ABA Banking Journal

The Headache: Handling asset-liability management proves more challenging than ever for community banks, as they face an unprecedented period of low rates amid increasing economic uncertainty.

Old jokes about bank management, about taking in money at one rate, lending it out at a higher rate, and being on the golf course by 3, may have never actually matched anything real. But they sure don't now. In an era where some large banks are actually charging interest to corporations to keep money on deposit, one can surely say that "normal" isn't in right now. But there is no pause button on reality, so community bankers are doing what they can.

Below is a sampling of what we've heard from community bankers. Add your own ideas and suggestions.

And if you would like to join our regular list of "prescribers," to whom we send questions, please email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it today.

Let's hear your views and ideas below! (Editorial Note: Contributions to Pass the Aspirin may also appear in our print edition. While we will ask for your e-mail address, this is only as an aid to verifying identity and will not be used for any marketing or promotional purpose. The e-mail address will not be published.)

Curt Hoff, executive vice-president, United Bank & Trust, N.A., $107.8 million-assets, Marshalltown, Iowa said:

We are fast approaching the day when low rates are no longer our friend. Our ALCO meetings have become more frequent and robust. Our committee recognizes we have no impact on the yield curve, but understands that we do have control of the structure of our balance sheet. We are striving for a better understanding of the elasticity of our clients on both sides of the balance sheet when it comes to pricing.

Identifying opportunities for realized gains in investment portfolio pieces in which there are credit risk and option risk red flags present is another shift in focus. In our shop, we have seen a subtle shift in focus from liquidity risk management and contingency funding to identifying the variables we have control of within interest rate risk management.

As we prepare to reread our asset-liability management policy and review how it fits with the bank's strategic plan, we must be prepared to modify budget expectations amid the backdrop of maintaining credit standards and pricing discipline.

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November 10, 2011
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Bryan Luke, executive vice-president, Hawaii National Bank, $577.9 million-assets, Honolulu said:

Our ALCO strategy has only slightly shifted from the strategy we have employed over the last two years. We have lowered deposit rates across the board to the absolute floor and are pushing longer-term CDs. We have secured public CDs by paying a few more basis points than we need to with the long-term in mind since they tend to be sticky in Hawaii. On the asset side of the balance sheet we are still not high on offering long-term fixed-rate loans and have made an effort to incorporate interest-rate-swap programs as part of the offering.

However, we are not actively working to keep effective duration on our investment portfolio to the 2.5-4 year mark anymore. We are open to letting it migrate up slightly between the 3.5 to 5 year mark if there is an opportunity to boost yield on new investments. The lack of good re-investment options is making it difficult to deploy liquidity effectively so we have actually seen overnight funds trend upward. Loan growth has been good surprisingly as we continue to try to be as competitive as possible with our loan pricing as long as it does not expose us to unnecessary interest rate and credit risk.

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November 10, 2011
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Bryan Luke, executive vice-president, Hawaii NatioDebbie Koennecke, executive vice-president, Mansfield Community Bank, Mansfield, Texas (a division of Woodhaven National Bank, Fort Worth, $416.8 mill said:

There have been new challenges in managing the investment portfolio because of the uncertainty of where rates are headed and knowing that the decisions we make today can significantly affect our bank's profitability in the future. So we have implemented a more extensive process of decisionmaking for the investment portfolio.

We have seen the need for additional oversight of the ALCO process. The low-rate environment and its accompanying unknown duration greatly complicates decisions regarding how and when to position for an inevitable rate increase. A continuous and more frequent review of key modeling assumptions has been necessary to determine how, when, and where the bank's balance sheet will transition as the interest rate environment stabilizes.

The bank reviews monitoring factors more frequently to manage capital, liquidity, and interest rate risk including: loan demand, deposit growth, economic value of equity, RSA/RSL, Gap, beta-adjusted gap, earnings at risk year 1, earnings at risk year 2, and net interest margin.

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November 10, 2011
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Larry Myers, president and CEO, First Savings Bank, $523.4 million-assets, Clarksville, Ind. said:

Early in the declining rate environment we began extending the maturities of our investments, allowing us to pick up additional yield. We lengthened by 25%-30%. We correctly anticipated that we were entering into a prolonged low-interest-rate environment. What we didn't realize was how long "prolonged" was going to be. We were also aggressive in purchasing step-up bonds, which provided a better yield as well.

Now many of those investments are rolling off and we are faced with few investment alternatives. In this environment it is very important to be successful in the marketing of credit. Underwriting is not being sacrificed, but we definitely do not intend on being beaten on pricing. We have staffed up our lending function and are seeing the benefits of a growing portfolio.

On the interest rate risk side, we have been diligent in monitoring the shock when rates start to move upward again. We have been using Federal Home Loan Bank term advances along with longer-term brokered deposits to balance our funding sources. While the FHLB short-term rates are extremely low and attractive, we recognize the risk inherent to this type of funding.

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November 10, 2011
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Jim Tibbetts, president and CEO, First Colebrook Bank, $225.9 million-assets, Colebrook, N.H. said:

We have continued to decrease our deposit rates while closely monitoring balances, so as to maintain the necessary level of funding we need for our asset growth. We have re-priced our relationship accounts such as our rewards checking and Moose gold accounts to continue to be attractive in this environment, while discouraging CD price shoppers.

As many of our borrowers have wanted fixed-rate loans, we have attempted to fund these requests with wholesale funding, which is generally less expensive than retail deposits.

In spite of the compression on interest rates, we have been able to maintain our net interest margin in excess of 4% during this time

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November 10, 2011
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Darrell Grogan, president, First State Bank of Forsyth, Montana, $110.5 million-assets said:

ALCO continues to focus on interest-rate risk in a rising-rate environment. As we see a few of our customers extend their CDs with us, we are extending some of our shorter-term investments as well. We have a 50% loan-to-deposit ratio, and therefore have a substantial investment portfolio. Both the loan and investment portfolios have long-term fixed aspects (fixed residential loans and municipal bonds—some up to 15 years) that will reduce our income in a rising rate environment since we are funded by deposits with CDs up to 4 years. We offset this risk some with short-term investments (cash and CDs at other banks).

We continue to stress test to understand the impact of rising rates so we can keep the income reduction within an acceptable range: -15% with 200 basis point raise in 12 months. The income from staying invested now will more than offset any loss in income when rates rise.

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