BAS Case Study - March 2023


Balance Sheet Considerations: Securities yields are based on the U.S. Treasury yield curve, with a credit quality spread (issues with more credit risk are higher ‐ yielding). Loan rates are typically associated with one of the indices noted above, with an additional margin based on the amount of risk (e.g. Prime + 100 bps). Deposit costs are based on local competition, and tend to be most correlated with short ‐ term interest rates. Because non ‐ maturity deposits represent a large portion of liabilities for most community banks, management’s ability to control deposit costs through interest rate cycles is important in maintaining a healthy net interest margin. • Interest rate banks charge their most creditworthy loan customers • Generally 300 basis points higher than the Federal Funds rate • Popular index used to set rates on many types of loan products, including commericial loans, auto loans, home equity lines of credit, and credit cards London Interbank Offered Rates (LIBOR) • Benchmark rate at which some of the world's largest banks lend to each other • Adjustable ‐ rate mortgages are often linked to LIBOR Constant Maturity Treasury Rates • Based on U.S. Treasury bond yields • Adjustable ‐ rate mortgages are often tied to these rates Cost of Funds Index (COFI) • Reflects the weighted ‐ average interest rate paid for funding by banks within a certain region (e.g. 11th Federal Home Loan Bank district) • Usually lags other interest rates in both up and down markets • Sometimes used to set the price of variable ‐ rate loans and adjustable ‐ rate mortgages Federal Funds Rate • Interest rate banks charge each other for overnight lending •Managed by the Federal Reserve to control inflation and maintain a healthy economy. • Changes in this rate will impact most other interest rates Prime Rate

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