Falling Rate Fever with Frank Farone

In episode 8, Vin and Zach are joined by the one and only DCG Managing Director Frank Farone. The trio discusses five key themes all bankers should be thinking about if the Fed does begin cutting rates soon, hitting all aspects of the balance sheet, and more!

For more insights and ideas, visit DCG at DarlingConsulting.com or follow us on LinkedIn.

Transcript

On the Balance Sheet® S3 E8:  Falling Rate Fever with Frank Farone

Transcript

 [Vinny, 00:07]

Welcome to On the Balance Sheet season 3 episode 8. Actually, a special episode we have brought in one of our esteemed colleagues, Frank Farone, who has been at Darling Consulting Group for two decades now, to speak a little bit about some of the challenges and things that banks and credit unions should be thinking about as interest rates are now sort of poised to kind of maybe turn around and go the other way. And so, we are once again joined by Zach, and Zach I'll tell you, it's always I think back to some of our other internal guests we've had, you know the Joe Kennersons, the Matt Pieniazeks, and other folks who have been kind enough to join us. We have so much brain power in these hallways, and I'm really excited to have Frankie with us.

[Zach, 00:49]

Yeah, I am too, and I think these are some of the episodes that we get a lot of good feedback from listeners saying, hey, you know, we'd love to hear when timely things come up. What should we be thinking about? What are you guys thinking? And you know, today, just as a a quick little tease, you know, we're going to hit probably 5 different areas. Talking about CD rates, CD game planning, talking about the non-maturity deposit kind of playbook, think we'll talk some BTFP and wholesale funding game plans here as we roll through the end of the year with kind of how the curve is moved and then we can shift to the asset side and talk about maybe some refinance pressures that we got to get get ahead of or and some loan pricing discussions. And then one of people’s favorites - some people are probably tired of, but it's the investment portfolio. Did we miss it in terms of putting on some duration? Is there still time? So those are five key areas. I know we'll we'll explore and and Frank, right. You were saying before that we're we're doing some webinars, too, coming up here in the fall to hit some of these timely issues as well, right?

[Frank, 01:40]

Yeah, so starting in a couple of weeks, we're going to be doing 5 C-Suite. There's going to go out to CEO's. Five consecutive weeks, we're going to have webinars, 30-minute webinars, hit it short, sweet, to the point, that that invitation will be coming out next week.

[Zach, 01:59]

Timely stuff. And then where? Where do you want to start today? You know, kind of with this discussion.

[Vinny, 02:02] 

Well, again, I think we're very fortunate to be joined by Frank. Frank, you've been through a number of different rate cycles. It certainly seems like you know The Fed, now the markets expectation, and even we'll probably get a new dot plot here in a few weeks from the Fed, but we may see our first Fed rate decrease in what is probably amounted to five or six quarters here. I guess the first thing that comes to mind and and so many institutions are sort of already evaluating this, maybe they've already gotten a leg up on the field. But talk to me about your expectations and for CD pricing as we move forward into this cycle, we have now kind of really seen the height of city promotions. They kind of were up at 5.50 and they're sort of moving lower. And look, we're finding that institutions are been pretty successful retaining most of those deposits. What are your thoughts, and and what should really banks and credit unions be thinking about as this environment unfolds as they go down a quarter as they may go down even further, you know, whatever that looks like? And thank you for joining us, Frank.

[Frank, 03:04]

Oh, thanks for having me. And I have been through a lot of rate cycles, and those of you that work with me and those of you that know me know that I am obsessed with looking at rate cycles, inversion of curves, rate movements, human behavior. And it's it's like a Shakespearean play, you know, all the worlds a stage, we're merely players and you know, one of the things you see over these cycles is how human behavior tends to be very similar.

[Frank, 03:32]

Throughout different rate cycles, both on the consumer side and on the bankers’ side, and there just tends to be very similar opportunities missed, I'll call it, and mistakes made as we go through these different rate cycles. One of the things that we always talk about is number 1, you mentioned Fed expectations that's already built into the market doesn't necessarily mean it's going to be it's going to materialize. And one of things need to be careful of is making bets on your balance sheet based upon what others think, the markets think. So, we have to take the bias out of that as hard as it may be. And one of the things that we've learned over the last for me, many cycles, but certainly over the last few years is, never say never and appreciate what could happen, how severe it could be and even when we use the word stress test in some of our analysis during our ALCO meetings, by definition, when you talk about a stress test and they're, they're designed to be stressful. We tend to not pay as much attention to those scenarios, and the reality is they happen all the time, and it's like the, you know, they're saying things that never happened before happen all the time. So here we are we're in an inverted yield curve environment. Probably the longest in modern banking history, if not history, right.

