Yield Curve March Madness and Distilling Fed Expectations with Jeff Croteau

In On the Balance Sheet®'s 50th episode, the guys are joined by DCG’s Jeff Croteau to parse through recent yield curve movements, the March Fed meeting, and Q1 ALCO themes. 

The discussion delves into why ALCOs need to understand their balance sheet needs and be opportunistic when rates are volatile, looking inward first when assessing funding game plans, as well as recent lending discussions and how pricing/volume trends may influence NII levels in 2026 and beyond.

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

Transcript

On the Balance Sheet® S5 E_3- Yield Curve March Madness and Distilling Fed Expectations with Jeff Croteau

Transcript

[Vinny, 00:00:05]

Welcome to On the Balance Sheet, season 5, episode 3. And it's not just episode 3. This, Zach, marks sort of a milestone for On the Balance Sheet podcast. This is number 50, and we got an awesome one today. We got a new guest, a colleague of ours, Jeff Croteau. He's here joining us, and I'm really excited for this one, Zach.

[Zach, 00:00:24]

Yeah, I can't believe we made it to 50. I think the odds were, we wouldn't. And here we are, episode 50. Jeff's going to be here. We're going to do a quarterly recap like we did in December. Got some really good feedback on that, just trying to sum up the quarter, tee up some key ideas, but also looking at what's going to happen here going forward. So, I think, Vin, the agenda probably is what, one, talk about the Fed meeting a little bit, because that was last week or kind of mid-March here. Obviously, the markets have been moving around quite considerably with some other geopolitical things going on. And then we could talk to some of the ALCO themes we've been seeing. We'll bring Jeff in because he's been on the speaking circuit significantly here, I think. Jeff, I had you down here for, well, we had a webinar last week with ABA.

[Jeff, 00:01:09] 

That's correct.

[Zach, 00:01:10]

On basis points up for grabs, talking about deposits. You get a Deposit360 webinar also going on this week. With the clients talking about the funding kind of playbook, you're going to go to New Hampshire. Is New Hampshire, Maine Vermont Bankers CFO conference too?

[Jeff, 00:01:25]

Yep, that's this week. And then next week, have another webinar with ABA on liquidity.

[Zach, 00:01:30]

So, Jeff was kind enough to fit us into the schedule here in late March, and we're super excited that he's here.

[Vinny, 00:01:35]

We’re thrilled that you’re here. And more than anything else, before we kind of get into that interview, making it to episode 50, I think we owe all of our listeners a thank you. We probably owe them some content, so let’s get right into it, Zach.

[Zach, 00:01:48] 

Let’s do it. And I think what we can start here too, Vin, is with the Fed met. So, last week, mid-March, there was no cut, no hike. It was on hold, 350 to 375. I had a few notes here, though, that I wanted to kind of get your thoughts on. I’m curious what Jeff’s hearing too, because you went from, if you look at the dot plot that they put out every quarter. So, they meet every six weeks, but on the second meeting of every quarter, or every 12 weeks, they put out a dot plot. They have one cut for the median priced in this year, and what’s interesting is the markets have been kind of seesawing after that meeting. There’s a lot, obviously, going on, but you have the markets are saying, yes, we agree with one cut later this year. By the way, that was three and a half cuts this year a month ago, or eight weeks ago. So, over the course of these last three months here, you’ve gone from we’re going to get three or four cuts this year, possibly, to the markets saying one. And then, at the end of last week, you saw no cuts in 2026 from the markets, maybe one in 2027, to the word “hike” got brought into the equation. This is not from the Fed necessarily, but it’s saying that, hey, those rate cuts that maybe you were banking on this year, right now the Fed is saying we are on hold and we’re trying to wait and see. And the markets are saying we don’t even know if that’s going to happen this year at all. And I think back this morning, we’re more on a neutral stance here where no hike, no cut. But I think, to me, this is going to change day to day. And by the time we publish this, I’m sure there’ll be a difference assumption here for what the markets and Fed expect. But I think for us, from the ALCO perspective, it just, to me, one takeaway is being opportunistic, and kind of knowing what you need. And if you bear with me here for listeners, I have a number of things from the yield curve a month ago versus today. So, late February versus mid-late March. Five-year treasuries up 50 basis points over the last month. We’ll talk about loan pricing a little bit later, but I think that’s a really important thing to keep in mind. Two-year swaps and five-year swaps a month ago were 317 to 320. They’re now 365 to 370. So, you’re talking 50 bps on swaps if you’re looking for pay fixed. Then it’s got more expensive if you want to look for receive fixed, a little better deal for you. How about cap pricing? Three-year cap pricing, because we’ve been talking about that. Joe talked about it last episode in terms of the February podcast, looking at five themes for this year, looking at options, looking at caps as a potential way to hedge rising-rate risk and not have any type of pressure on the way down. Three-year caps at the money, three times more expensive today than they were a month ago. 51 bps to 151 basis points, right? So, I think those are things that have jostled around very quickly. It could certainly come right back, but I think my takeaway from the Fed meeting was they’re on hold for now until inflation gets better. But also, be ready to go here, because there’s a lot more volatility that the Fed can’t really control that are kind of whipsawing the markets right now.

