Loans & Leases To Deposits
 

Orange Line – 5yr UST Yield
White Line – Loans & Leases divided by total deposits
Red Line – Previous cycle highs (not including 2008 housing crisis)
Source: Bloomberg & Federal Reserve H8

Over time, the economy cycles thru periods of growth and prosperity to times of contraction and sometimes recession.  This natural ebb and flow has existed throughout history as people become overly optimistic or pessimistic on a short run basis.  This is typically due to recency bias when times are good the economy gets irrationally exuberant (times will never be bad), while deep in a recession the market tends to be overly pessimistic (we will never see the good times again). 

The economy ebbs and flows thru these four stages of economic cycle: 1) Expansion 2) Peak 3) Contraction 4) Trough.  While perfectly timing this cycle is next to impossible, we can hopefully identify where we are in a cycle and what the future may hold on a risk adjusted basis.

The economy currently stands likely somewhere between peak and start of contraction.  Every banker I talk with indicates loan growth remains robust and it will seemingly not end (this is in aggregate across the banking sector your specific bank / market may be different).  At the current pace, banks should be near a historically high L&L to deposit ratio by Q4 2022 or Q1 2023 (excluding the 2008 housing bubble).

Typically, once L&L to deposit ratio peaks, rates overall decline as the economy enters a recession.  Loan losses tend to rise, while many banks use bond portfolio gains to offset these losses.  This cycle may be unique as banks have generally avoided buying bonds for the last 12-18 months. A 300bps drop in overall rates would still show most banks with an overall loss in their investment portfolio.

Liquidity is tough to find these days, but a small allocation to liquid securities (UST, TBA eligible MBS, high quality munis) at current market rates could be warranted.  We will always advocate dollar cost averaging and consistently buying throughout a cycle (banks that consistently buy / dollar cost average are typically the highest performing in peer groups as well). If the market does roll over you will likely have gains in these securities which can offset loan losses (or allow you to offset 2020-2021 investment purchases) to reposition the balance sheet.  Below are several ideas on current market offerings you may want to consider.  Please reach out to your CCB rep to discuss overall balance sheet strategies or if you have any questions.  

30yr GNMA 6% Coupon

Deep Discount ARM

Long BQ Muni – Westside School District Arkansas