" Since NECB essentially benefitted in the recent rate declining environment, it’ll likely be a headwind to earnings power if the situation reverses and rates increase rather quickly (which appears it will be the case)."
This is an interesting question to think about but in short, I unfortunately can't give you a good answer. Even if I knew how much rates would go up and when, the yield curve is hard to predict. Asset/liability sensitivity is notoriously difficult to quantify and based on a lot of internal modeling assumptions by a bank.
At a high level, the biggest determinants are non-interest bearing deposits which wouldn't increase in price with rate increases (and we know NECB has a good proportion of them), the ratio of floating vs. fixed rate loans (again NECB's book is largely adjustable rate), and the level and maturities of borrowings/liabilities. Loan floors and caps can also work their way into the equation. All of the above however would make me think NECB should be asset-sensitive (benefits from rising rates). In fact, Substack won't let me paste an image in the comments section, but if you look at p.106 of the prospectus, NECB seemed to assume they would benefit from rising rates as of YE20 as well.
This makes the mention in the earnings release all the more curious. Perhaps the Fed dropped rates so quickly they could reprice their elevated level, non-core deposits/liabilities so quickly without much effect on loans that they benefitted from a one-off. Their deposit situation has gotten better too so that should help against rising rates. I don't think I would expect it to be a material headwind given the impact it caused to date going the other direction (see below), I just thought it was interesting commentary. From the most recent release:
"Our cost of interest bearing liabilities decreased by 75 basis points from 1.65% for the year ended December 31, 2020 to 0.90% for the year ended December 31, 2021. Our yield on interest earning assets decreased by 67 basis points from 5.59% for the year ended December 31, 2020 to 4.92% for the year ended December 31, 2021. Net interest margin decreased by 5 basis points, or 1.0%, during the year ended December 31, 2021 to 4.40% compared to 4.45% during the year ended December 31, 2020."
I know this is a squishy answer, but I hope it helps you at least to some degree! An updated interest rate sensitivity table should be due out soon with the release of the 10-K, which will help shed a bit more light about what the bank expects going forward.
" Since NECB essentially benefitted in the recent rate declining environment, it’ll likely be a headwind to earnings power if the situation reverses and rates increase rather quickly (which appears it will be the case)."
How much of a headwind will rate hikes be?
This is an interesting question to think about but in short, I unfortunately can't give you a good answer. Even if I knew how much rates would go up and when, the yield curve is hard to predict. Asset/liability sensitivity is notoriously difficult to quantify and based on a lot of internal modeling assumptions by a bank.
At a high level, the biggest determinants are non-interest bearing deposits which wouldn't increase in price with rate increases (and we know NECB has a good proportion of them), the ratio of floating vs. fixed rate loans (again NECB's book is largely adjustable rate), and the level and maturities of borrowings/liabilities. Loan floors and caps can also work their way into the equation. All of the above however would make me think NECB should be asset-sensitive (benefits from rising rates). In fact, Substack won't let me paste an image in the comments section, but if you look at p.106 of the prospectus, NECB seemed to assume they would benefit from rising rates as of YE20 as well.
This makes the mention in the earnings release all the more curious. Perhaps the Fed dropped rates so quickly they could reprice their elevated level, non-core deposits/liabilities so quickly without much effect on loans that they benefitted from a one-off. Their deposit situation has gotten better too so that should help against rising rates. I don't think I would expect it to be a material headwind given the impact it caused to date going the other direction (see below), I just thought it was interesting commentary. From the most recent release:
"Our cost of interest bearing liabilities decreased by 75 basis points from 1.65% for the year ended December 31, 2020 to 0.90% for the year ended December 31, 2021. Our yield on interest earning assets decreased by 67 basis points from 5.59% for the year ended December 31, 2020 to 4.92% for the year ended December 31, 2021. Net interest margin decreased by 5 basis points, or 1.0%, during the year ended December 31, 2021 to 4.40% compared to 4.45% during the year ended December 31, 2020."
I know this is a squishy answer, but I hope it helps you at least to some degree! An updated interest rate sensitivity table should be due out soon with the release of the 10-K, which will help shed a bit more light about what the bank expects going forward.