Liquidity & Funding Strategies for the Current Environment March 2024

Liquidity & Funding Strategies for the Current Environment
0:05
Well, good morning everyone. Thank you for joining us today for our webinar. I'm happy to have you with us. I'm Andrew, this is Matt Stewart, our Director of Sales. And you may notice that this is not Sean, who's usually with us. You know, he's taking a great opportunity with a member institution. So we're certainly sad to see him go, but we're glad for him. I still have some opportunities to talk to him along the way here. Good morning, Andrew, it's good to be here. And I was just noticing our disclaimer seems to be growing.
0:39
So I'm hoping that's not because I'm on the webinar today, but we'll see on the advice of legal counsel, they tell me just to say no comment.
0:50
But that, you know, we have a great agenda here. Hopefully, you know, we'll offer up some things that'll be a value. So, a couple of parts here. So, I'll kick things off. Talking about the funding side of the Balance Sheet. Both deposits and wholesale things that we should be concerned with. Matt is going to talk about collateral and ways that you can really get the bang for your buck with, you know, your pledge with us.
1:16
And then, lastly, I'll come back on to talk about some things on the mortgage side that we can hopefully look to uncover some liquidity efficiently.
1:26
So, before we jump in, then what, We'll have some time in the end for Q and A. So, if you have anything you want to things you want us to address, please put it in the chat, and we'll address that either along the way or at the end.
1:39
So, before we jump in, you know, a public service announcement, our team primarily our housing and community investment team, will be hitting the road for a number of seminars over the next two months.
1:52
It is a really great program where we are trying to find ways where and how we can help you promote and grow affordable housing in your footprint. So, along the right-hand side, you'll see the dates and locations of where we're headed. So, you know, please do join us. If you can share it with your lenders across your organization, anybody who you think may find it to be of use. You can find the information you most likely received an e-mail related to it, or you can find the registration information on our website, and I'll reinforce some great programs they're going to discuss.
2:29
Attendance and registration have been pretty strong, so I definitely don't want to miss out on these events. Yeah, for sure.
2:38
So, let's jump into the funding side of things. And, you know, I like to start things off with questions.
2:45
And, you know, is there any relief on the horizon?
2:50
You know, when is it going to get easier? And I get teased around here as the perpetual optimist, but even I see more headwinds than tailwinds right now, and it comes down to a couple of things.
3:04
First and foremost, there is deposit growth or a lack of deposit growth.
3:08
And, you know, we're really in uncharted waters here because when we look back, most of you know.
3:14
We do an awful lot with Peer Analytics.
3:17
And, in terms of the median member's deposit growth, five out of the last six quarters for credit unions was negative, and for banks, it was four out of five. So, you know, those are pretty sobering numbers and really a departure from decades worth of what happens in the banking industry. And it's not just about the quantity of deposits that are coming in or the lack of quantity. It's really about the quality. And you know, we'll uncover that a bit more as we talk about some of the mix shift occurring from non-mature deposits into CDs and terms deposits.
3:55
We talked to an awful lot of depositories, and I can tell you, you know, hopefully, it makes you feel a little bit better.
4:02
Nobody is sitting back saying, wow, I can't believe, you know, all these, these cheap core deposits are falling out of the sky.
4:09
You know, that is not an experience, you know, that we're seeing or hearing by any sense.
4:17
And, you know, there are ripple effects of the types of deposits that are coming on that may not be doing the most for us in terms of interest rate risk or liquidity.
4:27
The other way we can get liquidity is cash flow from existing assets, and there's a lot of pressure there; you know, I'm not telling anything telling you anything that most of you don't already know, you know.
4:39
Prepays are have ground to a halt for the most part, you know, we still get some idiosyncratic things happening. But it's really about the amortization of the existing assets. So, that can range the gamut from not so bad. When you're talking about the auto portfolio, that tends to be a little bit shorter. And all the way, and the other end of the spectrum, with the residential portfolio, which is not so great right now, just to get the monthly principal coming back to us. And even the security portfolio, where, you know, that's meant to be a source of liquidity. Certainly, the moving rates have put those on the water and created some challenges in terms of affecting sales.
5:18
But then, the average life extension, for the most part there, has, as really put a, you know, an added wrinkle into liquidity management.
5:29
The last leg of this stool here is a new asset growth.
5:33
And it really pains me to say asset growth slowing down is a positive in any way, shape, or form, but at least from a narrow perspective of liquidity.
5:46
You know, that is something that is at least trending in the right direction.
5:50
And you know that over the last year and a half, two years, so much has been written and said about the move in interest rates and the challenges in deposit gathering in terms of how that equates to liquidity on the balance sheet. But I think the part that that kind of has gone under the radar is that loan demand and loan growth has been so, so phenomenal. And we go back to 2022, and is running in mid-double digits for many, many members, which is fantastic, and then things have slowed down, right? They can't go up that much in perpetuity, but even now, you know, mid-single digits, for most, so, when you have, you know, the tale of two stories, where deposit performance is not so great, the loan performance is so great.