[Zach, 04:51]

Yeah, It is it, yeah.

[Frank, 04:53]

And so, you know those of you that have sat through ALCO meetings  with me or seminars, webinars. You've heard me say this over and over and over again. Long rates move ahead of short rates on the way up and on the way down, and all of a sudden now you know we're all hoping, and for many of us waiting, for the Fed to start to start cut interest rates because it's going to be reduce our funding costs and hopefully widen our margins. In the meantime, while we're waiting for the Fed to cut rates and it went from seven expected rate cuts down to three, to two, to five, it's bouncing all over this, but the long end of the curve right now is anticipating, probably rates going down to 3% over the next couple of years, if you do the math, in the two-year treasury. And so, in in the meantime, we're waiting for that to happen. The five-year point of the curve and for a lot of our clients their their loans are repricing off of the five-year point of the curve. Existing loans that are repricing, and new loans that are coming on . And so, in the interim, a lot of volume that's coming on the books today is trending downward, right. And so, on the deposit side, you know, we need to be proactive and you talked about the the 5% handles. Well, those 5% handles were a function of liquidity concerns, liquidity issues, a lot of institutions were outside of their policies, they were running tight on liquidity. And so, in order to maintain funding, they had to pay those 5, 5 1/4, 5 1/2, and we still see it today. Meanwhile, in the wholesale markets, because of the longer end of the curve has come down anticipating Fed rate cuts, we can get one year brokered CD's with the with a phone call only cost around 4 1/4. So, the question becomes, what's the marginal cost of maintaining your CD rates with a 5 handle?  When you could bring those rates down into the mid to high fours and we know having a lot of discussions among our clients and at our consultant meetings that most institutions are retaining, the majority of those dollars in the mid to high fours. And if you have the ability and the capacity and the willingness, I guess, to utilize the wholesale markets from a marginal cost perspective, you you retain the majority of those CD's that have have probably rolled over at this point, three times on average, over the last few years. And so, the reality is the hot money that that resides in the CD booked today. If it sticks, great, if it doesn't, it rolls out, you replace it 4 1/4, that has a profound impact. A lot of banks are also shortening their CD maturities, right? I don't want to lock in 13-,17-month money at 5. I would rather have that funding roll over sooner rather than later if we're in the midst of a Fed easing cycle.

[Zach, 07:51]

If Frank, it's interesting, you know, I think that's a really thoughtful response, and I I hear from a lot of clients or you kind of hear out there in the field when you get some pushback, because we've been talking about falling rate game plans all year because you, you're right, the Feds started talking about potentially cutting rates on the market stop back in December of last year and we said, hey, let's start chipping away at those CD rates, nickels, dimes, quarters and start working your way down cause once you get through the first half of this year, you're gonna have some chances to get some cost savings. But I implore a lot of my clients to, when they push back on, yeah, we gotta be at 5 though. Or we gotta be, you know, higher. It's like, well, what is the data say? Because a lot of folks, to your point, they're keeping most of the volume, 80%, 85% like dig into your data. You know, cause you always hear the pushback ends cause Frank and Vin and Zach are vocal and they got a couple $1,000,000 between them at the bank and we're gonna make our pricing off of those five people or those three people. I think that's one of the things I try to get people to look at is what are you actually retaining? 

[Vinny, 08:54]

Yeah, Zach, I think it's interesting we talk about that because I think just human psychology is such that, particularly for your deposit folks when you have these conversations, if there's two people, they’re squeaky wheels, but the other eight are just rolling and rolling and rolling. There's this idea that, well, geez, the people are arguing, and they need better rates. The reality is that's that's not true - there's been 8 positive experiences for for the bank anyways. And so, to create a CD strategy or game plan around emotion, and just anecdotal stuff, just to me, it really kinda, it frustrates me. You should have a strategy that's derived on on data and intelligence. It should not be two folks who came through the door angry one day and or, you know, a competitor down the street that's got a 5.55 CD special, that should not be how you approach your CD game plan, and I think the sooner institutions figure that out, the better off they're going to be moving forward.