[Vinny, 00:04:47]

Terrific research, by the way, setting the table here. I actually, as you were kind of going through that, looked at the CME group for their, the implied probabilities for the Fed here over the next several meeting dates. Do you care to guess in that CME group as we sit here on March 24th, the next implied rate cut? At what meeting is it?

[Zach, 00:05:07] 

I'm going to say late 27.

[Vinny, 00:05:09]

Bingo. October of 2027. Something tells me Zach already saw that. But the reality is, I think you hit the nail on the head. With all this volatility, if there’s something that might fit for your balance sheet, you better be ready to go right now. How long this will last is anyone’s guess. None of us claim to be geopolitical experts, nor do we ever want to kind of go down that path, but at the end of the day, you see markets whipsawing all over the place. You better be ready to pounce if there’s something that you think might help your balance sheet. And I’m kind of speaking more specifically to off-balance-sheet transactions and so forth. And Jeff, I don’t know if you, in your speaking travels, kind of what folks are thinking about the Fed for 2026.

[Jeff, 00:05:53]

Yeah, one thing that’s interesting is how that relates to budgeting. I bet a lot of groups, late last year, early this year, were probably anticipating maybe, on average, two Fed cuts for their budgets for this year. Well, all of a sudden, if this course of action plays out and the Fed really is on hold for the remainder of this year, I bet a lot of groups are going to miss the interest expense number when it comes to their budget. And I guess it just begs the question: can we accept that? Are we okay with that? And if not, what are we going to do to try and make up for that? Are we going to get a little bit more aggressive with some of our deposit pricing initiatives, even if the Fed remains on hold? Are there some things that we can do on the asset side of the balance sheet to help make up for that from a margin or spread perspective? So, I think it really just makes the budgeting conversation for the remainder of this year that much more challenging and interesting.

[Vinny, 00:06:51]

Jeff, to that point, I actually got an email from a bank that I have some CDs placed at, and it is an online bank, who just raised their deposit rates. That was actually the, that led in the email. It said they had raised their six- and nine-month deposit rates. And so, you wonder, will this game restart itself kind of in the wake of what’s going on geopolitically?

[Jeff, 00:07:18]

Yeah, funny you say that. We’ve been asking a polling question in a lot of our recent webinars. What is your tiebreaker? What would you favor for your bank for the remainder of this year? Obviously, the answer is going to be both. We want both growth and cost savings, but we’re probably going to be faced with a choice. And when faced with that choice, which is more important? And the way we frame the question is: would you rather meet your budgeted growth or grow beyond expectations, but your funding costs remain the same? Or do you want meaningful funding-cost relief, but you would see slight deposit contraction? In the first webinar, we saw two-thirds of the respondents favoring growth. A recent ABA webinar, we saw 80% of the respondents favoring growth. So, I do think that we could see, like your case study that you just mentioned with your online bank, I think we could see banks getting more aggressive with their deposit pricing because they’re placing a premium on meeting those growth targets.