6:38
That's how we can see that fast turns in the liquidity Profile and again, you know, coming back to, you know, our good fortune of being able to talk and interact with so many people across the district.
6:53
You know, there are certainly a lot of qualitative and anecdotal things that we're seeing in terms of slowdowns in loan pipelines, and there are a number of different reasons for that.
7:01
It could be on your side of the house, or it could be on the customer's side of the house, right? When you're talking about deals where the arithmetic doesn't really tie out, when the borrower, the developer, is at 8% yields.
7:13
And on your side of the fence, maybe we've gotten a little stretch them on capital or liquidity, and even the inverted yield curve, that poses challenges in terms of the margin erosion.
7:25
So, you know, when you, when you let it all out, it's probably a combination of all those things. And your mileage may vary in terms of what things are most impactful for you.
7:35
And, even, you know, the other part of it is that you know, in our position as a lender.
7:44
Not a lender, like you all, but the lender, because we're providing funds. We see things in terms of the borrowing trends that do sync up with that qualitative anecdotal idea that loan growth is really slowing down, you know, in some cases, probably considerably.
8:04
So, alright, so much for being the optimist; what an uplifting start to the presentation here. But, you know, we'll ask another question: how does it start to get better?
8:16
And, you know, certainly, I think many of us are in the camp that the Fed lowering rates will be a step in the right direction.
8:24
And when you look at that title up top timing direction and magnitude, I think those are the three components of any strategic decision that you make, and that, you know, the timing is, is an important part of that.
8:38
And I think it gets overlooked because, you know, certainly with the inverted yield curve, over the last year or two years, many people of Russia say that's it, the yield curve is inverted. Recession is coming. Rates are going down, you know, batten down the hatches.
8:51
And that has proven to be early on that call.
8:55
Right, if you had extended assets or shortened funding when the yield curve inverted.
8:59
​As you can see on the chart, we're looking at fed funds versus the one-year Treasury rate.
9:04
If we were looking at longer tenners, like two or three years, the yield curve inversion began even earlier than that into 2022, and we're now, you know, historically in one of the longest periods of yield curve inversion, but the timing was missed.
9:20
and, you know, I've mentioned this before, if we've chatted or you've attended our webinars.
9:27
You know, when we look back to just a little more than a year ago, the Silicon Valley and the First Republic situations in both of those cases, when those banks ran into trouble within a week, the Fed Hikes interest rates. So, you know, if you're in the camp of, the Fed will cut as soon as something breaks. You know, those are pretty two significant tests of the system.
9:49
But I think in terms of the Federal Reserve's ability to respond to the market crises, they have a lot of an awful lot of tools in place. The BTFP being a perfect example of that, how quickly they can act to get things in place to triage and ditch, and just to keep the market from cratering. We can see this going back to 2008, for example.
10:10
But so, when we try to reconcile and summarize things, you know, in the subheader there, there are three important questions that I think we really have to zero in on.
10:21
Is, you know, you want to say you're making bets, but I think you have to have some conviction and some assigning probabilities to the type of scenarios that we're going to see.
10:31
I've mentioned, in green, on the right-hand side, whether we're going to be in a higher-for-longer scenario, a soft landing, or a hard landing.
10:39
And then you have to know what are your balance sheets, pain point, and, you know, and do you want to lean into certain exposures that you may have, Or are you looking to mitigate them?
10:51
You can see in the table that I've called out five years, going back 25 years, and looked at where Fed funds were in March and where they ended the year in December.
11:05
And you can see that the performance has been pretty mixed, and I'll ask Matt, and I'll ask everyone on the call here if you know the significance of these years, and I'll give a little hint for everyone out there that there's a certain geographical segment of the folks on this call are probably better equipped to answer this question than others. But I'll turn to Matt and see if he can get the correct answer. So I'm going to guess the word March, and I'll probably have to say there's some madness in this.
11:36
So you tell me, OK, well, your spidey sense is correct. And if you look at the color coding there, those are the years that the UConn men's basketball team won the national title.
11:46
And I know our members down in UConn and Connecticut. Many are avid UConn fans, and you know, they're playing here in Boston tonight and hopefully for their hands on Saturday again.
11:59
So, if you were looking for some correlation between Fed Funds moves and UConn basketball, unfortunately, I don't think there's any big correlation that jumps off the page—no, R squared there.
12:12
You came here looking for liquidity, you know, tips and tricks. And, you know, You probably weren't expecting UConn basketball.
12:21
Conversation But, you know, in any event, we'll move on.12:26So, let's look at deposit pricing trends. And here's an analysis of six-month CD posted rates for all our banks and credit unions.
