May 2025 Peer Analysis and Balance Sheet Strategies Update

0:06
Good morning, everyone.
0:07
Thank you for joining us today for our First quarter peer analytics and balance sheet strategies update. My name is Andrew.
0:15
This is Tyler. We have a pretty full agenda to go through here. You know a lot of things are happening these days, and in many pockets of our industry and the markets. So, if you haven't been with us before, the drill is we're going to go through things happening at a macro level that impact how depository institutions manage their balance sheets.
0:39
We'll take a deep dive into first-quarter call reports and identify some key trends that we need to be aware of. And lastly, we'll wrap things up talking about relevant and specific balance sheet strategies that we consider, given all the things that are happening at the moment and all the things that could be coming down the pike.
0:58
We'll try to make our crystal ball a little less foggy than it's been lately.
1:05
So we'll kick things off with a poll question to get some audience participation here.
1:11
So speaking of that crystal ball, looking forward, over the next 12 months, what scenario do you believe is most likely for your institution?
1:20
You can see some of these answers here.
1:24
There's no numbers here, that's okay.
1:26
So we'll leave it to you to define what a lot means to you in terms of loan growth exceeding deposit growth or the other way around.
1:36
And you can see that the last option there is part and parcel with some of the conditions and uncertainty that we think are prevalent in the markets today.
1:49
So as we see the answers that start to come in, you know, talking about that, that foggy crystal ball, you know, not to spoil the poll results here, but it's trending in that in that direction.
2:04
Looks like everyone knows what they don't know, at least some of us.
2:09
Wise words to live by here. So we'll just give it a few more seconds here to get some more responses coming in.
2:20
And, you know, we'll dig into loan and deposit growth trends that we saw, not just in this most recent quarter, but that have been occurring over the, you know, quarters before that, and identify what may be on the horizon.
2:35
So I think we can wrap up the poll now.
2:38
We have a pretty good sample here.
2:41
And interestingly, 28% say that loan growth is going to exceed deposits by a lot.
2:48
30% loan growth and deposit can be more or less in lockstep.
2:53
Not many who think that deposit growth is going to win the day.
2:57
And then tied for first at the most popular answer is your guess is as good as mine, nothing would surprise me.
3:03
​So that doesn't surprise me, that response given all the things that are going on. So let's keep things moving.
3:14
And as we try to kick things off, typically with a little light-hearted look at something.
3:19
I'm partial to the funny pictures and the intersection of banking and sports, or pop culture and things like that.
3:26
Tyler, he's fresh, young, and ambitious.
3:29
He likes numbers and data.
3:31
So he worked on this.
3:34
And it's been here in greater Boston, a horrible spring in terms of rain, and really always on the weekends.
3:42
So those of you who are golfers are not out there as much as you'd probably like to be.
3:48
But a little trend here, you know, as we tie it together with inflation and pricing pressure that is evident in all corners of our lives.
3:59
And we can see that the Master's compensation for winning has really outpaced what everyday people are earning at their modes of employment.
4:11
And so if you look at the sub header there, Tyler had the very astute observation that leaving work early to play golf is a smart career move Given that the compensation potential no what no probability waiting on and being able to capture that for at least for me the way I play golf, but Ambitious nonetheless. Yep, aspirationally.
4:31
I think I wrote that. Absolutely.
4:34
Yeah, so you've got to start somewhere.
4:37
So, let's jump into what's happening in the markets and the economy. As we sit here in the middle of May, we'd be remiss if we didn't mention what was happening in the first few weeks of April.
4:52
And with the tariff-related uncertainty and movements in the bond and stock markets.
5:00
And this market turmoil was different than the past few ones, specifically for depository institutions.
5:11
Because we weren't in the eye of the storm like we were in March of 2023 or March of 2020, and so if we start on the left-hand side, this is the St.
5:22
The Fed puts out a neat index called the financial stress index where they take it's a compilation of various yield curves and spreads and borrowing rates and indicators to look at and compile it into one true number to indicate how much stress there is in the market. So we saw a considerable spike in April.
5:40
Didn't quite reach that regional bank turmoil, the SVB situation, and COVID is not here.
5:48
That was off the charts.
​5:50
But it was pretty challenging and not going to belabor all the tariff-related things. But the key points for me were the weakness of the dollar.
6:03
And we can see that the top right-hand chart actually started before April in terms of the softening of the dollar, and that has implications for demand for fixed income and dollar-denominated fixed income products.
6:20
And the bottom right shows that the ten-year treasury rate and the S &P 500 and the key takeaway we've annotated here, it's tough to tell when you look at the five-month chart, But as we go back to the conversations we had during that period, the thing that got us nervous for that moment in time was that there wasn't that flight to quality in treasuries that typically happens when there's uncertainty or challenging economic conditions.
6:47
And that has been a bedrock of markets for not just decades, but centuries, right?
6:53
So that is all tied together with the dollar and the trade wars and our trading counterparties and things like that. But that subsided as things cooled off.
7:08
And in fact, interest rates have moved higher, more or less, in the intermediate and long end since then.