[Zach, 09:51]

100% that's where the number or the percent retention is higher than most people probably think based on your conversations, and I think from that to everyone's points like dig into it, push it because 25 basis points you save on $100 million in maturities, that's starts to add up, especially to Frank's point when the asset side is gonna start to move its way lower here, I think that's really, you know, really important and it's important to get a non-maturity deposit game plan in place too.

[Vinny, 10:19]

And that that's a great segue cause our second point, we wanted to really make sure, Frank, you had a chance to weigh in on, is kind of the outlook for non-maturity deposits and really the pricing in regards to some of those those products that have been laying out there at pretty high rates for some time now. Just kind of curious what you're seeing institutions do in terms of non-maturity deposit pricing. Are there any special products that you've seen sort of brought to market and what your outlook is and just, you made a remark earlier on that really resonated with me, it's about how human behaviors kind of repeat themselves over and over. So, given that as the context like, what do you think happens on the non-maturity deposit pricing side as we start to go down here?

[Frank, 11:00]

Well, first of all, if and I, I just had a, I just had a meeting yesterday with a client and we were doing a a look back over the rate cycle. And one of the things that we looked at was what what was the change pre-COVID to where we are today, this rate cycle, and what were the what were the betas on each one of their respective accounts? And so, we did it for every single account in net net at the end, the total non-maturity deposit base was about 12% beta. So, we went from 8 basis points to 550, and our beta, all in, was 12 basis points. And so, you can look at each and every one of these individual accounts, some of them since we didn't bring them up, we can't bring them down. Others, we've brought up considerably with market and we will have the ability to bring those down. One of the things that I think came to light when we when we work with the data scientists that we work with looking at a history of rates as far back as 40 years with all the data that we have is, a lot of us think that CD rates are driven by the, and non-maturity deposit rates is driven by the, short end of the curve when in fact, a lot of deposit pricing is driven by the five-year point of the curve. And as those long rates go up, short rates are soon to follow. There's a migration out of non-maturity deposits into higher yielding money market accounts, high yielding CDs as the long end of the curve moves up, there's a lag and then there's an inflection point at which people start to move. If you went back to 2007, the average community bank had about was a 60/40 mix between non-maturities and CDs and then went all the way down to 15% non-maturities, 85% excuse me, 85% non-maturity, 15% CDs. So, all of a sudden this migration out of non-maturity deposits into CDs there's this assumption that, well, when rates fall, everybody's going to pour back into non-maturity deposits. I think, in fact, you might actually see CDs starting to increase in the in the near term as people, as they shorten the curve comes down, you might see some migration out, but a lot of that comes down to, as Zach talked about, looking at the data, looking at the accounts, looking at the tiering, looking at the number of relationships, there have been some new products introduced. And that's always a tricky one from a marketing perspective. New money only requires certain things, some are more gimmicky than others. There's a timing element as to when you introduce these. One of the things that we've talked to clients about is getting some of that money market account of the old days that's now migrated into CDs because of the delta. How do we get them back into those money market accounts so we have more flexibility in terms of how we reprice those down, so we could spend a lot of time talking about all the different strategies, the pricing, the mechanics, etcetera. But I think a lot of institutions as Zach talked about, they're taking nickels and dimes off of a lot of these accounts. The one thing that I would caution listeners about is when you do look at your betas, if you haven't moved your betas up as aggressively as others. And you assume that in a falling rate environment you can move those rates down. Be prepared. Be prepared.

[Zach, 14:39]

Timing, timing, right timing is a huge piece of it and you would have models, right that say, oh, the Fed cuts so we're going to start to cut right away. To your point, you may have to wait three months, you might to wait six months if you aren't in a market or higher, higher like market sensitive type of pricing. And I think, too, Frank, that the nuance that you're getting at. You could look at nonmaterial deposit - oh we can shave off 10 bps off a billion dollars and that's X savings. Well, where are you going to do it? Because you get a lot of different areas in that balance sheet, I’ve had a lot of good conversations I'm sure you guys have had with clients saying, well, it's not going to be here, here, or here because we didn't move at all. So, it's gonna have to be in this section or this section, this section is index so it's gonna go down, this section is exception price, this section is rack. How are we going to get to that and how are we going to deliver that message? Because it's great if we talk about it, but if we can't execute on that, we can't communicate, all that planning goes out the window.

