Joe Kennerson
2021 Strategy Spotlight

ALCO | Deposits | ALM Strategy
Last year was one of the most challenging years in banking, and we are all happy to say good riddance to 2020. However, while the new year is here, last year’s challenges have not gone away; in fact many are elevated. For most, margins reached all-time lows and are likely continuing lower. Thanks to PPP and mortgage-related income, earnings fared better than expected, but what about 2021 and beyond? Now include a shift in political control, the potential for additional cash build-up (deposit growth from another round of stimulus), the overhang of credit uncertainty, and waning loan activity - and the earnings outlook for the industry looks bleak. And we thought 2020 was tough…
6 Key Steps to Re-charge ALCO
The decisions you make with your balance sheet today will have long-lasting effects and, therefore, having an effective ALCO process is essential in developing optimal decisions for your balance sheet. Below are the six key steps to re-charge your ALCO meeting:
1. Quantify your net interest income (NII) pressure. The downward trend in income continues, as most have a limited capacity to reduce funding costs while asset yields are declining with no end in sight (more aggressively in some markets). This ongoing margin squeeze is inevitable if rates stay low. So, what is a banker to do? Step one in the process is to quantify NII pressure by comparing your annualized run rate of NII as of 12/31/20 versus what your ALM model is projecting through 2021. For most, the outlook is for lower NII. This NII “gap” has been the nucleus of our Q4 ALCO meetings, and sets the tone for management teams to start the very difficult discussions on how to ultimately fill that “gap” at a minimum and then incrementally grow NII.