7:14
And where if you fell asleep in February, March, and you woke up in May, and you look at interest rates, you said, nothing has happened.
7:20
Well, you're right, but you're wrong, because it was a wild trip to get there.
7:27
So, back to things most relevant to us as balance sheet managers here.
7:32
If you were with us for the peer analytics webinar in mid-February, we were all smiles talking about the slope that we had in the yield curve, and we relayed a lot of the conversations we were having during that window of time with members, talking about how great it was to put the inversion of the yield curve in the rear view mirror.
7:55
And ironically, there wasn't a ton of slope, but the attitude or the intangible take that many had, you would have thought there was 500 basis points of slope in the yield curve when here we can see in the one year five between the one year and five year points, it was just 37 basis points, but relative to the deeply inverted levels that we had been, we'll take anything we can get on in terms of positive. But that went away as we went through the first quarter.
8:25
And now the slope has started to come back. Well, they're not sloped yet.
8:30
We're still invested in most combinations of tenors. But it depends if you're a glass half full or glass half empty person.
8:39
It's not as good as was in January or February of this year, but it's markedly better than it was for the bulk of 2024, especially when we were on the cusp at that point, especially in the summer, of potential rate cuts being priced in, which is similar to where we're at right now.
9:00
And so speaking of interest rates, while they are very, if not impossible to predict, there is some indicators we can look at to get a feel for the Fed's posture and what that might apply about rates and where they work when they go from here.
9:13
So on this slide, we look at the effective federal funds rate as well as the San Francisco Fed's proxy fed funds rate.
9:20
And the proxy Feds fund is a holistic look at the feds policy stance that includes things like changing the feds balance sheet size, forward guidance, and private and public credit spreads.
9:34
And all these inputs impact how the fed stands impact the wider economy.
9:39
And so, while we can't necessarily predict rates from this, it does give us an idea of what the Fed's stance is.
9:46
And so, when the proxy is much more hawkish or dovish than the EFFR, that can give us some clarity as far as how committed the Fed is to their stance.
9:57
So when that spread is really wide, we can see that the Fed is probably going to stay with the EFFR or their trajectory with the rates for a while.
10:08
But when it starts to converge, that might be a signal that a pivot is coming.
10:14
And so as we look back over time, the proxy stayed well below EFFR going through the low-rate period running up into this recent hiking cycle.
10:27
​And while there isn't anything particularly salient as far as predicting the future rates out of this measure right now, it's something to watch.
10:36
Because, like I said, when those converge or expand, as far as the spread between the proxy and the AFFR, it does give us an idea of upcoming pivots and just the commitment to that policy and stance.
10:49
Yeah, and I'll just chime in that I was excited when Tyler brought this to light, because it really is fascinating to look at the historical.
11:01
So as he said, there isn't a divergence right now, but I would absolutely, it's in our toolkit of things that we're watching and monitoring as a potential leading indicator.
11:11
So I think it can most certainly be very useful to that end.
11:19
And another indicator worth watching, and while we know that not all our members are public, looking at the public's perception of bank performance is an important indicator, just of market sentiment towards banks, and where the future performance may go.
11:35
And so what we're looking at here is all of our members, public bank members, weighted based on market cap and indexed at $100 or at 100 on January 1st.
11:44
And so we see that run up that many of you experienced or saw late 2024 and into early 2025 with expectations of the new administration and potentially you know some more friendly regulations as far as just banking generally and M &A and then as those kind of expectations waned and we started to pivot towards seeing more talk of tariffs we did see and just a general public market public perception shift or sentiment shift that got a lot more negative just based on those tariffs and kind of away from the jubilation of the new administration and that led to this kind of drop-off that we saw culminating with that sharper drop.
12:24
And that was the more specific announcement of tariffs that we saw in early April.
12:29
But since then, we have seen more clarity, less uncertainty, and a re-steepening of the yield curve.
12:35
And we've seen public member stocks come back to almost that level that they were at in early January.
12:43
So we're contractually obligated to talk about inflation unemployment in any section called markets and an economy.
12:51
Those of you who have been with us in webinars before heard our stance, you know that we don't have a sense, have a celebration because inflation ticks down according to the way that it's measured.
13:05
There's the compounding effect that happens when inflation is very, very high.
13:11
So this idea of looking at year-over-year changes doesn't paint a picture when you have volatility like we've seen.
13:21
So we've been in the camp of don't discount higher for longer, that inflation still needs to be fought.
13:29
​And we've been seeing that with the numbers, that those numbers, even to 2.8, that's not 2% or that's not 1.5%.
13:40
And so that goes to where that terminal rate may not be 2% anymore.
13:44
It may be closer to 2.5% or 3%.
13:48
And even we've seen some of the commentary from Chairman Powell uh trying to counteract some of the tariff related uncertainty and things like that and even making comments that We can't lose sight of the fact that uh in inflation and pricing Pressure is something that we continue to deal with On the unemployment rate the other key metric that the fed watches uh Things have started to plateau a little bit.