[Zach, 00:08:24]

Yeah, Jeff, I fully agree. So, if the first thing from kind of the last quarter or last few weeks of the Fed is, be opportunistic, kind of know what your balance sheet needs. I think the second one, you just hit the nail directly on the head, which is the funding side may not be kind of the solution here in terms of seeing the margin get better. That actually might not be as fruitful for us, especially given what you talked about budget-wise if you had cuts priced. And so, understanding tactically, what do we do with the Fed on hold? What do we do if they cut? Because that could happen. We could sit here three months from now, and we could have a cut. We could also have a hike later this year. So, I think understanding kind of what you would do either way, where you would do it, and then on the other side of it, which is if I’m going to, if I need growth, like what are those areas? So, like, Jeff, what are you talking about? Because I know people, everybody wants growth. We want to fund loans. We want to keep growing. Easier said than done. So, what are you seeing kind of in your speaking travels, talking with clients and folks, in terms of the growth, where folks are looking, I guess, for growth?

[Jeff, 00:09:25]

I guess before I answer that, I just want to set the table with it’s going to be dependent on your current liquidity position and what your liquidity needs are going forward. We’re seeing banks that are also seeing their loan pipeline slow down to some extent. If you’re budgeting 3% loan growth this year, maybe you don’t need to get as aggressive as another group that’s looking to grow double digits this year. Or we have banks that are sitting on no outstanding wholesale funds today, while some of our other clients are bumping up against their policy limits north of 20%. We’re going to need a different deposit pricing strategy or a different sense of urgency when it comes to ensuring that we generate deposits on a go-forward basis. So, I would first look inward at our current liquidity position and liquidity needs going forward. Once we’ve determined that we do need to grow deposits, one easy area is from looking within. Right, our existing customer base. I bet a lot of us have legacy savings, legacy money market accounts that saw significant attrition since rates started tightening. A lot of institutions have an attractive non-maturity deposit out there today. Maybe a premium money market or savings account in the twos or the threes. Back in ’22, ’23, maybe even early ’24, we didn’t have anything attractive on the non-maturity deposit side. We played in the CD space, but some of those depositors went to brokerage accounts, for example, or Treasury Direct. Now, if you have a compelling offering on the non-maturity deposit side, that delta between what they can get elsewhere and what they can get at your institution has narrowed significantly. I would want to look at who’s still banking with me but has withdrawn significant wallet share. Maybe that’s a good calling list to try and win some of those funds back. So, that would be one example of looking within to maybe generate some additional deposits here this year.

[Vinny, 00:11:34]

Yeah, Jeff, it's interesting. One of the slides I sometimes share with clients who utilize Deposits360 is, you can sort of stratify and see where your CD growth has come from. In particular, is it single relationship customers or is it those who have a checking account with us as well? And overwhelmingly, every time you bring that slide up for most of these organizations, you don't ever grow your total CDs with those single relationship customers. It's just you're getting into a bigger piece of the overall wallet of those folks who have multiple relationships with the organization, like you said.

[Jeff, 00:12:13]

Yeah, absolutely. And you know, it’s funny when we talk often with institutions, they’re okay initially with paying up on the CD side because they’re under the assumption, hey, I’m going to bring in all these new customers, and then we’re going to cross-sell the checking account. It’s going to be a more core relationship and more profitable, which in theory would be great if we are bringing on those new relationships. But often, what the data tells us, I think groups are surprised when they see their own data as to how little that actually happens.

[Vinny 00:12:48] 

In practice, it makes all the sense in the world, but in practice, how is it that we're tasking our CSRs and those who are responsible for getting into those other parts of that customer's wallet?

[Zach 00:13:02] 

