15 Hoosier Banker September 2014 half of 2013, the same cannot be said for the loan portfolios of most community banks. One might wonder, then, why it is that the pricing sensitivities, or betas, of the various loan categories at most banks are still being modeled as if they were participating in a higher-rate environment when, in fact, they are not. While much discussion has centered around the possibility of higher betas for NMDs, causing unexpectedly large increases in interest expense, little concern has been mentioned about the risk of lower betas on loans, precluding interest income from rising commensurately with rates. That, however, is exactly what has happened. Stress This! While regulatory hand-wringing over how to best model NMDs has brought us the need to stress whatever assumptions are being used on the liability side, the assumptions for asset behavior have not garnered the same level of attention. Attempts to quantify the effects of nontraditional depositor behavior have resulted in higher betas being modeled, so that management can see the potential results on earnings if banks are forced to be more market- responsive. Further behavioral stress comes in the form of shorter average life assumptions and reduced time lags for the imposition of higher rates. Whether or not these behavioral changes ever manifest themselves is yet to be determined, but knowing what the potential results might be can aid management in avoiding the trap of making decisions based on best-case scenarios. When it comes to earning assets, though, the vast majority of community banks are, in fact, modeling their behavior based upon assumptions that reflect a best-case scenario. Assuming higher rates can be fully passed on to borrowers with no delay will certainly help maximize projected interest income, but, as has been discussed, that is not what has happened. So if the fear is that assigning altruistic behavior to the owners of NMDs understates projected interest expense, that concern should also extend to the possibility that interest income from loans might be overstated, by presuming that loan rates will move up with other market rates. Empiricism vs. Speculation It might make sense, then, for managers of interest-rate risk to put a little stress on the left side of the balance sheet. Just as pricing sensitivities for deposits are increased to apply behavioral stress, one could make the case that those same sensitivities for loans ought to be decreased. This would not only give management a look at what might happen in the future – it would also more accurately reflect the present. t The rooTs run deep And The growth is strong. 2.7 Billion of investment and lending Over 525 developments Over 1.3 Million in commercial space Serving over 75,000 people No Foreclosures No Recaptures Delivered on the stated rates of return 100% on time reporting 20 years of stellar execution GreAT LAkes Capital Fund is a full service financial organization supporting healthy, vibrant, and sustainable communities. www.capfund.net 877.FOR.GLCF 2.7 Billion of investment of investment and lending
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