14:13
Uh, we saw some not-so-great trends through 2023, and you can see that the green bar on the bottom, excuse me, the green line on the bottom.
14:23
And the green bars indicate the change in rate versus six months prior to that particular reading.
14:33
So you can see in 23, beginning of 2024, there was that trend of we were 0.2 to 0.4 higher than where we had been, an upward sloping path of unemployment rate, not so great, and potentially a leading indicator for rate cuts that are going to be coming.
14:51
But we're right at the level right now on the national unemployment, where we were in July of 2024.
14:57
So we're bordering on a year of unemployment not rising.
15:02
So that doesn't necessarily make the case in my mind that aggressive cuts are right around the corner.
15:08
​And we'll get back to that when we get to section three, when we talk about actual balance sheet strategies and tactics that we can employ and how we can take advantage of overwhelming hawkish or dovish sentiment.
15:23
All right, so let's move on to peer analysis, color poor trends, and what happened in the first quarter.
15:31
So we'll start things off by looking at margin.
15:34
And again, you can be glass half full or you can be glass half empty.
15:41
When we look at the path of margin over the last few quarters, it's been improving.
15:48
​And we'll get a little bit more into the specific driver.
15:54
So we can see we bracketed with the top and bottom deciles and quartiles, as well as the median for our membership base.
16:03
And just for clarification, this is all of our bank members, all of our credit union members here in New England.
16:09
It's not national.
16:11
​And from a color-coding perspective, it's blue for banks and green for credit unions as you follow along here.
16:17
So, we have seen lift. The past few quarters, the median bank NIM has gone up by 16 basis points.
16:25
Credit unions have been rising since 2022, and there are a couple of dynamics there.
16:34
As we've talked about previously, deposit betas and performance have been a little bit stronger relatively for credit unions versus banks.
16:40
And then there's also the asset repricing frequency, you know, auto loans that have allowed asset yields to do a little bit better.
16:50
But when we think about where we've been, we can see a divergence in that the only group who is higher for banks than where they were in 21 and 2022 is that top decile.
17:10
And then everybody else is weaker, so from the quartile, the median, and then the underperformers.
17:18
So I think that tells us about how challenging an environment it has been these last couple of years with managing deposit costs, but also the overhang of some of those low fixed rate, long duration assets that are still prevalent on the books.
17:37
Credit unions have done a little bit better, and in fact, it's only the bottom decile who's not in a better position, NIMWISE, than they were in 2021 and 2022.
17:49
So that's margin.
17:50
So that's looking at what we can get on yield and cost on the asset and liability side.
17:57
But when we take it really down to return on assets, earnings, where are we?
18:04
where have we been?
18:05
We can see similarly for both banks and credit unions, it's been a slow shift down our trend.
18:11
Even as we see this recovery and lift in NIM, there still is pressure on return on assets.
18:20
And the big thing that jumps out is in 2019, 2020, and 2021, what did we have going for us as a significant tailwind, mortgage banking income.
18:33
The refi market was booming because of the path of interest rates.
18:38
So independent of what was happening margin wise and on the retained balance sheet, non-interest income for many folks was in a good place.
18:47
We'll talk a little bit more about growth of the balance sheet, but overhead and expense management is something that is at play too.
18:57
So when we think about in 2020 and 2021, that all that pull forward growth in really, really significant numbers, let's just make up some numbers here for a second.
19:08
Let's say over the past five years, you've grown your balance sheet by eight percent annualized.
19:14
Well, that helps from an expense perspective, because even if you've grown expenses by five percent per year as a percentage of assets, you're going to be better off, and Tyler and I were talking about how the efficiency ratio is good to look at, but can give you some misleading signals because of how profitability feeds into that.
19:35
But I'll point out, looking to the right hand of the bottom chart, 38% of credit unions and 20% of banks have still seen non-interest expense as a percentage of assets increase even though growth has been pretty phenomenal.
19:54
So something to be wary of as we try to achieve some levels of economies of scale.
20:03
So let's move on to talking about loan growth and yields.
20:07
And start up here on the top, on that colorful chart, and we can see a shift going from the bottom left to the top right in terms of how we bracket these groups for loan growth.
20:22
And we've done negative growth up by zero to five, five to
10.20:
26And then the light gray bar is those who have grown quarter over quarter at an annualized rate of 10% or better.
20:33
And that bucket has really, really, really shrunk. And that is probably no surprise to anybody when you think about your pipelines.
20:40
And the $64 ,000 question is, is that because of lack of demand on the customer side or weakening credit, we'll get into some credit metrics in a little bit.
20:50
Are we capital or liquidity strained?
20:54
Less so now than six months ago, the yield curve shape is more of a friend than a foe.
21:01I
wouldn't say it's a best friend right now, but it's not as much of a foe as it was in the summer of last year.
21:08
But the moral of the story is, loan growth is slowing down.
21:13
On the loan yield side, for a while there, we had the deposit lag that was our friend, and then that caught up to us.
21:25
The check came due, and we're still fighting those battles. But loan yields were rapidly repricing. All asset yields were rapidly repricing.
