Worried About Not Having a Worry
Bankers are used to having something to worry about.
We recently spoke with bank analyst extraordinaire, Gerard Cassidy of RBC Capital Markets, on a recent episode of On the Balance Sheet®. His concern today is that, broadly speaking, there is not much to worry about.
Credit quality remains healthy. Loan growth improved. Capital strengthened. Earnings trends are solid. Gerard described an industry backdrop where profitability is strong, and the near-term outlook remains constructive.
For community banks, this should be welcomed news. However, as risk managers, we are keenly aware that favorable conditions can also create complacency. Too often the biggest mistakes are made when times are best.
Below are three takeaways from our conversation with Gerard that stood out from an asset/liability management perspective. We encourage you to listen to the episode as well to hear his broader takes on the industry and prevailing trends.
1. Growth is only as good as the funding behind it
Gerard noted that many larger banks still have meaningful balance sheet flexibility. Industry loan-to-deposit ratios remain well below pre-financial crisis levels, giving many larger institutions room to fund additional loan growth through excess liquidity, securities runoff, and continued deposit gathering.
Community banks face a different reality. Loan-to-deposit ratios are generally higher, deposit competition is usually more intense, and the marginal cost of supporting new growth is rising more quickly. He specifically noted that funding pressure appears more evident among community banks than at larger institutions, which we here at DCG can corroborate.
For your ALCO, the big question is: What is the real cost of the next dollar of loan growth?
Evaluating the loan coupon or initial spread is not enough. Nor is justifying that the new loan rates are higher than your legacy portfolio. Institutions need to understand the marginal funding source, its current cost, its potential future cost, and the liquidity and interest rate risk created along the way.
2. Be careful with how NII growth is generated
One of Gerard’s more interesting observations involved what tends to happen as a banking cycle matures.
When margins come under pressure, but management teams still want to deliver net interest income growth, the natural response can be to push harder on balance sheet growth at lower spreads. That is also where underwriting discipline can begin to erode.
He highlighted loan policy exceptions (“exception loan percentage”) as one potential early-warning indicator. Every institution believes it maintains strong underwriting standards, but the more revealing question is how frequently exceptions are being granted and whether that frequency is increasing.
For your ALCO, the principle should extend beyond credit. Gerard cautioned against manufacturing earnings growth by accepting risk that is not adequately compensated. It may appear positive in the near term but often works against the institution down the road.
3. Manage rate risk instead of trying to predict rates
Gerard’s most direct ALM message is the simplest, and one we here at DCG strongly support:
Do not make the balance sheet dependent on an interest rate forecast.
His point was not that institutions should eliminate all interest rate sensitivity. Rather, it was that forecasting rates is extremely difficult, and ALCOs should be cautious about using rate exposure as a primary tool for generating incremental earnings.
For your ALCO, it is important to understand how the current balance sheet is positioned across a wide array of rate paths and stresses, but also how future growth could impact that, one way or another.
Once there is an understanding of your current position and future trajectory, it becomes more efficient to develop strategies to help hedge risks to maintain a more balanced interest rate risk profile as well as calibrate loan and deposit pricing and terms more appropriately.
Strong banking conditions should create opportunity to strengthen your balance sheet, not add unnecessary risk
Healthy credit, improving growth, and solid earnings give ALCOs valuable room to make thoughtful balance sheet decisions before conditions become more difficult. That means understanding the true cost of growth, maintaining discipline around how NII is generated, and avoiding unnecessary dependence on a single interest rate outcome.
Gerard’s concern about “not having a worry” is a useful reminder. When the environment feels most comfortable, that is often the best time to stress the balance sheet, challenge assumptions, and strengthen your position for what comes next.
DCG wholeheartedly agrees.
For more insights from Darling Consulting Group, click here.
Zach Zoia is a Managing Director at Darling Consulting Group. He helps management teams throughout the country develop strategies to improve financial performance and more efficiently and effectively manage liquidity, capital, and interest rate risks.
Zach began his career with DCG in 2008 as a financial analyst. He earned a BS in finance from Boston College and an MBA from Babson College.
© 2026 Darling Consulting Group, Inc.
