Published in: CU Business

Domestic economic expansion is steady, and short-term interest rates have increased 2% in three years’ time. Loan growth runs hot and earning assets are repricing to higher market rates causing gross income to increase at a notable clip. At the same time, deposit growth is less robust causing loan-to-deposit ratios to gradually climb. Funding mix is responsive to the new higher market rate environment as well, steadily shifting from core non-maturity funds to higher-cost term deposits and growing reliance on wholesale funding. This ever-changing and challenging business environment is very much a reality for most depository institutions in 2019.

Although financial institutions have largely seen an increase in net interest margins during the FOMC’s tightening activities, market concern has shifted focus to when the earnings benefit might come to a halt. With a significant factor in this growth being low, stable cost of funds over the period, it is natural to question whether this can persist given the current level of rates and the pressure of economic growth.

Depositories that regularly and systematically analyze profitability and relative value to steer the balance sheet understand the attractiveness of loans relative to traditional regulatory-compliant investment portfolios. Stripped down risk positions in the investment portfolio require more leverage to compete with the profitability of loans which carry added exposure to – and compensation for – credit, liquidity, and interest-rate risk….

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