12:38
Going back to the beginning of 2022.
12:41
And I think the really important thing to focus on is looking at where the annotations are. And I've highlighted in August 2023 and March 2024. And that's important, because August of 2023 was when the last rate height was affected.
12:58
And, as you can see from the direction of that trend, we all enjoyed the lag in rates that we were able to lean on as rates went higher, and we didn't have to move deposit rates all that much. But the check has come. Do we all know that? And the check is continuing to come down.
13:18
​And, you know, a couple of things here are that this doesn't account for term specials or exception pricing. Right? Those are some of the immediate response actions that we can take. So, these are the benchmark tenders that we're looking at.
13:34
The other thing is that these are just posted rates.
13:36
​These are the clearing rates, You know? I've had some good conversations with some of the ALM consultants out there in the universe. And, you know, where they have access to. Certainly, different types of data. And the rent, you know, you can post whatever rate you want, but it doesn't mean that the posit is going to come in the door when we see what the rate is actually needed in order to bring funds in.
14:04
You know, it probably starts, if you're fortunate, within 50 basis points of where advance rates are.
14:11
And in some cases, it's either at or through, so that you know, that poses a challenge. Because even if we get into, you know, we're not getting that fast pivots scenario, where rates are going to come down, we can start changing our pricing. If we do persist for a little bit at these levels, we're going to see the pressure continue. You know, even if this is the scary part, even if rates start to come down, we may still see the bad version of the lag in terms of deposit pricing.
14:46
So, you know, that's a segue talking about the spread on what the clearing level is for deposits and what the true cost of bringing in any deposit is it and, you know, we've talked about this before, the marginal cost the fund's concept and combating that cannibalization.
15:03
I told you I'm the ever optimist over here, so I'll put a glass half-full on things.
15:10
Is that where the arithmetic works if your deposit costs are higher?
15:16
You know, the pain of getting cannibalized is not the same as when deposits are really, really low.
15:22
So here we're looking at the different levels of cannibalization shifts from existing low cost deposits into a higher-cost offering.
15:32
And you can see that the less steep line, the light blue down on the bottom as that's on the existing deposits. At 4% Assuming a new deposit rate of 5%, the green is deposits coming out of 0% so that that's where the pain.
15:49
You know, it's worse, and it gets worse.
15:51
As that cannibalization rate continues to go higher, I think the moral of the story is when you think about where's our, our overnight rate is just north of 550, going towards 5% as you get to the one-year rate.
16:07
So you can see there's not an awful lot of cushion before you get from an economic basis to be cheaper. Tapping into funding wholesale funding, as opposed to being out there with the city special, and this doesn't even begin to factor in the dividend benefit, 3.4%.
16:29
So, wonderful.
16:32
theoretical, 30,000-foot view.
16:34
What should we be doing? What are the strategies that, you know, maybe look a little better than others?
16:41
So, you know, three broad ideas here.
16:45
In terms of looking at the deposit side, we can look at shorter CDs with a high sticker rate.
16:51
We can try to nudge our way out the curve a little bit with longer cities, and we can also look at the money markets, as well.
16:58
So, you know, on the shorter CDs, you know, 5%, 5.5% for five months, Just as a round number. For example, you know, as we outlined before that, that's it. That's expensive to wholesale.
17:13
But, the ability to maybe kick the can down the road on this deposit gathering environment where you can say, You know, what, at least the maturity of come back and maybe in 5, 6 months, we'll be in a better position. Will have. You know, rates will have come down or will have some asset, class cash flow, and we won't need to play this.
17:30
This is a very challenging and difficult game Because when you look at what a 5.5% short-term CD provides for us, from an ALM perspective, it's not doing much for margin with the inverted yield curve.
17:45
It's not giving us any interest rate risk mitigation benefits. It's not providing much liquidity benefits, given such short tenures.
17:54
So, you know, the counter-argument to that is, you know, while we're keeping customers and maybe we're getting some cross sell opportunities and, you know, your mileage may vary.
18:04
You know, many have said that, that, you know, that the rate sensitive, one, Product, CD, customers, you know, they're not the, typically, the types that are going to have, know, the benefit to other parts of the institution.
18:18
Another counterargument, which I think, you know, holds water and may be valid, is that, if you're doing this from a metric basis, right, It's easy for us as third parties to say, oh, well, you know, this is, this is one basis point cheaper than you should do this and put blinders on and ignore all the other factors. But if your collateral is constrained, or if your loan-to-deposit ratio is tripping a liar that you don't want to be tripping.
18:40
Then there absolutely is, is, is benefits and motivation to be doing something like that on the CD side.
​18:48
Longer-term cities, you know, that's interesting.
18:52
Where it's interesting, and it's challenging because I think that the typical CD customer, we've talked about this before. They don't necessarily agree or understand the concept of an inverted yield curve. Right.