[Vinny, 15:31]

Yeah, Zach couple of things come to mind in regards to your comments. The first would be the degree to which the Fed goes down. 25 basis points, probably isn't gonna you know, spell the end of deposit pricing pressures for community banks. I mean we have models, of course, that our scientists have put together that are saying that's the case. So that's a great point you just brought up. I I do think on the other side of the equation, there are pockets where you can find those nickels and dimes. Again, I think you just have to be courageous, you look to certain accounts that maybe the rates have come up. And they could be laying there at at levels where presumably those folks could have went out and got 5%. I I remember a comment Matt Pieniazek made earlier this week at our consulting call, I believe. When he's like folks have had 12-15 months to go get five, five ½ percent, why haven't they left yet?  So that really resonated with me, and I think, you know, you you have to have a little bit of courage. And I think you have to also have some data to support what you're doing. You can't just willy nilly do it, but I think the reality is are probably some nickels and dimes that institutions could start picking up if they really wanted to.

[Zach, 16:37]

Yeah, and then get the big cuts ready, right? Cause you get money markets at 4.50, we're not talking nickels and dimes necessarily. Once the Fed starts going, you start seeing those T-bill accounts, or the money market mutual funds - they’re gonna start moving down fast. So, I think being ready to react to that doesn't mean you can't cut to the nickel or dime today, but I think getting ready to get those the big cuts, get those plans out and then get the smaller ones. And and to me, it's all about planning. Get the playbook in place or use whatever comparison or analogy you want to use in the sports world. But I think that's the key.

[Vinny,17:07]

I thought a few weeks ago when we had that day in the equities market when we saw that plunge, you know, I had a handful of folks reach out to me and say, well, look, there's some widely followed economic pundits out there talking that the Fed should have an emergency meeting and they should be cutting, and I'm sure we all read about that on the that particular day or in the days following that. I actually thought it was really good because it provided an impetus for a conversation for all these institutions that, hey, you know, the reality is it's probably not going to happen. But if it did, what is your plan for your deposits tomorrow? You know, I think it was Jeremy Siegel at the University of Pennsylvania talking about 75 emergency, 75 basis point cut, and then coming back and doing it again. Well, let's just say, for example, hypothetically, they did do that. What are you doing? Are you prepared? And so, we have a Fed meeting in September 18th here and on the 19th. What are you doing?

[Zach, 18:02]

Be proactively reactive or be proactive, however you want to say - don't just be reactive to the people down the down the street. And I think part of this, too, comes into the pricing into your wholesale alternatives or to the risk free rates because, and Frank was alluding to the treasury curve, too, in helping with deposit pricing. But Frank, I'm curious too, it's kind of like, kind of like a third theme here on the funding side is it's been interesting on the wholesale book the last couple of weeks, a lot of people with BTP come and due in January if they don't have that they have wholesale stuff that they put out there. What type of conversations are you having with clients or what what should they be thinking about? In terms of, yes, the the long has fallen. You mentioned brokerage 4.30 for a year, you see swap rates, I think 2-year swap was 3.85, so is this a catch a falling knife moment? Is this. No, just stick to your with your balance sheet needs. What what are you talking about? What? What other things that are have interested you and people should be thinking about if the curve keeps falling?

[Frank, 19:00]

First of all, if the BTFP rate that a client holds is above what they can earn in Fed funds, they have a free put option. You could consider right a pre funding the maturity of that if you've got exposure to rising rate, you could do that in the form of a forward starting commitment, or you could do it, or just take the funding now if your capital supports it and stick it in Fed funds. So, we've had clients over the last couple of days took, you know one year brokered at four and a quarter and they stuck it in Fed funds. When the BTFP comes due in January, they've already pre funded the maturity there. Others have said, hey, I don't have the capital and my policies don't allow me to take down $100 million of brokered and stick it in cash, it throws me outside my policy guideline for borrowings. So, we're gonna prepay the BTFP today at 4.70 and replace it with 4 ¼  because a lot of it comes down to earnings. How badly do you need the earnings today? That's that's what some are doing. Others it was a pure arbitrage play and when it comes due, they're just going to pay it off, if and when it drops below The the Fed funds yield that they're getting on the on on the funding.

