How Bell Is Helping Community Banks Handle Higher Liquidity

Can you really have too much of a good thing? When it comes to liquidity, for community banks, the answer is yes.

One of the many ways the COVID-19 pandemic has disrupted business as usual is by prompting a record level of bank deposits as a result of:

  • Increased loan loss provisions at the onset of the pandemic
  • Government assistance programs for consumers
  • Reduced consumer spending
  • Increased deposits from businesses due to programs such as the Paycheck Protection Program

While there are certainly benefits to ample liquidity, it also poses some challenges – specifically when it comes to bank earnings.

Many banks put higher-than-usual amounts of deposits into cash and securities, the FDIC states, adding that when combined with such a long period of low interest rates, “caused the industry net interest margin (NIM) to decline to its lowest level on record.”

While fiscal policies minimized the pandemic’s impact on banks, the FDIC says those policies also contributed to a 49% increase in liquid assets and a 7.54% increase in the liquidity ratio from 2019 to 2020.

At the same time, loan demand was low, resulting in the loans-to-deposits ratio decreasing from a 20-year high in 2000 to a 20-year low in 2020, the FDIC notes.

Addressing the Challenges of Higher Liquidity Levels

Since higher liquidity levels and lower loan demand can cause lower earnings and lower overall asset yields, the FDIC says banks have been “adding longer-term assets to their balance sheets in order to maintain or increase NIM.”

As interest rates rise to more normal levels, too many longer-term assets could mean banks have to endure earnings pressure for a longer period of time.

Bell Bank has been helping financial institutions – including community banks – manage assets for more than 30 years, so we understand the challenges community bank finance managers face managing the bank’s balance sheet assets. In this environment, we want to work as your CFO and controller’s partner – as an extension of your finance office – to ensure you’re optimizing your opportunities.

Bell manages bank balance sheet assets by capitalizing on our investment process for financial institutions, namely insurance companies and banks, to meet the income, accounting and regulatory requirements of bank investment portfolios.

Our services include:

  • Active management of bank and insurance company assets
  • Consultation on investment policy, asset allocation and risk management

Bank portfolios have historically focused on low-risk U.S. Treasuries and Agencies, providing a liquidity placeholder for funding loans or deposit draws, as well as for asset/liability management. Managing over $5 billion in fixed income assets, primarily in the highly regulated realm of banks and insurance companies, Bell’s experience with bonds is at the core of what we do. We manage investment strategies customized to the needs of your financial institution, in compliance with regulations governing the industry.

As a manager of fixed income assets on community bank balance sheets, we employ a regulatory compliant short-term liquidity strategy to earn greater net interest income through the investment portfolio. Doing so today, while deposits remain elevated and low yields persist, is a value add, and continuing to use this strategy as rates rise leads to greater yields long-term, helping bolster ratios.

We view these portfolios with a strategic mindset for managing risk, liquidity, capital and earnings with the goals of enhancing NIM (profitability) and diversifying balance sheet risk.

For help employing a strategy to manage higher levels of liquidity at your bank, contact your correspondent banking officer or Becky Walen.

photo of becky walen

Becky Walen AFC® CFP®

SVP | Market Development Director

Bell Bank Wealth Management
15 Broadway | Fargo, ND 58102
Office 701.451.3079 | Mobile 701.866.8192
bwalen@bell.bank

Deposit and loan products are offered through Bell Bank, Member FDIC. Investing and wealth management products are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not A Deposit | Not Insured by Any Federal Government Agency.