21:34
But since September, we've seen 100 basis points of rate cuts.
21:38
So certainly on the bank side, any exposure to floating rate assets has brought those yields down, but also the slowdown in growth.
21:46
Here we are in this environment where there are 6.5%, 7% alone yields to be had where your existing book has still a lot of 3, 4s and 5s in it.
21:59
So it makes sense intuitively that as growth is slowing down, the aggregate yield of the entire portfolio isn't reaping same benefits because we're only adding 1% to what we had last quarter.
22:12
And then on the right-hand side, point out, for a while there, pretty much everybody was growing improving loan yield, but we saw a big leg down in this most recent quarter where only 29% of bank members were able to experience an improvement in loan yields.
22:30
Pretty much the same story on credit unions, but even more to a more drastic level, if you think about it, because looking at where we are today, just about 10% had long growth in excess of 10%.
22:47
And rewind that to June of 2022, where it was closer to 70% who were able to grow at that pretty considerable clip.
22:57
On the loan yield side, because credit unions generally have less floating rate loans than banks do, there wasn't that immediate jump, but especially on those who are heavily allocated towards auto lending that produce a lot of cashflow, which can be, it can give a thing, and it can take it.
23:19
So it was great when you were trying to reprice on the way up, But now as growth is slowing down, we're starting to see a little bit of a tick lower in loan yields And so speaking of that we'll pivot to look at loan growth by category and so we do see is An overall convergence.
23:41
I'd say if there's one main theme It's that things are coming together after kind of jumping around a little bit as far as category by category we're seeing everything kind of coming closer to that about Half a percent quarter over quarter growth which annualizes out to about two percent And then one thing uh, we want to point out here So you see that kind of dramatic drop in cni loans that is due to a change in how those loans are reported on call reports So that's a little bit. Um, you know, misleading.
24:08
Um, so keep in mind there um but another thing to look at too is What you might be saying, you know, the residential doesn't look so bad as far as the growth We're not really doing any volume. How is that possible?
24:21
And really the story there is the prepay volume There's no prepay activity happening And so it only takes a trickle of loan volume to stay to stay in the green as far as a positive loan growth Another thing to look at there is CRE has been shrinking This this might be kind of salient for those shops that really rely on CRE growth to drive their overall growth but Um, you know, multifamily has been, uh, a stronger point there, and that might be offering some relief to those kind of same shops who rely on both of those categories.
24:55
And then consumer, as we see, is shrinking, but that, you know, does, uh, exist as much smaller aspect of bank books.
25:02
So a little bit less, uh, less concerned there and now we're going to look at the credit union side and same thing, uh, quarter over quarter loan growth by category.
25:14
And as we see, auto has been weak, both new and used that we do see a little bit of an uptick in that first quarter 2025.
25:26
And anecdotally, this could be due to uptick in volumes from consumers who were buying in anticipation of the auto tariffs.
25:37
A lot of that was late March, but then especially April.
25:40
So we'll see if that materializes more in Q2's call reports, but just that might be what that little uptick is there and to watch for the next quarter.
25:51
On top of that, residential is has been steady, steadier than with on the bank side, but kind of just the same story, really.
26:00
There's no prepay activity.
26:01
So while it may seem strong, it's not really due to any sort of overly strong volumes.
26:08
And commercial is strong here.
26:09
But like a consumer on the bank side, commercial isn't really a strong or a large portion of credit union books.
26:15
So a little bit less salient, um, of a takeaway there.
26:21
Um, and so now we're going to take a look at asset, asset repricing timing.
26:25
Um, and this is for both credit unions and for banks.
26:28
Um, and what we're looking at is these huge spikes in asset growth from the COVID era to 2020, 2021.
26:35
And a lot of that is due to the PPP funding coming in and just that absolute firehose of deposits that came in from all the COVID surplus funding and all that happened there.
26:47
So while I know that doesn't necessarily directly relate to, you know, asks being put on right away, a lot of that went in just as cash on the balance sheet.
26:56
But a lot of that was deployed, whether it be five-year Cree, or commercial real estate and investments, or key locks.
27:05
And so that giant maturity glut is coming up soon.
27:10
We're five years out from Q1 2020 and Q2 2021.
27:15
That's all in the next 12-month horizon.
27:18
​So something to watch for as those matures, one, it's going to be a really nice accretion for NIM as those all either roll off and reprice, roll off or reprice at a higher rate.
27:30
Something to keep in mind as well is credit testing for those, say, commercial real estate loans or commercial loans that are repricing much higher now, it'll be a nice NIMB boost, but worth considering where those borrowers stand now that they're going to be paying a much higher rate.
27:46
So I'll hand it back to Andrew.
27:48
Thank you.
27:50
So let's go back to talking about profitability for a little bit.
27:56
So for this exercise, we're looking at the change quarter over quarter in interest income as well as interest expense, and here we've aggregated all of our members to create one giant credit union and one giant bank.
28:12
We've omitted banks over $100 billion in assets.