And I think too, there's an accountability piece of it. And I think a lot of groups maybe don't have the data to understand the cross-selling and how that happens or contract those metrics. And I know we certainly have some of those with Deposit360 and with the clients who use that. And I'm sure plenty have it on their core, but it's like, can you get that? Because I go to some of these meetings, I'm sure you did too, this quarter, Vin, where we're looking at, you know, there's 90 plus percent retention. So, 9 out of every $10 of CDs that are coming off or are being retained. But there's always some conversation about, yeah, but X, Y, and Z banker, this credit union's offering four, we're losing people. And you got to kind of take a step back and say, well, loudest voice doesn't always win in terms of these meetings. Like show me the data because I'm seeing 9 out of $10 are staying. CDs are flat, which means we brought new money in. So where'd that new money come from? Are they single threaded folks? Are they people with 19 things with us? Right? So I think digging into that type of data is really important. The second thing too, on the cost side, I've had a lot of interesting discussions here with, I know that the funding side, the relief is abating, right? It's slowing down. But I've been surprised a bit by the amount of folks who are saying, yeah, we're at 375 on a CD and everyone's taking it up. And you look at the data, it's like, well, your average rate was make it up 320. So, there's a ton of money that's renewing at 3 or 250 or 2 or even lower, depending on what you've done with the rack rates. And yeah, there's a bunch of people who are definitely renewing at 3.5 to 3.75, but what's the origination rate? And I know, Jeff, you've probably seen a lot of that in your work with Deposit 360, because a lot of those folks who are talking about everyone's at 3.7 or 3.8, their average origination rate's like 3.2. And it's a different discussion on the funding side when you can show them where the money's going, who those people are. And I think it's a really valuable insight.

[Jeff, 00:14:54]

You're spot on, Zach. And I've worked with a couple of banks recently that actually lowered their special offering down to about 350, but they adjusted those short-term rack rate CDs. And they have a three, six, and or nine month that's in the 3 to 330 range. So now all of a sudden that delta between their special and their rack rates is between 20 and 50 basis points. So, a lot of those that are rolling into a still somewhat attractive rate in the low threes, they're accepting that and they're not calling to go into that special. And like you said, we're seeing rollover rates below 3 1/4. And some of these groups are still retaining 90 plus percent of their CDs.

[Vinny, 00:15:36]

One thing that Zach and Jeff, to your points about that 90% retention, oftentimes when you're in these conversations and you have folks from retail talking about, we have folks leaving, it's like, well, you have one out of 10. It comes back to this like human psychology. It's like folks are more apt to remember that negative experience than the nine positive experiences. And I, at times, may be like that myself, but the math is telling us, hey, folks are staying. The other thing in regards to pricing, I keep coming back to, and this is overly simplifying things, but go back to when rates, when the Fed was up in the fives, and see how most institutions priced back then. And a lot of times they were basically just below Fed funds. Fed funds or just below it, somewhere in that range, and retention rates were 40%. But today, I'm worried about a 4% CD handle, that's Fed funds plus, when retention rates are 90%. So why is it that we're so worried about retaining or keeping our rate elevated at a time when everyone's rolling, whereas back in the day when no one rolled, we had our rates lower? So, it's like, have you thought through that process? It's pretty straightforward, but that's a conversation that has really resonated with some folks because they're saying, yeah, you're right. What are we doing?

[Zach, 00:16:50]

Yeah, it seems like we’re in this transition phase where a lot of those historical correlations, right, to the Home Loan Bank or the Fed funds have broke down a little bit. And I think they’ll work their way out as the cycle, as we get through this year. But if liquidity remains a huge priority and folks aren’t maybe looking inward, and they’re looking at trying to fund loan growth that, and are paying up, I think that might prolong some of these higher-cost CDs. I really would have thought 4% would be gone with the Fed at 350 or 375, but they’re still there. And I’m curious, Jeff, your thought on this, because what you mentioned Vin, about the CD in your personal life, they raised back up, and the email was something like, we’ve increased our CD rates. That’s a little different than if you were at 4 already and went to 425, sure. But if you were at 3 1/4 and now, you’re going back up, you just cut, cut, cut, and you came back to neutral probably. So, I think that’s an important piece too, is understanding like you may be dealing with online competitors or other folks, and you got to get down to, well, apples to apples, let’s have the conversation and be ready to defend against those, because it’s not always as simple as the ad seems.

