Page 38 - June 20, 2024 Bulletin

BUSINESS PARTNERfeature article

Balance Sheet Strategies

for a Better 2024

Greg Tomaszewicz

Associate Partner and Senior Financial Analyst
The Baker Group

The rapidly changing environment of the last two years has left • Risk Premiums: Most institutions employ risk-based
many financial institutions in a state of increased uncertainty. pricing, but are we regularly evaluating those tiers to see if
Rising cost of funds, declining liquidity, and a higher rate our pricing lines up with performance?
environment are some of the main pressure points financial • Profit Margins: At the end of the day, earnings grow net
institutions have struggled to overcome heading into 2024. This worth. We need to ensure our pricing on loans aligns with
in turn has left many balance sheets unprepared for a potential our goals for our net worth ratio and R.O.A expectations.
falling rate environment that many economists are warning
about. Deposit Pricing: There are several factors to consider when
pricing deposits:
Even though the Fed may be done increasing interest rates,
it’s not too late for institutions to protect their balance sheets • Cost of Funds vs Cost of Servicing: Just because the rate
from the potential change in rates. There are several core areas is 0% does not mean it doesn’t cost us anything to service
institutions should focus on in 2024 to better position their the deposit. Are we factoring in deposit expenses when
balance sheets for the increasingly dynamic marketplace. understanding our actual cost?

Proactively Pricing Loans and Deposits • Source of New Deposits: Are we targeting more
money from our current depositors or money from new
After over a decade of low interest rates, it’s not hard to see depositors?
why many institutions have lost touch with having proactive • Market Share: Most Americans today have some sort of
discussions on loan and deposit pricing. With the return of banking relationship. If we plan to grow our market share,
a more dynamic rate environment, it’s more important than we may have to consider other strategies of getting that
ever to focus on our core product lines to ensure they are being relationship that are not just higher deposit rates.
priced appropriately, not just from a competitive standpoint but • Tier Structures: Just like risk tiers on loans, we need to
also for our balance sheet risks and objectives. regularly evaluate the appropriateness of our deposit tiers.
Loan Pricing: There are several factors to consider when pricing • Wholesale Alternatives: When pricing deposits, we need
loans: to be aware of what the wholesale market is doing.
• Cost of Funding: Cost of funds is not locked in at the Investment Portfolio
time of loan closing. Are we factoring for potentially
higher wholesale liquidity costs? With tight liquidity conditions facing many institutions, it
• Operating Costs: Costs to service loans, compensate has been difficult to focus on investments. The higher rate
originators, or even marketing expenses all chip away at environment has given us access to yields not seen since 2007,
our potential returns. yet few are taking part in that market and are instead allowing

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