When rates were at record lows for long periods of time, the true value of low-cost funding may have faded into the background; however, low-cost core deposits continue to be the driver of long-term franchise value. Now, with rates continuing to rise — the one-year treasury exceeded 4.5% in January of 2023 — the importance of low-cost funding is once again at the forefront. The chart below is for a financial institution with strong low- and no-cost funding. In record lowrate environments, its cost-of-funds advantage over its peers was relatively small at 20-30bp. When rates started to rise from 2017-2019, it tripled to 60bp. For a $1 billion institution, that represents a $6 million increase to the bottom line. The current rising rate environment will lead to similar increases in profit. The jump from an 18bp to a 38bp advantage in 2022 shows a trend that will continue to accelerate. Under Pressure: Cost of Funds Strategies in a Rising Rate Environment By Achim Griesel and Dr. Sean Payant, Haberfeld In addition, deposit growth stagnated in Q2 of 2022 and then started to decline in the second half of 2022. On the macro level, FDIC-insured deposits were down for the first time in a long time, and they were down significantly at 2.89% from their peak in Q1 of 2022. A deeper dive into the deposit decline shows that the majority of the decline happened in non-interest-bearing deposits, which declined almost 6%. That decline was partially offset by growth in growth in time and brokered 24 West Virginia Banker
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