Pub. 7 2017 Issue 1

11 ISSUE 1. 2017 seen an increase in their funding costs over the past 12 months. With the December 2016 rate hike, it’s possible that higher funding costs will become the experience for a ma - jority of bankers. This could create greater issues for banks than in previous rising-rate cycles. Loan-to-deposit (LTD) ratios are still well below pre-crisis median levels at the coun - try’s biggest banks. According to Call Report data, LTD at banks with more than $250 billion in assets is at 76 percent, well below the pre-crisis median of 98 percent. As these large banks continue to grow their assets, eventually they may need to push further into the deposit market, potentially driving funding costs upward. A deposit push from big banks may be a particular concern for community banks that currently hold a substantial amount of surge deposits, which have settled in banks awaiting yield from whoever is willing to offer it. 1 Looking Back to Look Ahead So what can banks expect to happen in 2017? Given the similarities between the end of 2015 and the end of 2016, it’s useful to consider recent history and how 2016 deviated from expectations with respect to the funding side of the balance sheet. In the Q4 2015 edition of the Bank Execu - tive Business Outlook Survey, which was taken in January 2016, nearly 40 percent of respondents indicated that their funding costs had worsened. That was double the percentage of respondents who had experi - enced higher funding costs just one quarter before. And expectations were high that increases would continue. More than 70 percent of re - spondents to the January survey reported that they expected to see their funding costs rise in the 12 months after the survey. Expecta - tions were similar in the April edition of this same survey. Then came a substantial shift. In the Q2 survey, taken in the final two weeks of July, there was a notable drop in expectations for a funding cost increase. By this time, barely half of all surveyed bank leaders expected to see an increase in funding costs over the coming year. This shift in expectations may have been due, in part, to uncertainty following the June Brexit vote, which caused U.S. Trea - sury securities to fall sharply, U.S. equity prices to decline, and the foreign exchange value of the dollar to increase. Turmoil in Europe was also paired with mixed econom - ic news in the United States. The mid-year economic rollercoaster and the failure of the economy to hit the inflation and employment targets that the Fed had set at the end of 2015 delayed Fed action on interest rates and raised the possibility of a much longer wait for any future interest rate movement. However, the eventual impact of the midyear turmoil was less negative and shorter term than many industry observers expected. By August, acute economic anxiety had mostly dissipated; Treasury yields were down only slightly, equity prices were higher, and the foreign exchange value of the dollar was lit - tle changed. Positive job numbers supported more economic optimism and revived belief in a December interest rate increase, which ultimately happened. Reporting in November 2016, nearly 73 per - cent of respondents expected to experience a moderate increase in their funding costs within 12 months. This was three percentage points higher than reported for the same time one year before. Less than 3 percent expect to see a significant increase in funding costs. While interest rates finally appear primed to move, it’s worth noting that the expectation was in a similar place last year, and, as with last year, a range of economic factors could still impact the Fed’s decisions about rates. w 1 FDIC’s statistics on depository institutions About Promontory Interfinancial Network Promontory Interfinancial Network offers unique ser - vices that bring banks and other institutions together in a way that helps each to benefit from the Power of ManySM — enabling them to offer services that otherwise might be too difficult or costly for them to offer on their own and providing them with tools to help manage their balance sheets. Promontory Interfinancial Network’s services include Insured Cash Sweep®, CDARS®, Bank Asset - point®, Residential Mortgage NetworkSM, IND®, and Yankee Sweep®. For more information about Promontory Interfinan - cial Network and its services, please contact Reg Truman at (866) 776-6426, ext. 3448 or rtruman@ promnetwork.com. © 2017 Promontory Interfinancial Network, LLC.