19:05
You should pay me more if I'm going to give you money for longer, that's not quite how the, the world of interest rates work.
19:13
So, you know, in terms of the relative cost to alternatives, it's that much more expensive to find the clearing level.
19:24
Similar to what we just talked about with the shorter CDs, if you nudge out, maybe it does give you some better liquidity and interest rate risk and benefits, and not just on its own, but think about it in combination with what you may need or want to do on the asset side. So if you bump out a little bit further, then maybe that gives you some capacity to go longer and assets that maybe you weren't doing, right, instead of buying three or securities, You're comfortable buying five-year securities, or, you know, you're hesitant about making a fixed rate loan. Maybe you feel a little bit better because you are able to extend your funding a little bit. Same thing, change the terms on on on your autos.
20:03
No.
20:04
The another consideration is, you know, there is the possibility that given, despite the inversion, we are still high in terms of nominal rates that many depositors and customers haven't seen in a long time.
20:19
So, you can test the waters with those longer specials that say, you know what? Here's 4% lock it in now before rates go down to 3%.
20:28
You know, think of people of, you know, before we get into this 5% world.
20:35
You know, you're talking over a decade, where rates were not above 3%; we go back to 2019.
20:42
I know a lot of credit unions had a lot of success with 3% for three-year type offerings in 20 19, when they, when the yield curve inverted. But there is something to consider as you look at the different strategies and the deposit side.
20:57
Last is getting aggressive with rates on the nonmaturity process, the money, and The money markets.
21:03
And, gosh, if there ever was a time to dig deep into the playbook on all the different ways that you can, you know, appeal to customers with non-rate features.
21:14
Whether it's, you know, no cost withdrawals or teaser rates or things of the sort now is the time.
21:23
And and I sympathize because it is a tricky game because it's so assumption driven dealing with non maturity deposits.
21:30
It's not the maturity and the rate that you have with the CDs that, you know, the execution is so important, you know, because you don't want to cut off your nose to spite your face.
21:42
with, you know, getting rid of those core deposits. And training people to be rate sensitive at the end of the day. You have to preserve the value proposition of why folks want to bank with you beyond just saying you're going to pay me one basis point more than the institution down the street.
22:00
As a reminder, if you have any questions, you know, you should see on the goto panel along the side, you should be able to enter anything and we'll tackle it as we go.
22:13
So, you know, with the challenging environment for deposits, it really puts into focus, you know, what we have to do on the wholesale funding side of the house.
22:23
And, if I don't mention, you know, some specific advanced strategies, I'll get kicked into the table in the shins here, or I don't think there's a taser anywhere around here.
22:35
But know, when the key advantage of deposits, which you know, the cheapness relative to wholesale rates, are muted like they are now, that didn't.
22:45
Then it behooves us to really think about, you know, what we can be doing on the wholesale funding side. And we'll look at three different buckets here.
22:52
You know, again, I like the questions where we can say If you have a wall, a wall of approaching maturities.
22:58
So, many folks right now have more funding with stated maturities than they have probably in a long time, whether that's CDs, advances, or even a bank-to-funding program, advances.
23:11
So, we know when that funding is going to roll off, as opposed to the non-maturity deposits, which are not assumed and decay-driven.
23:20
So, we'll dig into this in a little bit.
23:22
But just to introduce the idea, Forward-Starting Advances and HLB-Option Advances are fantastic ways to deal with that.
23:32
Those walls of approaching maturities, then, are the other two concepts for us to be familiar with if we have or disagree with what is being priced into the current yield curve.
23:43
So, on the first front, we think that too many cuts are priced in.
23:49
You know, we've talked about this in previous webinars where the way yield curve calculus works is that we can infer what the implied short-term rate is going to be in the future based off of today's yield curve.
24:04
So we can look at that, that, the 12-month advance rate, and we can figure out what the market is forecasting. The three-month rate is going to be not just today.
24:12
It's three months from now, six months from now, and nine months from now. So if you have a disagreement, or you have a balance sheet, that puts you in a position where.
24:25
Taking an alternative stance is complimentary. Then, extend that funding incrementally where, however far you know, it works for you. It could be three to six months. It could be three months to three years.
24:38
The HLB Option in the forward will work here as well.
24:42
On the complete opposite side of that is, if you think we're in for a hard landing in a fast pivot rate, short-term rates are going to come down pretty aggressively.
24:50
And if we think that that turbulence is not just going to be rated speed because it's going to introduce a credit event into the market, then then we're going to want some, some stickiness to our liquidity, but we're also probably going to want the fastest repricing that we can at 100% beta. So, our Floating Rate Advances are really tailor-made for those types of situations.
25:14
So, let's look at, you know, three different events that I think, you know, are worth digging into here. So we have Forward-Starting Advances where the price is off of today's market, but the funds can be disbursed at a later point. So here we can see six-month advances 18 months in 24 months. We can see the inversion because as we go longer and tenor, the rate goes down.