[Jeff, 00:17:59] 

Yeah, absolutely. And that's where you need to look inward at your own pricing strategy and not worry so much about what the competition is doing. Because it could be an online competitor. Or I've had a lot of groups that say, Jeff, we're dealing with this 4% CD special in our marketplace. And you look into it, well, they're bumping up against their wholesale funding policy limit and maybe have some regulatory issues; so they need to pay up more than you do, who has a totally different liquidity position and liquidity needs going forward. There's another New England bank that I work with here that they've always paid well above their peers on the deposit side, but they have a 40% efficiency ratio, and their loan rates are 20 to 50 basis points higher than their peer average. So, they just have a different business model than everybody that's always allowed them to pay up on the funding side. So, sometimes we don't know the reasoning behind why they're pricing the way that they are. We just react in our pricing meetings and say we need to pay what they're paying in order to compete. And it gets back to what Vinny said too, where there's the psychological component where you might hear a few one-offs of folks that are looking for a higher rate or are leaving because of rate. And that is going to stick out significantly more than all of the successful rollovers that you never hear about because they just rolled into their CD at 3 1/4. 

[Zach, 00:19:31]

Totally agree. Let's kind of wrap up maybe the deposit discussion that we can get to loans if you guys are okay with that. I encourage our listeners, go to our website under Insights. January 21st, none other than Jeff Croteau wrote a nice piece talking to what he just mentioned, which was, it's titled Competitor Deposit Rates Don't Matter. The two most important factors for effective CD pricing strategy. I encourage folks to read that because it was really well done. And obviously competition does matter to a degree. But Jeff's point, like he's mentioned, is to look inward 1st and have that strategy overall. So, any final thoughts, Vin or Jeff, on deposits before we jump to some loan discussion?

[Vinny, 00:20:11] 

I say we get into the loans.

[Zach, 00:20:12]

Let's do it. You can't talk about lending without having that deposit discussion, right, overall. And I think, whether it was Joe Kennerson last month in our episode, the Bulletin and I wrote last month, which talked about that. And we've had a number of pieces talking about how asset tailwinds are still there, right? We still have legacy cash flows coming off of the twos or threes and fours and the resetting in the fives and six and sevens. But in most models we see, those tailwinds are starting to dampen a bit and they're getting less because we've already pulled some of that forward. But also, a year ago, the yield curve was 100 bps higher for the most part. So, you're just not getting that extra relief or that extra benefit from assets repricing upward. So, Jeff put it nicely, I think, where he said, hey, if the asset side is starting to dampen and we're not getting that funding cost relief, what do we do? Do we have to cut funding costs more to keep the margin? Do we have to grow? So then I'm curious, what were your discussions on the growth, the volume versus rate side? Are people growing loans? Are people worried about that? Are they worried about rates? What was the general feel for this quarter?

00:21:19 Speaker 1

This is a really interesting question because internally, most of our listeners may know that we have a Monday morning consulting call where folks are sharing their experiences from the road; and a lot of it, at this point, would be anecdotal. We don't have all the Q1 data. The data sets are kind of making their way through. We'll get them here in some time. And so, it's really more or less what you're hearing from others as you're traveling to different institutions and talking with bankers and credit unions. And my experience has been that most are pretty satisfied with demand, but that is not necessarily congruent with my colleagues, some of which are saying, hey, we're not, loans are way off. One thing that I think folks have been relatively, I don't know, I guess, I don't want to say negative, but frustrated by, is spreads in lending. That there's no doubt about that. That's across the board. We have, as Zach mentioned, you've got term structure rates was a little bit lower here, and you're hearing, like, commercial real estate deals getting quoted in the mid to high fives. And so, that was an area we didn't really want to see as bankers, but that's kind of come back into play. But I just think when you think back at last year, there's a lot of uncertainty last year. Demand was off for a lot of banks last year. But I kind of want to circle back. You know, we're talking about anecdotal stuff; and so much of our opinions can be framed by what we run into. Zach and I kind of got into a little bit of a discussion in the office a few weeks back, and we had one of our data gurus, Brian Cowan, pull average loan growth for DCG clients in 2025. Does anyone care to guess what the average loan growth number was? 

[Zach, 00:23:16]

5%?

[Vinny, 00:23:17]

Great guess. The median was in the mid fours, and the average was 6. So, I had to go out to my AI app and remind myself what the difference between median mode and averages. So that was a fun experiment. But it's interesting, you think back on last year and a lot of banks were negative on their loan growth. You were negative maybe just in their perspective of it, but yet they grew. They grew loans. And so that brought about another experiment where Zach and I said, what has deposit growth looked like versus loan growth over the last two decades, Zach, we pulled this up off the. 