[Vinny, 20:18]

Basically, an arbitrage on an arbitrage.

[Frank, 20:21]

Yeah, exactly. That's a that's a that's exactly as others as you mentioned are looking to the swap market and what they're saying is when the BTFP funding comes due, I will just replace it if I need the funding short, and if I need to add duration on liability side, I'll do it in the form of an interest rate swap. The beauty of that, it gives you not only a lower cost, but it also gives you the flexibility that, what happens if another event happens and we know events happen all the time right? We had the financial crisis, we had 911, we had COVID. I mean, it's not a matter of if, it's a matter of when. And if, all of a sudden, banks started getting flooded with deposits you want to have the flexibility to take those deposits in and shrink your wholesale funding base. That's the beauty of having access to derivatives, short funding, swapping it out fixed to lock in the lower cost. That gives you flexibility in in terms of, you know your balance sheet size.

[Zach, 21:27]

And and you could stick those derivatives on the asset side too, right? You got fair value to give yourself even more flexibility. So I'm hearing a lot of flexibility and I'm hearing, too, some of these things are, if you're looking for an answer, it's well, your capital position can help with this, your wholesale funding policy and your appetite for cause, a lot of clients with their wholesale policy is 35% of assets, but you know, if that thing goes above 20%, they're having, you know, the heart starts to beat a little faster. So being honest about how much wholesale could you actually put on over and above what you currently have, and what you need for earnings, right. Because there's very different discussions that I know I have with clients and you guys do, too, and the rest of our colleagues with. They, three clients might do three different things because they have a different risk profile and a different appetite for their current earnings or their different charters, right, from a stock bank, to a to a mutual, to a credit union, right. So, I think those are key things to whatever you're analyzing is - understanding your risk profile with those components.

[Frank, 22:24]

And I also think that if you think about all of the the loans that have been generated over the last 15 to 18 months, let's say. They're all in that window of prepayment opportunity right now. And so, the question becomes, we've had this conversation with our clients about loans, loans that have made five-year commercial real estate loans made over the last year. Rates have come down so far, they're now coming in and negotiating. So now the question becomes, what do you do? Do you have sufficient prepayment provisions in there? Are you willing to negotiate? And you know what we're finding is there are a lot of banks that say, hey, as long as you refinance within our organization, there is no prepayment penalty, and we've all had this discussion at the at the consultant meeting saying, yeah, that's a pretty common thing, what's the value of that? So, understanding the prepayment risk that you have within your balance sheet. Getting back to derivatives, one of the other things that we all know having preached this for as many years as we have that, there are still a lot of institutions that don't have access to derivatives. They thought about it, they've looked at it, they still haven't gotten set up for derivatives. So, so maybe you missed the last cycle, but get ready for the next cycle. And if and when rates come down to a certain level, it might make sense to utilize some pay fix swaps to create some floating rate assets out of those low yielding assets that were booked at the bottom of the rate cycle. As opposed to selling them off at small losses, why not create a floating rate asset? Very powerful tool to have in your toolkit.

[Vinny, 24:11]

Yeah, Frank, I’m I can't help but think, you know, so many institutions they it seems like the common refrain is we missed it and that commentary brings me back to our conference. We had our 41st annual Balance Sheet conference in Boston. We had one of our presenters with Chatham Financial and they showed this chart. And the chart was basically plotting, call it Fed funds or Libor, versus what the forward market markets expectations were for rates, they call it the hairy chart and it's like, it's like you really shouldn't put any stock in what the futures market says that that goes back to I remember, George Darling, you know, yelling about that years and years ago. But it's interesting that you made that point because I think it's so important for folks to get set up and understand that, and that is a tool that can help banks and credit unions alike. You know, for example, now you look at the supervisory tests and some of the exposures that institutions are showing there. I mean you could use derivatives to sort of shield yourself from some of that.

[Frank, 25:10]

Well, Zach, well Zach can tell you because back in ’18 – ‘19 we were, we were heavily involved with regulatory issues for institutions, and we we got these institutions set up and executed. And and if I told you that we still have clients that have 10-year fixed rate swaps on the books at between 47 and 53 basis points that they're paying and they're receiving 5 and 3/8.