25:36
The Forward-Starting Advance has a month delay of 18 months once it's to disburse. So it brings you out to month24.
25:45
That is going to be at a lower right here. So, you know, you can use an example if you have funding coming due over the next couple of months, well, here's a great way to say we're going to look to replace it now based on market rates today.
26:03
And it's going to disburse, at that point in the future, and really lean off that customization. That advances afford you, and do things to point out in the forward, is that you don't have to buy stock against it until they disperse; you already know a friendly dividend. But the other part is that it doesn't use up your collateral capacity until, again, the advance is disbursed. Matt's going to go through a couple of key points there.
26:33
There will be options. We've talked about these for a while because they've been, you know, there's been some relative value, and there's been some.
26:40
There's been an awful lot of fit on member balance sheets.
26:46
So, I think what's, you know, important here and a point of color to share with everybody is that we have, We've seen a shift towards shorter tenors and really seeing a lot of activity not just in the longest maturities, with the lowest rates. And I think this is a function of; remember, we talked about a few slides back about the timing and magnitude of the market rate of market moves.
27:11
I think there really is consensus about the direction in which short-term rates are going to go over the next few years. But the timing and the magnitude. Certainly, there's a lot of uncertainty. And when there's uncertainty, there's volatility. So that is what created these opportunities here.
27:27
When we talk about the different rates and scenarios and what is going to perform better or worse, you know, these types of advances are tailor-made for a soft landing scenario.
27:37
So I'll give you one example. So you can see the gray line that there is the three-year Maturity Ag option. So, let's look at the one-year lockout. So, for the three-year maturity and one-year lockout, and for 24, let's say that rates go down one hundred basis points over the next year.
27:56
That would bring our overnight daily cache manager to approximately 450.
28:02
​So, how would that 4.25 advance fare?
28:05
Well, you will; you would have saved interest expense all along the way.
28:12
The marginal cost and the new funding rate would still be below. Excuse me, but above the coupon that you have on the books. So, you save money along the way, and you're still, you know, in a favorable position.
28:26
Andrew, the volume of HLB Options has doubled from last year, and that's the number.
28:33
And the actual dollar value is more than five times what it was a year ago. So, it's been a pretty popular product.
28:40
Yeah, absolutely. And the last event, so, well, you know, we'll talk about here, is the Silver Index events. Again, this goes back to the short-term rate exposure with the long-term Liquidity Profile.
28:52
And so, you can see the pricing is pretty advantageous when I pulled these numbers the other day; it's cheaper than the Daily Cash manager.
29:00
When you combine the silver index rate plus the spread on the events those spreads are pretty narrow historically. So, you can see them on the brightly colored graph at the bottom.
29:15
It's just a simple ladder structure, that if you have some, if you're far guessing at that, we're going to be in a position where we're going to need wholesale funding, with some level of conviction over the next few months.
29:28
Then, maybe you can get some of the term benefits, but you can keep your interest rate exposure on the short end of the curve. And then, I like the latter approach because it gives you some balance. That as conditions change, you have the ability to pivot away. You know, what you don't want to do is necessarily log in with too much funding. And then, all of a sudden, you don't need funding anymore.
29:51
And then you're in a position you'd rather not be in, so you know, as the funding starts to roll off the early parts of the ladder. You revisit.
30:02
But in this case, the rate that you're paying is going to be immediately responsive to moves down in market rates.
30:10
The other thing I'd point out, Andrew, is the sister product, the DNA floater, which has a four-week and a 13-week reset. And so that's a popular product as well.
30:22
That gives you the free option to either reduce or terminate early at the reset dates.
30:28
So that's obviously a sister product to this.
30:33
So I'm going to take it to Matt. And he's going to go through some arcs and collateral things that we should be aware of.
30:38
Yeah, thanks, Andrew. So, obviously, collateral is a popular topic.
30:42
It's something that we hear from members all the time, whether they're very active borrowers or whether they're even a little inactive, if you want to say it.
30:53
Having capacity is so crucial.
30:55
And what I would emphasize is, it's so easy to borrow, you can come in and call at 455, or whatever time of the day, and you can get borrowing pretty quickly, but collateral is something that you have to think about beforehand to make sure that you have the capacity.
31:12
And so when we look back at a year ago, during the crisis with the bank failures, we had some fire drills. And so, you want to be able to have that collateral, especially with some of the types that we're going to talk about. It's not something that you can pledge, and it'll be there tomorrow.
31:28
So, commercial real estate, mortgages, rather, is an example.
31:33
And so, similar to that, I'll put a plug in that members should be testing their lines regularly to prove that they have a healthy liquidity strategy and demonstrate to the rating agencies and the regulators that they can borrow.