[Zach, 00:23:54] 

Back to 2000, yeah. 

[Vinny, 00:23:54]

And that data was sourced from. 

[Zach, 00:23:57]

It was FRED data as well as with some FDIC quarterly banking profile data, yeah.

[Vinny, 00:24:03]

And what we found is that on average, loan growth is going to exceed deposit growth by about a percent.

[Zach, 00:24:10]

If you go back, there's different, I mean, you could.

[Vinny, 00:24:13]

Look at this differently.

[Zach, 00:24:14]

We're picking time frames, obviously, but going back to 2000, loan growth on average, whether it was for 10-year periods or over the 25 years, it was 5 to 6% and deposit growth was about 4 to 5%.

[Vinny, 00:24:30]

4 to 5%, which is very interesting. You know, our Deposits360 is forecasting something like 3 to 5% deposit growth this year. That forecast, I'm sure, will be updated here as we move through the cycle. But I think, when you take a step back and say this generically, are banks going to grow loans right around somewhere near the level they grew at last year, if it's 4, 5, 6%? Myerly, Yo-Yo Travels would tell me, yes, I think they will, but certainly that can all change really quickly. And there are others who are seeing a lot of different things. Jeff, I'm curious what you're kind of hearing.

[Jeff, 00:25:07]

Yeah, I'm hearing a mixed bag, and I think, on average, somewhere in the 5% range is probably a fair bogey for today. I'm definitely interested in touching upon the spread conversation, though. Obviously, long intermediate term rates came down at the end of last year, and as Zach noted earlier in his astute research, they've recently bounced back up 40 to 50 basis points over the last month. Is that going to transpire into our loan pricing? Because we've been getting squeezed on both sides of the balance sheet a little bit here, where the funding cost relief is starting to run its course and it's going to continue to do so if the Fed is on hold. And if we see commercial pricing dipping into the mid-fives, if that holds true today and does not respond to the increase in longer- and intermediate-term rates, and all of a sudden our funding costs start to dissipate because the Fed is on hold here, are banks going to start to respond differently over the coming months because margin is all of a sudden getting squeezed?

[Zack, 00:26:18]

Jeff totally agree. And let's unpack that a little more because I think there's a couple of things going on, on the lending side. One is, there's still the rationalization that I have cash flows coming off in the force on average or low 5s. So anything I do above that is positive. And that is a true statement in terms of, yes, they're renewing higher from a yield perspective, but is it appropriate? Are the credit spreads appropriate there? I think that's the other question here, because, yeah, it's easy to say it's all accretive because it's going from a lower rate to higher rate. But if you take a loan, make it a 575, 6% on commercial real estate. And these are bigger deals, right? I'm not talking about $100,000 deals; million plus, 3 million plus, 10 million plus. That deal early in Q1 was 265 to 90 bps over the swap curve. I think a lot of groups can live with that. You were 225 over the home loan bank for a lot of that. That same deal today, if you're still at 575 and if you've quoted a fixed rate. You didn't do an index plus a spread. That same deal that a month ago looked pretty good, you know, is now home loan bank plus 150. Or it's a swap curve plus, what's that? It would be the swap curve plus 200. You know, maybe a little bit less, give or take, depending on what tenor you're at. So I think that's a really important point here too, is that just because it's absolutely better than what's coming off overall, doesn't mean it's an appropriate spread. And I think we got to really look at that. It's always a great reminder when we get these kind of yield curve; the yield curve volatility is what's your fixed rate commitment strategy? How do you price those out? And then are you fixed rate? Are you spread plus index? Do you have floors and caps on certain things? I think all those pricing discussions that are so important that I think people learned in 2022, early when rates really went up, that we have to look at that. Maybe some folks forgot it, maybe folks didn't, and they're really priced well, but I think that's an interesting component for me here because a lot of those deals you thought were great a month ago may not look as good here if you didn't price it appropriately.

