Friday, June 15, 2018
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer  Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
6/08/18	1.78	1.93	2.12	2.30	2.50	2.63	2.77	2.88	2.93	3.00	3.08
6/11/18	1.82	1.94	2.11	2.32	2.52	2.66	2.80	2.91	2.96	3.02	3.10
6/12/18	1.81	1.92	2.10	2.31	2.54	2.67	2.81	2.91	2.96	3.02	3.09
6/13/18	1.82	1.94	2.09	2.35	2.59	2.71	2.85	2.95	2.98	3.04	3.10
6/14/18	1.81	1.94	2.07	2.35	2.59	2.69	2.81	2.90	2.94	2.99	3.05

                                                                                      Source: U.S. Department of the Treasury, as of 06/14/2018 

 

                                  Narrowing Spread and Margin…Sound Familiar?

There are some exceptions, but almost all of the community banks we work with are beginning to see a slow, but steady, decline in the spread and margin. Spread is the difference between the Yield on Earning Assets (YEA) and the Cost of Funds (COF) while Net Interest Margin (NIM) is the difference between Interest Income and Interest Expense divided by Total Earning Assets (TEA).

In short, Interest Expense is rising at faster rate than Interest Income. Most banks have been able to “drag their feet” on rising deposit costs since the first Fed increase in December of 2015, but now six raises later (seven in all) the dam appears ready to break. Even though increasing overnight rates have created a higher short term rate environment, they have not “directly” caused deposit costs to increase.

The paradox is that as the Prime rate has increased 25 basis points every time the Fed target rate has increased, real loan rates are still not “keeping up” with the current increase in the COF.  Just as there is not a perfect correlation between deposit cost and the overnight Fed target rate, there is not a perfect correlation between NY Prime and the overall offering rates for loans (unless you have variable rate loans indexed to Prime).

The fierce competition for loans has constrained loan offering rates while increasing Loan/Deposit ratios have driven the need for increased funding, which is expensive. Just keeping current deposit balances has become more expensive, and raising new deposits can be outrageous, and in several cases not possible.

There is no perfect solution, but the “damage” can be mitigated. First determine the cost to maintain current balances. It will be a combination of raising rates “proactively” and then determining what to pay “big depositors” who are threatening to leave. Secondly consider the marginal cost of bringing in new deposits. It is surprising just how expensive new deposits are. So, if the balance sheet can bear it, seriously consider brokered CD’s.

In our opinion, these are acceptable for most balance sheets, and they give you the ability to raise money fairly quickly for a suitable term and at a reasonable rate.  In particular, consider those with a call that allows you to send the deposit back if and when you no longer need it. In brief, issuing brokered deposits you will not destroy your COF through core deposit migration to deposit “specials” (thereby reducing the marginal cost) and you will have the ability to raise and control funds.

Call us at AMG (800.226.1923) if we can help in any way.
 

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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