31:51
And so that goes hand in hand with planning your collateral, but also thinking about it on a regular basis, and what I would recommend is do a borrowing. That is something that you would expect to do.
32:03
And if you're telling the regulators that you can borrow X, well, maybe on the smaller end, you want to do a test borrowing but do something that is in that ballpark.
32:14
So that it's not just insignificant.
32:18
Then if we look at the slide here, these are the different types of collateral. Obviously, you're probably pretty familiar with the 1 to 4 families, the commercial mortgages and multi-family. So obviously with category one members. If you provide the qualified Cloud report, what we call QC are updated on a quarterly basis.
32:41
Those go in, and we're doing a review periodically to make sure that everything is good. And then what I'll point out is that the haircuts on this sheet here are ballpark because they can adjust based on certain criteria. I Would recommend that you go into the Product and solution guide to see what the haircuts are or talk to your RM Or Collateral Department. They can go through it with you in more detail.
33:06
So, one thing that's not on there, Andrew, do you recognize the obscure collateral type that we don't have lifted?
33:17
Oh, I'm, I wasn't prepared for the trick question, but cash, I'll make it easy for you to cache. It was a trick question. Yeah, we actually have just under $100 million of cash wedge.
33:30
And I think that's more convenient than anything else. But if you do pledge cash, you have to set up a cash collateral account.
33:38
​It certainly doesn't make sense to pledge cash to get cash, but it's there from more of a convenience, I think. So, the two answers to the questions today are that you can play basketball and cache things that most people are around here.
33:50
Like so, and especially now that you can gamble with the caches, OK, alright, so then this is a summary of what's pledged to the system.
34:03
This includes all 11 FHLB banks across the country. You see that single-family, or 1 to 4 households, is roughly half. About a third is commercial, mortgages, or multi-family. Securities are about 15%, and ancillary loans are seven. So, if we switch the slide, this will show Boston.
34:31
There's not a huge difference, but there is a lot more, not a lot, but a 10% increase in 1 to 4 families. So up in the northeast, obviously, we're pledging more of that partial and multi-family goes down. That's really the difference.
34:47
The securities and the ancillary loans are about the same.
34:53
Alright, so we mentioned that the BTFP program is going away, which I should say already did, on March 11th.
35:02
And so, having the line at the Fed with the discount window is very important.
35:08
Andrew and I are a little biased, we feel that the Federal Home Loan Bank is a pretty good source of funding as well. So, what you probably will be thinking about is what type of assets you pledge to us versus the Federal Reserve. And on this slide, you'll see the difference.
35:26
And so, our eligible collateral is dictated by regulation, and so if you go into our regs, if you ever get bored, you'll see that it's spelled out what we can and cannot take.
35:39
And then the Federal Reserve, obviously, has some ancillary stuff that you're not eligible to pledge to us.
35:45
And certainly, that would be something I would focus on because you're going to the Fed.
35:51
And I think that the process, you see, the BTFP was about 160 billion, and that's going to unwind pretty quickly over the next couple of months.
36:01
I've read many articles where banks are prepaying and lowering that quicker than probably expected, and then the discount window remains.
36:11
And we all know that the regulators are looking at that as more of a last resort. But, Andrew, the question is, when do you know it's last resort? With Alaska? We'll look at what we saw last year going into the weekend, and all of a sudden, on Monday morning, it's the banks not there anymore.
36:29
So, if we push to the next slide, the thing that will point out is that we know that the rates interest rates have gone up quite a bit in the last three years.
36:41
A reference I've always heard is, they usually take the escalator up and take the elevator down and vice versa. It looks like we took the elevator up this time and probably going to take the escalator down. But because of the rate increase, we saw the valuations of collateral, the loans come down and you can see here, the green line is commercial. And the blue is 1 to 4 family.
37:07
And so you can see, just three years ago, we were above 100% down into the eighties for 1 to 4. And then the commercial, just around 90%. But that has an impact.
37:18
And certainly, that has brought people's clatter levels down.
37:22
You can see on the right what some of the factors are, mainly interest rates, credit spreads, and whatnot. Portfolio composition has certainly had an impact. So, if we switch to the next slide. So here are some tips that we suggest.
37:38
so understand that we are now valuing the loans on a quarterly basis. And that was something we switched recently.
37:47
We used an external source reinforced with our internal modeling.
37:52
And so that is good because now you're going to get consistency; it's going to be more stability and less volatility than you would see when we were doing six months.
38:01
And then the other thing is, as rates go down, Andrew, what do values go?
38:08
They go up, so you'll have a quicker appreciation of your loan recognition, so that'll help. obviously, hopefully, we don't go back into a rate-increasing mode again.
38:20
So the other thing is the Category one members do not have to list but if they do, typically it will be a higher valuation for the haircuts and the loans. So that's something to consider.
