better position, maybe, than you are in today.39:45 There is the asset side.39:48 You know, I said that the liability side is less of a focus, but, you know, there still are some levers to be pulled in terms of deposit pricing.
39:57
So here, this -- little two noisy charts here -- is looking at the cash to assets for banks and for credit unions, and then some deposit metrics.
40:09 
So first on the left here is for credit unions, cash to assets on the X axis, and the Y axis is the money market rate.
40:19 
So, you can see it's kind of all over the map in terms of folks who are with high cash and thinner cash, and high pricing and low pricing. So, I think the opportunity for margin and liquidity relief rests in that upper right-hand corner. So, if you have 17% cash, but you're still paying 40 basis points on your money market rates, I think, you know, that's a low hanging fruit now.
40:44 
Obviously, there's more variables that go into why you price deposits where you do, than just the quantitative side of things.
40:53 
But, you know, as you balance the margin and earnings needs with those things, those folks who are with high cash with high rates can certainly test the elasticity of your deposit portfolio and hopefully get some margin and liquidity relief at the same time. On the right-hand side, it's for banks looking at cash to assets, but also those folks who have higher CDs as a percentage of their total deposits.
41:24 
And, as we mentioned, it’s about 16% was the median bank, but there's still a fair number of banks out there with 20, 30, sometimes higher allocation towards CDs.
41:36 
So as those are coming due, there really is the opportunity to reprice the deposit portfolio and maybe trim some of that cash as well.
41:47 
So, great, you've worked through the asset, you've worked through the loans, you’ve worked through investments, you've worked through the deposit portfolio, and you get your liquidity back into a more normalized place. So, there's a couple of things on the wholesale funding, the advance side, that I think are worth pointing out that can be attractive and useful. So, the first thing would be looking at the inverted front-end of the curve.
42:11 
So, as many are familiar, that 12-month part of the curve is typically the lowest rate and also the tightest spread to Treasurys of advances.
42:21 
And, you know, recently, the one-year has been in the Tuesday, Thursday markdowns along with the one-, two-, three- and six-month maturities. But another thing here is that the one-year is eligible for the Advance Renewal Discount Program, which is a way to save two to four basis points versus the posted rate. You don't necessarily need a renewing advance to take advantage of that program. So, feel free to call the Member Funding Desk and they can walk you through that process.
42:59 
Secondly, would be our discounted housing advances. So, as many of you know, the mission of the Federal Home Loan Bank of Boston is to support affordable housing efforts here in New England.
43:09 
So, one of the ways that we do that is by offering Community Development Advances that are discounted versus the Classic rate.
43:15 
So, here, you can see discounts of between 10 and 28 basis points from one to five years.
43:24 
So, now, each member gets up to $35 million of CDA and $15 million of CDA Extra funding per year.
43:34 
So, … if you're not familiar with this program or the application process, pretty straightforward,
43:40 
reach out to your relationship manager, and they'd be happy to walk you through what you would need to do to get that in place to be able to access that discounted funding.
43:50 
​Then, lastly, one thing that has been of particular interest of late has been Forward Starting Advances.
43:57 
So, you know, one common refrain that we've heard from a lot of folks, and as we've seen through this presentation, is that with all the excess liquidity, funding, incremental new funding isn't necessarily something that folks are seeking, many folks are seeking out right now.
44:13 
But the level of rates, right now, and spreads, is attractive. So how do you reconcile those two?44:20 
So Forward Starting Advances are a way to tackle tomorrow's funding needs, but with a price that is determined off of today's yield curve. So, here's an example of an offering that we had last week, and many of you may have seen the daily rate emails, where we've had some special offerings.
44:38 
So, this is an example where it was an 18-month advance being offered, but rather than being disbursed immediately, there was a six-month delay.
44:48 
So, the rate of 44 basis points, you don't have to pay, you don't have to purchase any activity stock, or have collateral tied up against it, until it gets dispersed six months out.
45:00 
So, this can be a useful tool to guard against any potential deposit outflows that you may be modeling or expecting, in any extraordinary loan growth that you may see coming down the pike, or even hedging against rates rising. If your asset sensitivity isn't like some of the examples we've worked before,
45:25 
you know, there would be a benefit there. And like many of our advances and solutions, there's an infinite number of ways to customize them.
45:35 
So while you may see the one offering out there, if you want to move around more to your unique needs, the delay for the disbursement or the final maturity, you know, I think we have a series of offerings going out tomorrow, seven-month and 15-month – seven-month delay, 15-month maturity and then eight-month and then 18-month.
45:59 
Don't quote me on those. But again, we can customize those in a number of different ways.
46:08 
So, with that, that wraps things up. Thank you, everyone for your time here. If there's anything that you saw here that you would like to dig in to discuss, or if there's any of the reports or pieces related to the pure analytics, we're happy to put together a report or series reports that you can pass around in ALCO or … things like that. You know, reach out to your relationship manager, or us directly, and, you know, we'd be happy to help. That's what we're here for. So, thank you everyone, for your time today, and hope you have a great rest of your day.