Balance Sheet Trends

This is a brief update on the observations made a few month ago regarding community bank balance sheet issues discussed in ALCO meetings lead by Asset Management Group (AMG).

 Liquidity

The problem of excess liquidity has grown worse. Deposits continue to grow while lending opportunities remain constant, or in some cases have even declined.  In fact, Funds Sold are now a greater percentage of Earning Assets (EA) for almost all of our client banks.  The percent of EA represented by Funds Sold is still about 5 to 10 percent for many banks, but there is a growing number now in the 10 to 20 percent range.  Investment managers who have aggressively added securities to the investment portfolio have been barely been able to keep up with deposit growth. In addition, the arrival of stimulus checks will probably only exacerbate the problem.  Overnight Funds Sold are yielding about 8 bps on a good day, so keep adding securities if possible.

Yield on Earning Assets continues the downward trend

3.30% appears to be the new 4%. That is, most of the banks in the top percentile of YEA last year were in the 4% range, today the top group is about 3.30%. In fact, most banks are now in the 2.70 to 3.00% range. The combination of increased liquidity, lower loan rates and low reinvestment rates of securities have combined to challenge bankers to maintain the YEA produced just one year ago. 

The Cost of Funds

Most banks have slashed deposit rates but still see a shrinking Spread and NIM. TD cost continues to dramatically decline, but as previously mentioned many banks have to wait until longer CDs to mature.  The COF for most banks is still in the 40 to 60 bps range, with many more now in the 30 bps range.

The Investment Portfolio

Most banks have been adding securities aggressively. The trend is still toward increasing the portfolio duration has slowed a bit, but does continue.  Many are now favoring MBS with 10 year finals (about 3.5 year projected duration and yield of 85 bps) or 15 year finals (about 5 year projected duration and yield of 1.25%).  In addition, many continue to add Municipal Bonds of all varieties, including Bank Qualified, Non-Bank Qualified (because the TEFRA penalty related to COF is almost non-existent), Taxable Munies, and Bank Eligible Munies. Bullet and callable agencies including canary bonds are of course also popular. Finally, some are rolling treasuries in an effort to beat overnight funds.

Let us know if we can help and thank you for working with us.