Pub. 8 2018 Issue 1

15 ISSUE 1. 2018 Combining the treasury yield curves from our time periods with the above graphs we can gain insight into a few trends. During the 2004 rate hike cycle, the yield curve was much steeper, which incentivized depositors to move from non-interest bearing accounts into time deposits. However, as the financial crisis reared its head, deposits flooded into non-interest and MMA/savings accounts mainly due to risk aversion and limited alternative investment options. Leading into the most recent rate hike cycle, the yield curve was not as steep as in 2004 and is beginning to flatten. This has reduced the incentive to move into time deposits. Furthermore, competitively priced MMA accounts have satisfied depositors yield appetite while providing flexibility. Taking a look at community, regional and money center banks we see how the utili - zation in funding channels changes over the course of a rate cycle. The graph above looks at the aggregate totals of brokered, listing service deposits and FHLB advances as a percent of the total deposits. During the last tightening cycle for community banks, we see their reliance on brokered deposits increase substantially from beginning to end. Conversely, in our current rate cycle we are seeing community banks growing brokered deposits at a much more modest pace. This is not surprising due to the effects of the finan- cial crisis, and the subsequent negative per- ception by regulators on brokered deposits. Alternatively, for regional banks we see their reliance on brokered deposits actually decreasing from beginning to end of the rate cycle, while increasing their reliance on FHLB advances. One new component in the funding mix we didn’t have in the last tightening cycle is the introduction of listing services being broken out on the call report. By nature of the product this makes up a relatively small percentage of total deposits across the industry, but is growing in capac - ity as more and more banks look to utilize those services because of their preferential regulatory treatment. Another funding source of consideration moving into 2018 could be the designation of reciprocal depos - its as non-brokered. However, the principals remain the same, it’s important to understand the underlying depositors, not just the source. Conclusion As we move further through this rate cycle, banks will be presented with challenges as deposits grow and funding compositions continue to change. Trend analyses of past results are powerful tools to understand possible outcomes when returning to a similar environment. However, the financial industry is returning from an unprecedent - ed period of remarkably low interest rates, a slew of regulatory reforms, and anemic economic growth. Management has done a good job navigating through this environ - ment. Looking forward, it will be important to understand the unique characteristics of the bank’s depositor base and funding chan - nels in order to continue fostering sustain - able growth. w About D. James Lutter D. James (Jim) Lutter is the Senior Vice President of Trading and Operations at PMA Financial Network, Inc. and PMA Securities, Inc. where he oversees PMA Funding., a service of both companies that provides over 1,000 financial institutions with a broad array of cost effective funding alternatives. Mr. Lutter is a Registered Representative with PMA Securities, Inc. and Investment Advisor Representa- tive with Prudent Man Advisors, Inc. Mr. Lutter has the following FINRA licenses with PMA Securities, Inc.: Series 7, 24, 50, 53, 63, 65 and 99. Disclaimer PMA Funding is a service of PMA Financial Network, Inc. and PMA Securities, Inc. Securities, public finance services and institutional brokerage services are offered through PMA Securities, Inc. PMA Securities, Inc. is a broker-dealer and munic- ipal advisor registered with the SEC and MSRB, and is a member of FINRA and SIPC. Prudent Man Advisors, Inc., an SEC registered investment adviser, provides investment advisory services to local government investment pools and separate accounts. All other products and services are provided by PMA Financial Network, Inc. PMA Financial Network, Inc., PMA Securities, Inc. and Prudent Man Advisors (collectively “PMA”) are under common ownership. Securities and public finance services offered through PMA Securities, Inc. are available in CA, CO, FL, GA, IL, IN, IA, KS, MI, MN, MO, NE, OH, OK, PA, SD, TX and WI. This document is not an of- fer of services available in any state other than those listed above, has been prepared for informational and educational purposes and does not constitute a solicitation to purchase or sell securities, which may be done only after client suitability is reviewed and determined. All investments mentioned herein may have varying levels of risk, and may not be suitable for every investor. PMA and its employees do not of- fer tax or legal advice. Individuals and organizations should consult with their own tax and/or legal advi- sors before making any tax or legal related invest- ment decisions. IRS CIRCULAR 230 NOTICE: To the extent that this communication or any attachment concerns tax matters, it is not intended to be used, and cannot be used by a taxpayer, for the purpose of avoiding any penalties that may be imposed by law. Additional information is available upon request. For more information visit www.pmanetwork.com and www.pmafunding.com. ©2018 PMA Financial Network, Inc. Source: Bloomberg Source: SNL Financial