[Zach, 25:40]

It was a great tool, and for for listeners who aren't initiated, what Frank and Vin are talking about is in the credit union space theres a test for EVE or for NEV. But whether you're a credit union or bank, caps, floors, some of these swaps can have very big value changes, if you're trying to rectify EVE or NEV or any type of issues there, it could help earnings, too, in in, in income, but the point here is it's it's a very important tool to have, right.

[Vinny, 26:05]

You can almost bring it back to loan pricing as well. Understanding the value of some of those options should have some influence on how you price your loans, and your lenders should understand what these things are worth, what, what, what the value of the options are in the financial markets that you may be giving away for free, they should understand what those things are. I'm sure they would understand, they might just push it aside. I I understand it, but sort of it's all holistically related.

[Frank, 26:34]

Well, one, one of the things that we hear quite often from our clients is we've got borrowers, commercial borrowers coming in and they read the headlines well, they watch CNBC, too, and the expectation is rates are coming down. And so, they want funding, five-year funding, but they don't want to lock the rate today for fear that rates could come down at the same time, they don't want to fund short, we've got an inverted curve because the starting rate is prime 8 1/2. You look out in the swap curve, right, a 5-year fixed rate commercial real estate loan point of indifference is about 6.50. So, one of the things that we've come up with, and I won't give away the secret sauces creating a floating rate loan with a floor and a cap, and it's worked wonderfully for a lot of our clients. It's getting that education out to the client and to the lenders and the lenders love it. So that's another tool, understanding how derivatives are priced. What the valuations are, what is the value of a floor? What's the value of a cap? And right now we know the value of a floor is very high. The value of a cap, it's very low. Alright, buy high, sell low. So so, again having access to those tools and understanding even if you don't utilize derivatives, understanding the concept can go a long way and being more effective at at pricing in your local market and more competitive.

[Zach, 28:00]

Yeah, 100%. And I think that has benefits for the refi discussion that you were having an obstacle handed, but also for new volume and it's every cycle, it doesn't matter where rates are, you can you you can kind of weaponize that swap curve understanding those the the value of derivatives like that doesn't matter where rates are, there's different ways to interpret it, but being able to understand that it benefits any lender, right? Overall, I think you know, one of our 4 themes today, right then was talking about the loan book, thinking about the refinance wave and understanding what do you have at risk? Because I have some clients who have nothing at risk really because they haven't booked a lot of loans the past year and have they been able to? I've asked them, can you stratify the coupons? Like what's above market right now? And cause there's some hysteria, right, in terms of all, all this refi and Wells Fargo and we saw, you know JP and and then at Bloomberg's saying this and next thing you know, it's like well, oh, we only have about, you know, 2% of our assets above above current you know markets. So, what's the what's the risk, others I'm sure have real risk, and I think the point is can you answer the question of how do my coupons stack up and where can we start to foresee some of those risks right?

[Vinny, 29:07]

Absolutely, that's a great way to kind of put a bow on that, that discussion we we did have one last thing today we only have 5 things, or kind of themes, we're we're looking at and discussing today and the the last one would be in the investment portfolio. There's a terrific comic that's sort of floating around the deep, the halls of DCG, and it's it's basically hard for me to sort of bring it to life, but it's essentially a ton of people lined up to buy 1% Treasury bonds and no one standing at the window to purchase 5% bonds. And I think some of us have used it in different presentations, and it's interesting when you look at it, there's a lot of reasons why that may be. But Frank, I I always look to you, I always appreciate sort of your insight when it comes to investing, you're always so acutely aware of kind of changes in the markets. What is your perspective right now for most institutions because they doesn't seem like folks are leaping into the deep end to buy bonds right now.