28:21And what we see here is talking about, as Tyler talked about, convergence of loan growth to very low levels here, that while interest income has been coming down, partially the dips in loan yields and the slowing of growth, we've gotten relief on the funding side and that's been the driver of NIM, the improvements in NIM that we have been seeing.
28:50
And we'll get to a little bit in just a slide when we talk about deposit composition.
28:56
So we can see here, pretty impressive for banks in the aggregate, while interest income was down $9 million, quarter over quarter, interest expense was down by over $100 million.
29:13
So, how you get there sometimes can be immaterial as long as what spits out the other side on and that basis is working to your advantage.
29:23
And you can see banks in particular, more so than credit unions, the blue line, dark blue line was above the light blue bars for a considerable period of time, which really highlights how stressful and challenging the catch-up of that deposit funding was impacting the bottom line.
29:48
But it's good to see that now work in the other direction.
29:53
So let's look at the composition of the deposit book and how that's changing.
29:57
So this chart up top should be a positive development because non-maturity deposits are probably where most want to be more often than not.
30:06
So to see now what it's costing is a whole other story, but even in non-interest-bearing accounts, we have seen some positive trends, not super overwhelmingly like 2020 and 2021, but certainly there's help on the horizon that doesn't seem that we're in perpetuity going to be in this CD rate-chasing game.
30:30
So, to the point where almost three-quarters of members on both the bank and credit union side saw quarter-over-quarter growth in money market deposit accounts.
30:41
Again, pricing is a whole other ball of wax, but let's celebrate the win right now on balance growth and then work on pricing later.
30:51
The bottom chart is interesting because it shows CD trends and the big growth in CDs that we saw in 22 and 2023 as we realized that we had to go to market, that we couldn't just rely on deposits just continuing flow in at low cheap levels that we had to compete with what was out there for alternatives for the deposit dollar. And the line indicates the shortest bucket. So, credit unions have zero to 12.
31:23
Banks go a little bit more granular and say zero to three months.
31:27
And we can see that we're at the highest level in terms of concentration on the short end.
31:31
So that creates a little bit of, it can cut both ways. It creates some potential NIM expansion in a falling rate environment.
31:42
And we'll get to this in the next section when we talk about particular strategies, but it's got to be a holistic approach.
31:48
So if we're inclined to say that rates are going to be down on the front end, that cuts are going to materialize, then we're pretty well position when we think about how much we have on CDs in the book.
32:01
But a lot of what's in these very short buckets is going to be dependent on what you did with your CD offerings over the last year and a half, right?
32:12
If you were just really focusing on four-month specials, then you might have already gotten most of the, squeezed most of the juice out of those improvements, right?
32:22
You paid 5% and now you paid four.
32:24
The clearing level is probably still close to four.
32:27
But if you did a 13-month CD in June of last year, well, two months, you have some potential to pay that off, especially now as loan growth is slowing down, right?
32:43
You don't feel as compelled to be out there aggressively on deposit pricing because you have growth that you need and want to fund.
32:54
And so I like to take a look at this measure because it really pulls together all of what we're talking about as far as the dynamics of shortening on the asset side and just this repricing asset liability dynamic.
33:07
So what this measure is, is the gap between the percentage of assets and liabilities or pricing in the next year.
33:14
And so the larger the positive gap, the more asset-sensitive a bank is.
33:20
They don't have this for credit unions, so we did just look at this from the bank side.
33:24
But this chart really should offer some reassurance for bank managers who saw their balance sheets, which they thought were asset-sensitive, actually turned out to be liability-sensitive during this recent rate hike cycle.
33:37
And so what we see is that after this period of having liability shortened and liability shortened to reprice higher, we're starting to turn the corner.
33:46
We're seeing some relief coming online as liability durations extending and asset duration is staying where it's at or improving.
33:56
And while much of this relief is due to that repricing on the liability side, there has been a shift on the asset side as well.
34:02
And that segues to changes in investment book average duration.
34:25
So what we see is that the distribution maturities of bank for bank investment books have been shortening on average tenor.
34:35
So with bonds repricing in the next zero to three years, having gone up by 10% since Q1 of 2022.
34:44
And long bonds have shrank as a percentage in tandem.
34:48
So alongside that shift in average tenor towards or that shortening of average tenor, we've also seen really slow growth in the investment book.
34:5
6We've only seen about 1.47% annualized over the last three years. So really, really low investment book growth.
35:03
And so as these low coupon bonds start to roll off and reprice higher, you're going to be able to invest these at much higher rates or even just take that cash and put it into IORB at 4%.
35:17
So it's going to be a really substantial NIM boost as these bonds continue to reprice much higher.
35:28
And so we're going to take a look now onto the credit union side and it's a very similar dynamic here, uh, bonds with zero to three years left, uh, till maturity or repricing have gone from 39% to 50% of investment books, remember credit unions.
35:43
And there's actually been a pretty substantial shrinkage on the investment book, uh, or the overall investment book, or credit unions.