38:35
Right now there's 320 members that Pledge 1 to 4 and about half are listing and so for those other half, if that's something you want to consider, certainly reach out to the collateral department or your RMs as you may improve your collateral situation.
38:54
As far as commercial real estate, remember, we review those upfront before they're eligible.
39:00
It's a process where you would schedule with our collateral department.
39:05
So, my recommendation is to get a notification earlier rather than later. Certainly, we have several members that are always in the queue. And then, the other thing is we started a couple of months back here, so or more allowing provisional.
39:22
So, once you establish a relationship with the commercial team, they consider some easier process for provisional.
39:30
So, the other thing is participation loans; I won't get into it in detail right now, but just know there are a couple of documents that have to be signed up front and another great way to expand.
39:41
On the security side, you'll see that municipal securities—we included the bank-qualified bonds a year ago and certainly that’s a great way for you to add to your collateral. That can go down to the issuance of five million, which makes a huge difference, especially for the bank PQ loans of the bonds rather.
40:10
I'll mention to you, the nonagency CMBS last year, we decreased the number of underlying loan requirements from 50 to 25, which makes a huge difference.
40:22
We're also accepting private placements as long as they Rule 144 A, which most of them tend to be. So that's a couple of things to point out. The other one I should mention is on securities.
40:36
We do allow external parties for custodians.
40:40
So if you have a relationship with any of those that are listed, we're happy to set up an agreement and it makes your life easy and or you can just pledge to us.
40:50
And we use Citibank behind the scenes Now one thing I'll note if it's anything other consider other real estate which are listed on the bottom.
40:58
There's a max of a net value after haircuts of two times your capital. So still a lot of capacity, but just be aware of that.
41:06
Well, thank you, Matt, and you know, I'll just throw in, especially as it relates to moving collateral, to and from the Federal Reserve. Yeah, there's a lot of moving pieces involved.
41:15
And you know, Matt and his team of relationship managers, they fielded a lot of calls and they've, they've, they've hammered out the process of, you have any questions on the things that you need to be doing. Things need to be aware of, right? There are considerations if you're a Massachusetts bank with a security core there's some wrinkles there as well. But please do reach out to your relationship manager.
41:36
They'll help shepherd you through the process, work with our collateral team and the Fed, and all that.
41:43
So, we'll wrap things up by talking about the mortgage side. So, you know, as is tradition, we will go a few minutes over. I'll try to speed through. They don't blame me. We're talking about liquidity. Talk about liquidity.
41:57
So, you know, the path of market mortgage rates has created this interesting dynamic when we have three buckets of mortgage rates over the last few years, and we'll get into this in a second.
​42:09
But you know it's interesting to note that no surprise to many that loan yields of what is held in the books repressing higher but on a snail's pace.
​42:18

It has been going at about 15 basis points per quarter and about 100 basis points. You know, almost since bottoming out in 2022. It's fascinating to me as I was pulling this data that the resi loan yields have increased more than securities yields have. You know, by about 20 basis points different, which I would not have guessed. Just thinking about, you know, the typical durations where folks focus on securities and loans.
42:45
It is interesting to note nonetheless, but, you know, it's interesting as my first mortgage was 7%; I thought I was doing pretty well right now that's financial hell.
42:57
You want to be in the dark green there.
43:00
So, you know, there's three distinct coupon buckets here and Matt is a swimmer but that's not him, and he's got nicer and brown shoes, that, those black ones there.
43:10
But, you know, so, what's fascinating is that the aggressiveness of the move in rates is created, three portfolios within the portfolio.
43:18
So you had the low coupons that were put on when we had so much liquidity, and rates are so low the vaulations are underwater.
43:25
Hence the picture, the mid-range coupons, those are the ones that are, you know, the rates are starting to go up, you felt good about the higher rates, but they have gone up a little bit. So maybe, you know, the sale, the potential sale price isn't where you would see new production flow right now.
43:39
And lastly, the highest coupons. Those where, you know, you really top tick the market, but there's a prepayment clock that's ticking on those loans.
43:49
So here's a look at the pricing from the other day on a conventional 30-year loan for MPF our mortgage partnership finance program.
43:57
And when you look at this type of pricing across a range of about 200 basis points, you're always going to see loans priced in this range. It's just a function of which coupons are going to fall in that group here. So we're looking at the mid-range coupons as well as the higher ones.
44:13
And the circle here denotes, where you typically see the new production flow common. Refrain we hear from folks is “With our new mortgages, we target trying to, you know, make at least a point a point and a half, or, or maybe even two points, on, any sale to pay for. In all things, we need to need to pay for.”
44:32
But, you know what, we'll get into it.
44:36
You know, we're not talking about necessarily new production sales, but the stuff that made its way onto the balance sheet over the last few months and even few years, and seeing if there's a way to, you know, capture some liquidity.