[Jeff, 00:28:29]

Zach, I think one other factor is the budgeting too. It was easy in Q4 of last year, where banks had a phenomenal year. It was easy to sit back and say, "I'm going to lag this Fed rate decrease on the deposit side because I don't want to upset my deposit growth, risk lack of retention, and we're way ahead of budget anyway." You could say the same thing on the asset side, where maybe I'll get a little bit more skinny on the spreads to compete with others in my marketplace because I want to get some good momentum with volume heading into next year. Well, what if that narrative changes and all of a sudden, we're off of our 2026 budgets? All of a sudden, that narrative flips, and are we getting paid appropriately for the risks that we're taking?

[Vinny, 00:29:17]

Those are all great sort of things that I think teams have to really take very strong consideration into because let's not bury the lead. Most of the models you run. If there's no growth, and we certainly run, well, I'm going to loosely use the definition of static here. So, we run a balance sheet that doesn't really grow. Most of these models would say that spreads are going to widen, your income's going to go higher. And that is if you just kind of show up and keep the lights on and replenish your business. However, one thing that is certainly emerging for some banks and credit unions in these models is that, at some point, you reach the end of the runway. That upward momentum, or that, I should say, the tailwinds, they sort of peter out; they're gone. So, you have a situation where at what point are you willing to let those winds kind of die down faster than they really might? And that is all going to come back to your budget, your pricing, how you want to go about this thing. But we are going to reach a point, an inflection point, where you are no longer going up. Some institutions are much closer to that than others. Some of them have legacy duration that's just going to keep replenishing. You're talking 2, 3, 4% handles that are coming off forever. And others don't have that anymore. And so, these are really serious questions, I think, ALCO committees should be tackling in Q2.

[Zach, 00:30:43]

Yeah, I encourage folks to find those inflection points, knowing the models are not perfect and we run static models, no growth, but I would run some dynamic models too to understand how that might play out with the balance sheet shifting. But for a lot of the groups I've seen in the current environment, there's still those tailwinds that are helping, but to your point, Vin, they diminish over time. But you see rates come down like 50 to 100 at the long end of the curve, where either now those loan tailwinds are headwinds or they're very neutral. And for some groups, it's more. It depends on how low your current loan book is, how much duration, all these things. It's not a perfect answer; but I've been encouraging folks to just try to figure that out. How much room do we have? It's not a strategy to go to that floor. Like, I always joke with the clients, the strategy is not go to, if 550 is the lowest point before it becomes a headwind, we're not going there, right? But we should understand how much room we have before this becomes a different discussion, right? You know, overall. So I think that was a huge theme from last quarter. I don't think that's going to change. I think that's going to only increase this quarter. And I think with the yield curve selling off a bit, I wonder if those volume concerns then are going to be more prevalent overall, because if this higher yields, will we be able to get the volume, or are we going to accept thinner spreads to get that volume that everybody wants, right, overall? So I think that's going to be a very key concept here in Q2.

[Vinny, 00:32:11]

Jeff, anything you'd like to add? You've been terrific, our listeners are going to really enjoy your insight. Is there anything else, any closing remarks?

[Jeff, 00:32:19]

I appreciate you having me on. The only other thing we didn't touch upon on the asset side, which we don't need to delve into too deeply, but those that are seeing loan volume starting to run dry a little bit, or maybe pricing is getting a little bit thin for our appetite. Like you said at the beginning, Vin, being opportunistic— is this a good time to look at the investment markets to help supplement income and put some higher-yielding assets on the books? Something to consider.

[Zach, 00:32:48]

Yeah, the flip side to all the funding costs, maybe challenges or some CDs bumping up, wholesale rates going higher is, the investment markets are higher too, right? I ran some stuff for some clients earlier in the quarter, you know, some 20-year mortgage backs at discounts. No loan growth, we need some assets, and those are at 450, they're now over 5% in some cases. So I think that's a huge discussion that is important. The last thing, just to go back, Vin, to your discussion on the loan growth versus deposit growth, I should have added in here. When we plotted that back to 2000, what did we say? 4, 5% deposit growth, 5, 6% loan growth, but there's obviously mins and maxes in this sub dispersion. And Vin made this point to me last week. He goes, look at the graph. And I know you can't see it on the podcast, but I'll illustrate it for you. There are two times when deposit growth has exceeded loan growth annually in this data set. Jeff, do you want to guess? I'll put you on the spot. Two periods of time in the last 25 years.