35:50
Um, we've seen the 22% overall drop in the, uh, so our total credit union member credit union investment book over the last three years, which up to six point nine one percent annualized but that really is going to offer a tremendous opportunity as well we still have these high rates and maybe some capacity to deploy into that you know and so that segues into looking at asset quality so we'll start on the bank side and look at both the top line and then get into the categories and so what we see is that it's still continuing to We're seeing a slight tick upward on total non-performing loans, and this is median percentage past due and non-accrual loans that we're looking at here by category.
36:41
And so while the overall category continues to tick up, we see 1 to 4 key locks and CRE moving in tandem, all going upwards as well.
36:51
An interesting note is that non-owner-occupied and owner-occupied, CRE had been moving inversely previously, where the non-owner-occupied was deteriorating while the owner-occupied had been a little bit safer, but that is no longer true.
37:03
We're seeing the owner-occupied deteriorating as well.
37:06
There's something to watch there.
37:08
Multifamily continuing to be kind of a safe haven.
37:11
Well, construction and development has had a lot of issues, and it has continued to deteriorate.
37:15
And a little bit of color there.
37:17
I mean, the top line looks a little bit ugly, but if you get below the hood, there's even more concentrated pain.
37:24
So definitely something to watch there.
37:25
And then C &I is elevated but improving and consumer much smaller percentage of books but is improving as well.
37:34
Thank you.
37:38
So let's go the other direction. Talking about capital and capital affords flexibility and optionality.
37:50
And over the last couple of years, interest rate risk has been right front and center.
37:56
Interest rate risk is math and is linear in terms of how it impacts us, right?
38:03
Rates go up a hundred, my fixed-rate asset declines by X.
38:10
But so when we look at capital ratios and we look at the excess capital to whatever the limiting ratio is, so we have different capital ratios and different structures whether risk-based capital or leverage or that, generally speaking, banks and credit unions in New England are pretty well capitalized and have a lot of excess capital.
38:33
But I mentioned that point about interest rate risk being linear and credit risk not being linear.
38:39
And I have had this conversation with many members in saying that we know that credit risk, if it starts to rear its ugly head, things can get pretty ugly pretty quickly right so when we look at the shifts whether it's year-over-year or even going back five years from how the distribution is in the various buckets of do you have less than a hundred basis points of excess capital or you have 400 500 600 whatever the case is it's not always the case that you transition from one bucket into the next that oftentimes we see folks jump from they jump over two buckets and it's more often than not it's a jump going right to left not left right in terms of less capital.
39:21
So, something to monitor as credit risk as we tiptoe through the minefield of loan credit performance at this point of the economic cycle.
39:32
So let's go to the last section here and talk about balance sheet strategies. So this is a simple chart.
39:42
​It's probably one of my favorite charts because I think both in the moment and in hindsight, it gives great perspective on our interest rate risk positioning and the levers that we pull.

39:54
​So, it's the Fed funds rate in green and the five-year treasury in light blue.
40:00
So, it seems easy looking at it in hindsight to say, well, goodness, when the intermediate rates are so much lower than the Fed funds rate, it creates opportunity.
40:14
And even we see that in September 24 when the five-year treasury got into the mid freeze and then snapped back over 100 basis points in just a matter of a few months.
40:25
So we'll get into it in the next slide in terms of when the markets and the yield curve price things in, it behooves us to be able positioned to take advantage of that.
40:37
And so when we think about the path of rates, similar to the proxy rate chart that Tyler shared in the beginning.
40:45
We're not at any one extreme right now in terms of when we were here in February, we were patting on the table when that five-year rate was at 461, saying there's an opportunity if you are able to take asset duration and fund shorter to see things work out really well.

41:03
And even going back to September of 2024, when the curve was aggressively inverted, There was opportunity to extend liabilities or even shorten up As existing assets. We'll get into that in a little bit. Still, moral the story is I think you need to have an opinion on which type of landing that we may expect to see and where the pain is for your balance sheet and When we have the convergence of events where there may be some opportunity In in one direction or the other to be able to take advantage Absolutely.
41:40
So like Andrew's saying, when you're considering how to fund coming up over this next year, between rolling short or extending or going a little bit longer, it is really worth considering what the yield curve is currently pricing in relative to your expectations as far as a landing.
41:53
So what we're looking at here are rates for the three-month and 12-month classic, as well as the implied three-month classic rate nine months forward.
42:00
And this is the rate at which you would need to be able to borrow cheaper than if you're rolling three months in order for rolling three months to be cheaper than taking out a 12-month Classic.
42:11
For example, in September of last year, you did a three-month Classic at $5.08, and instead of doing the 12-month at 4.13%, you would need to replace the three-month at 3.24% nine months from now.
42:24
With the three-month currently at 4.5%, the 12-month was the better option in hindsight.
42:30
So right now, with one to two cuts expected by the futures market through the end of 2025, you would need to be able to replace the three-month classic 59 basis points lower than today's rate of 4.5%, nine months from now, to make the three-month more advantageous than the 4.21% 12-month classic.