44:48
So, let's first talk about the low coupon strategies. Now, you know, this is far from a cookie-cutter, one-size-fits-all strategy because it involves selling at a sometimes significant discount. So, this is, you know, an ALCO discussion, right? Everybody has to be on board.
45:05
And when you think about the dynamics involved with taking a loss of that magnitude, I think you need, you know, the four components that we've highlighted here, that you you have to have the motivation to do to tamp down the interest rate risk.
45:19
You have to have the motivation to bring some liquidity onto the balance sheet.
45:25
And your earnings and capital have to be in a position where you could take some of that.
45:29
Earnings volatility. So, you know, we've seen members affect these transactions because it was a nonnegotiable that the integrated risk and liquidity risk needed to be brought back in line a little bit. And, you know, that, the short-term earnings, versus the medium and long-term earnings, and that the trade-off is where it needed to be.
45:52
So, I will point out something here: independent of this, it is going to be across all the coupon stack.
46:00
When you think about selling loans into MPF, you need to offer loans to borrowers with lower incomes below 80% of the area's median income in an effort to support one part of our dual mission, which is to support and advance affordable housing across our footprint. You know, there's going to be a higher sales price potential on those loans that meet those housing goals, a goal qualifications so to the extent that that, you know, we can put a number on any of those prices of those loans.
46:31
I think you will be pleasantly surprised by what you see there.
46:37
And, you know, the goal is there, as we talked about, you know, the nonnegotiable of reducing rate, risk, and liquidity risk is that it allows you, the ability to reposition the balance sheet, and which is that's going to apply for the mid-range coupon strategies as well.
46:53
And this is where I am, and I highlighted three different coupons there, and because of the characteristics of the loan.
47:00
Know, there are right around par, so it's a 578 with an 85 K loan size; so that's a favorable prepayment characteristic: conventional 6.25. Then, there is a 7% high balance, which will have adverse prepaid characteristics. So most of those are there below the floor, where you would normally have cell production.
47:19
But if you've carried it on the balance sheet, you've earned that carry for a number of periods.
47:24
So the calculus is a little bit different, right? You don't have a loss that you have to recoup.
47:30
So it allows you to, maybe more efficiently, reposition the balance sheet, go into assets that have a more favorable risk-based capital, or a better duration or a better spread on something.
47:42
And this is where I get kicked in the shin again. We say, Maybe you want to de-lever the balance sheet and pare down some of your wholesale funding. So, that's that's one way that you can do that.
47:52
And on the highest of coupons, you know, great.
47:56
Your top pick in the market, but that is that valuable option that you give to the customers, the ability to prepay.
48:04
You know, puts that, that then coupon that loan at risk.
48:07
And I'll put on my Dave Ramsey hat for a little bit here and put on the mortgage payment analysis.
48:14
And without boring you with that, you know, negative convexity. Always put people to sleep when you say that phrase.
48:20
But the impact of a 100 basis point drop in rates is different at higher rates than you have at 4%. So you can see in this analysis that we drop rates from six to six and four to three.
48:33
The monthly savings for a $400,000 loan are more going from 76, versus four to three.
48:40
That's just bond math for you. So, what does that mean?
48:44
Is that, yes, those customers with the high mortgage rate?
48:50
Yeah, they're at risk of prepayments, but there are probably a few basis points more or less needed to get them in the money to prepay.
49:00
So, to the extent that you have some of these loans kicking around, and we can see along the right-hand side, you get to some of those higher coupons, and they're trading north of 102 close to 103. No, I would give a good, hard look to see if you can get them off the balance sheet and put yourself in a more favorable profile.
49:23
So, let me, I know, we're over time, me, Andrew, we're waiting.
49:31
Don't forget the annual stock recalculation will occur next week.
49:35
So, at the end of the year, five basis points of assets at the year end will be updated. And we have a fair number of members that will have an increase.
49:44
A lot of it is because of asset appreciation over the past year.
49:48
There'll be some that will stay the same; remember, we have a minimum of 10,000 of membership stock and a maximum of five million.
49:55
So, there's a handful of members that are at the max, and they stay the same, obviously, and then there's a handful that will decrease. So that communication can be sent out shortly.
50:05
And so be aware of that.
50:07Y
eah, so, as always, you know, this presentation will be recorded, and the slides will be up on our website. You'll receive a copy. If you registered via e-mail, even those folks who didn't join us today, they'll get it as well.
50:21
So you should all see that. Again, hopefully, you're familiar with our website, where we have different strategies and inside content that, hopefully, you will find the views of. You'll also find the HCI, Community Investment Forum Calendar, and Registration. Hopefully, you can join us there. And, you know, that brings us to the end. Thank you so much for your time. Thanks for the extra six minutes and for sticking with us. As always, if you have any questions, feel free to reach out to us, and we'll do what we can to help you.
50:50
Have a great day. Thanks, everyone.