[Jeff, 00:33:49]

I would guess the financial crisis or shortly thereafter, and then during COVID.

[Zach, 00:33:54]

Bingo. Bingo. So the two times when you had actually differences in the graphs here was 08, 9, 10. And actually, loan growth was negative for a few years. It was booming, double digit for a couple of years, and then it collapsed, and then during COVID, we had PPP lending, but we also had that deposit surge. So deposit growth does usually lag loan growth, you know, most years, which I think brings us back to looking inward for liquidity, wholesale funding game plans, those type of things too. So, I should have mentioned that 20 minutes ago, but I think that was an interesting chart to remind us that deposit growth doesn't always outpace loan growth. That's been happening at times here in the last couple of years, or 2021, 22, 2020, but it is not the norm. It's hard work to get those deposits in.

[Jeff, 00:34:38]

Yeah, I'd encourage you to look at that graph too, because as Zach noted, there's peaks and valleys, but it is a slight downward trend throughout that 2025 year period too. And with this easing cycle that we're in; it's a lot different than the financial crisis and the COVID era so far. Where have we reached the bottom of where rates are going in this easing cycle? And even if we do get a few more Fed cuts, if we're in a 3 to 375 Fed funds world, deposit competition is alive and well. And during those two periods, the crisis and COVID, rates hit zero. We could roll out of bed with no deposit strategy and grow 5 to 10%, no problem. That's not going to be the case going forward, especially with new competitors in the deposit-gathering arena, even outside of the banking industry, that's just going to make it that much more challenging.

[Zach, 00:35:36]

Jeff, wholeheartedly agree. And the last thing I have, and Vin you can wrap up here, is these quarterly updates, and we brought Jeff in this time. Vin and I did one in December. Again, we got some good feedback. Vin and I had about 60 meetings this quarter with different groups in banks, credit unions, et cetera. We have almost 400 quarterly as a firm with all of our colleagues who are out there. So, we've taught this every day, but I think for folks who are more uninitiated, we have a lot of insights from about these 400 clients. And we also have that Monday morning meeting, which is now a blog on our website. So, for folks who are interested in a one to two-minute read, we try to summarize some key things every week. It usually drops every Monday morning or Tuesday morning, I think. But it's a newer blog, we'll call it, on our website. So we encourage folks to kind of take a peek at that too, if they're interested.

[Vinny, 00:36:27]

Yeah, it's great stuff. Kind of get to keep your finger on the pulse of, if nothing else, what our group's talking about, which I think is pretty cool, pretty dynamic, very informative usually. I think it's certainly worth your time to check that out as a listener. But I think we're probably reached the end here. Jeff, thank you so much. Zach, I do have a question for you. Now you're sitting across the table from a Bentley University Falcon and a Merrimack College Warrior, and those two schools are now in the NCAA Men's National Hockey Tournament, and your BC Eagles sit there and today they go golfing, your thoughts?

[Zach, 00:37:06]

Yes, it's been a tough, tough decade and a half of BC sports here. But I'm sitting across from a kid who threw 90 mph for Bentley on the baseball diamond and a division one hockey player. So, I don't even know what to say. I'm just happy to be here and be able to compete.

[Vinny, 00:37:22]

Yeah. Well, and in all seriousness, thanks to both of you guys. And it really be remiss if we didn't thank our support staff here, Dana, the rest of DCG, the marketing team, Matt Penzak for supporting us, and mostly you folks, the listeners, thank you so much for making this thing an ongoing concern. This has been so much fun in all truthfulness. Zach and I get to learn from each other about these great guests that we bring on. And I hope that for On the Balance Sheet, and we'll see you next time.

00:37:56 Speaker 4

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 of 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 opinions expressed are based on the information available at the time and may have changed based on current market and other conditions. For more information about DCG, please visit www.darlingconsulting.com or e-mail us at info@darlingconsulting.com.

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