42:50
So, as you consider funding options, weigh your future funding needs and maybe roll short if you do expect deposit growth, low deposit growth, sorry, high deposit growth, and low loan demand, but also look to see what the yield curve is implying when you're choosing Tenor.
43:05
And if you decide to extend out one year based on your relative expectations, consider using CDA or CDA Extra.
43:13
Currently at the 12-month tenor, the discount for CDA is six basis points and up to eight for CDA Extra.
43:19
So, really, some valuable savings there if you do decide to turn out a little bit.
43:26
And we can tell you that we did see a little flurry over the last month or two when rates did tick down and provide some opportunity to capture the priced-in cuts.
43:40
We saw folks, members who had been rolling short, turn out to the 12-month, 18-month area because there were immediate cost savings, and you were taking advantage of what the market was telling us. So this is something that has come into play.
44:00
It's not an all-seasons strategy when we think about wholesale funding.
44:06
It's interest-grade, path-dependent, but it's something that bubbles up at various points. So it's an advanced restructuring.
44:14
So where we take an existing advance and blend and extend, blend the implied prepayment fee that may be embedded into the advance and put it into a new borrowing.
44:28
So, some of the key highlights of being able to do this are that it mitigates interest rate risk because you move further out on the curve.
44:35
It improves your liquidity profile.
44:36
So it's not short-term wholesale funding.44:40You're not adding growth, right?
44:41
Something that we're all sensitive to now, because loan growth, the pipeline is slowing down.
44:46
So maybe we don't need incremental wholesale funding the way we used to.
44:50
It's immediately accretive to the margin because you're lowering the cost as the prepay fee is blended into the new coupon.
44:59
​So the visual on the left-hand side gives us an example.
45:01
So if you had an advance with a $4.99 rate with just about six months left to go, and you see rates are at the low fours for any new borrowings, but you don't need a new borrowing, you have this existing one that you want to do something with, or you can restructure it, take that fee and blend it in to the new rate, and the coupon is going to be reflected of that and it can get you pretty cheaper than where you go.
45:25
So the idea that I like right now a lot is called restructure and invest because you know, let's consider an example where you're looking at a five-year investment at a price that treasuries plus a hundred.
45:41
Okay, we like that it's a little wider than it has been.
45:45
But a five-year average life, I don't love the interest rate risk of moving out that far.
45:55
So let's say we had that existing advance, we take it from the $4.99 with six months left to go, and we restructure out the five years.
46:02
And that's where we're going to see that $4.38 in light blue along the right-hand side there.
46:08
So you're saving on day one, 61 basis points.
46:11
So one way to think about that is that takes that bond that we're earning plus 100 on to plus 160. Okay.
46:19
Well, now we really like that bond at that type of level of compensation, but we still have that five-year average life.
46:26
Well, here's where the liability extension comes into play.
46:29
Because we're adding four and a half years of average life to our liability, that nets out with the bond to, we're only adding half a year of average life or duration, almost, to the balance sheet.
46:44
So now we're adding a plus 160 investment, and our interest rate risk profile is not even advancing by a year.
46:52
So there's appeal on the earnings side, there's appeal on the interest rate risk side as well. Two birds, one stone.
47:01
And so I'll mention both for restructures, as well as new incremental advances, you're able to leverage our community development advance program, which allows you to save upwards of eight to 15 basis points on any event.
47:18
So we have tools and metrics to look at this, put visuals like we have here together.
47:23
So if you have an advance that's at a high rate and you're kicking the tires on something like this, reach out to us, we can put something together, and we can show you where it may map out to.
47:33
And so as you opportunistically shop between funding sources, wholesale funding, federal home loan bank, and promotional CDs, HLB options are really a salient option to consider.
47:46
So we see in the top half of the slide is pricing for the six-month classic, the two-year classic, and the two-year, six-month HLB option.
47:54
The notable is how the pricing does not necessarily move in tandem.
47:57
And the dynamic at play here is that the HLB options pricing improves as volatility increases.
48:04
So while volatility does have negative connotations, in this case, you can actually benefit from it.
48:10
And to measure this, in the bottom of the slide, we do a breakeven analysis to see the rate at which you would need to replace a six-month borrowing at 4.29% and have the same costs as a two-year, six-month HLB option advance at 3.48%.
48:24
And the resulting breakeven rate of 3.21% suggests that the HLB option is well worth considering.
48:29
And we have tools to tell you what the breakeven replacement rate would be between, say, a six-month CD special and an HLB option advance with the same lockout.
48:40
So, please reach out and let us provide pricing insight before you take down funding or promote a deposit special.
48:50
So, oftentimes the time to talk about and workshop an idea is not in the moment.
48:56
It's beforehand to talk about different approaches about what can be done
.49:03
Again, going back to that being opportunistic and taking advantage of volatility, and as conditions change, often pretty rapidly.
49:12
So here's a couple of things that I think that are on our radar either now or could be on our radar in the near future that I think it behooves us to at least kick the tires on everything.
49:23
Doesn't mean we do everything or anything close to everything, but we kick the tires on everything.