[Frank, 30:04]

As I described earlier, and and thank you by the way, long rates move ahead of short rates on the way up and on the way down, there's a there's a, there's a pattern of interest rates cycle after cycle after cycle. And if you said, you know, when do most institutions buy bonds? Typically, when the difference between what they earn in short term Fed funds when they can't make loans and the yield curve is positive slope, there's a there's a big pickup and we saw that when interest rates went to zero and when the long end of the curve started to move up. And you can get out of Fed funds at 12 basis points and pick up 2% and Powell came out and said we're not even thinking about raising rates, seemed like an easy decision. SVB got sucked into that, we know what happened with SVB. So, the question becomes, when do bankers typically buy bonds? How do they go about making those decisions to buy bonds? What's the objective? And so, if we go back to the bottom of the rate cycle, banks had more cash than know what to do with. They looked at the pickup and spread, they went out on the curve. Again, long rates move ahead of short rates, short rates follow, banks get squeezed, they're upside down, big unrealized losses. The last thing they're going to do, despite the fact that the greatest increase in magnitude of rate changes in in our lifetime took place. And at that point, that was probably the time to buy bonds when the five-year when the 10-year Treasury hit 5% . Because most of the risk of buying bonds was gone, and yet bankers didn't want to buy because number one, I'm not going to get a 6% yield when I'm getting 5 1/2 in Fed funds, there's not enough juice. And what we've said is some of the best bond purchases are made when there's little to no spread in buying the bonds versus short term rates, and that typically happens when when the curve is flat or inverted. What typically happens after an inversion of the yield curve, right, long rates move down, short rates follow - it's cycle after cycle after cycle. So, there's a tendency for bond portfolios to always be at low yields because they buy when excess cash, when do you typically have excess cash? Deposits are plentiful, we’re in a recession, loans are down. Then when loan demand picks up and rates rise, we have unrealized losses and nobody wants to buy bonds. And so those 6% yields that you could have gotten just a few months ago at discounts, they're now in the low fives does is it too late? It depends, not necessarily, and even though the market expectations, if you look back at that hairy chart, if you look at the history of of interest rate cuts. Rates tend to come down farther and faster along all points of the curve than the markets typically expect, so there is no one-size-fits-all strategy. But if the loan demand doesn't exist right now, and you've got a lot of assets repricing over the next 12 to 24 months. If the Fed does cut, right, you could be looking at pretty low yields and all of a sudden now 5% handles on securities might look pretty good. The other thing we talk about is dollar cost averaging. You've got bonds coming off at 1%, you you could replace those at 6%. We talked about pre investment strategies, anticipating. Even if we have to borrow at 5 3/8, and put on 6% bonds, there's there's very little spread. But we're not buying spread, what are we buying? Protection against slope to the curve, lower rates, and potentially credit related issues. I don't think there's a, I don't think there's an institution out there right now that has much in the way of gains in the investment profile, even if rates fall precipitously. That's the other reason why establishing what's the objective of this of this strategy, and it's not necessarily picking up spread picking up income today. It's looking down, it's as Wayne Gretzky was was quoted, right, he skates to where the puck is going, not to where the puck is.

[Zach, 34:26]

And so, it's not it's not transactional, right? 

[Frank, 34:28]

Correct.

[Zach, 34:30]

It’s a program, it’s a.

[Frank, 34:32]

Balance sheet approach.

[Zach. 34:33]

No, I think that's really important.

[Vinny, 34:36]

And that's almost a terrific place to sort of end this conversation. You know, we hit on five of the issues that are coming up in these conversations. And I got to tell you, I think our listener is going to love this. There's a lot of meat here, and it's always a pleasure, Frankie, to have you. You've got the benefit of so many years of experience in this industry.

[Frank, 34:57]

That's the way of saying I'm old, and you are correct.

[Vinny, 35:01]

You are the senior club champ at your at your home club. So, you know, maybe next year it would be better off. But Frankie, Zach and I really want to thank you for your time today. This has been, really, I think worthwhile for all of us and Zach, any concluding remarks?

[Zach, 35:18]

No, no, I think that was that was terrific. Frank's the best. Always learn something, you know, when when he's here, hope the listeners enjoyed it and yeah, looking forward to to next episode.

[Dana, 35:33]

On the Balance Sheet is a podcast produced by Darling Consulting Group (DCG). All views and opinions expressed by the hosts and guests are solely their own and may not represent those at DCG. All third parties are independent entities and are not affiliated with DCG. This podcast is intended for informational and educational purposes only and is not considered as advice. All views and its opinions expressed are based on the information available at the time and may have changed based on the current market and other conditions. For more information about DCG, please visit  www.darlingconsulting.com or e-mail us at info@darlingconsulting.com. Today's background music is provided by John Sid, Como Media, and can be found on pixabay.com.

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