49:28
So I think for those who have the balance sheet capital and liquidity and interest rate risk positioning, if you're able to and willing, that the opportunity for investment leverage is really attractive right now, considering the widening of spreads there, the lack of aggressive inversion, and this idea where you can take advantage of those high historical yields and spreads to replace into the book.
50:02
Think about investments for decades.
50:05
​It's been two to 3%.
50:07
We look at a lot of peer analysis.
50:08
Two to 3% is where most investment aggregate yields are.
50:12
We have the ability to get five and 6% yields right now.
50:16
That is appealing.
50:17
So, intermediate assets, short funding, and then maybe if rate cuts materialize, then we have the ability to replace it, not with a 4% advance like right now versus a 5.5% bond, but a 2% deposit, pay off the advance and lock in that even greater spread from the wholesale asset side of things.
50:41
Investment opportunities later, right?
50:43
We're seeing volatility.
50:44
We're seeing widening spreads.
50:45
We're seeing great macroeconomic uncertainty.
50:48
If we came in tomorrow and investment spreads were wider by 200 basis points, what would you do?
50:55
Would you buy, would we wait, would we watch?
51:00
So I think we all have to have a good answer as to what our appetite is to take advantage of some of those opportunities.
51:06
And we've seen and we've heard anecdotally folks going back to March of 2020 or 2023, who really got some generational opportunities because, not because they saw it in the moment and acted upon it, but because everybody was on board from everyone in the Treasury and Finance Group to the CEO, to the ALCO, to the board, and they knew that we were going to be prepared to be opportunistic
.51:33
We mentioned before, there's still the overhang of low-yielding, long-duration fixed-rate assets.
51:42
And it can be painful to rip the Band-Aid off and sell them at current market rates.
51:49
But you're experiencing the pain every quarter by continuing to keep it on the books.
51:55
And I get the arithmetic where the gain may be too much, or the liquidity raise may not be enough.
52:03
So, whether you have a threshold for liquidity, i.e.
52:06
I have 50 million in advances, I want to be at 20 million, so I need to find a way to get rid of 30 million or the earnings impact.
52:13
I can only withstand a two-million-dollar loss on a transaction or margin lift.
52:19
I'm at 296.
52:20
I would love to be 301 because that sounds way more than five basis points better.
52:24
In capital ratios, maybe I can only withstand, you know, I'm at 1004.
52:28
I can't go to 999.
52:30
​So whatever those numbers are.
52:32
So when you're looking at the bond portfolio or a fixed-rate loan.
52:35
So, for those of you who are PFIs, part of our mortgage partnership finance program. We've been having a lot of these conversations about season loan sales.
52:43
So you can triangulate, okay, maybe the price is 85 today, but we know if it gets to 91 because the rates rally a little bit, then we're in the zone where we can check off our liquidity threshold target.
52:58
We can get some go-forward margin lift, and it's within the aid of how much earnings we're comfortable with.
53:08
So then we talk about extreme dovishness or hawkishness.
53:12
And as we showed before, is that when the intermediate part of the curve goes down aggressively, then extending liability is going to be advantageous.
53:23
So, and we'll be doing more on this and the efforts of preparing for what may be coming down the pike.
53:29
Be familiar with our forward-looking advances.
53:31
So they're classic advances that instead of being immediately dispersed can be dispersed up to two years into the future.
53:39
And where these become really, really attractive is when the curve inverts because the forward rate, and this is just fixed income math, is much, much lower oftentimes than where the current rate is.
53:52
And you don't have to buy capital stock.
53:54

You don't have to reserve collateral against the advance until it gets dispersed.
54:00
So there's some liquidity optimization benefits there as well.
54:05
On the other side of the coin, if when markets price in less and less cuts, familiarize yourself with our floating rate advances.
54:13
In particular, the floating rate advances that afford you the ability to pay back the advance early with no penalty.
54:21
So, for example, the callable sell for 12-month maturity, six-month option to pay it back.
54:27
So you may think right now, you may look at your model and say, okay, I need one year worth of liquidity protection.
54:35
I don't want one year of rate protection because I think rates are going down, but I need the liquidity protection.
54:41
But if rates really rally, I may not need wholesale funding anymore.
54:46
I may see mortgage prepayments.
54:48
I may see bond maturities.
54:49
I may sell off some of the bond portfolio.
54:52
Deposits may start falling out of the sky again.
54:54
Okay, so while it's great that you had this 100% beta funding that reprices down with the market with you, you'd rather have a 1% deposit than a 3% advance.
55:08
We know that.
55:10
So that's an opportunity to take advantage of that and efficiently give it back and put yourself in the best position going forward.
55:19
So we will end on that note.
55:21
Thank you very much everyone for joining us here, only 10 minutes over, not bad.
55:27
But as we said, we had a lot to cover, a lot's been going on.
55:31
As always, you know, reach out to us if there's anything we can be of help with, qualitatively or quantitatively.
55:42
And we're here to make things easier and better for you.
55:46
So thank you very much, everyone, and enjoy the rest of your day.
55:50
Thank you.