Pub. 7 2018 Issue 8

The National Bureau of Economic Research (NBER) declared the current economic expansion began in June 2009. The NBER also reports the average duration of the 11 economic expansions since 1945, prior to this one, was 58.4 months. Doing the math, we are experiencing an extraordinarily long recovery! In fact, only the 120 month, 1991-2001 expansion is longer than the current recovery. 1 At the same time, U.S. unemployment, at (or below) 4%, sits at levels visited only four previous times post World War II, 2 each of which was followed by varying degrees of economic retraction. History, thus would say a slowdown could be around the corner. Bulls will point to late cycle fiscal stimulus in the form of infrastructure spending and tax cuts, as a reason for the good times to continue. Bears will point to a flattening yield curve and say recessions develop, historically, about 12 months after the lowest level in unemployment. Avoiding the Triple Threat As the yield curve continues to grind flatter, client conversations reveal on-balance sheet liquidity is largely tightening and loan competition remains robust, despite tighter credit spreads. In a broader context, while the economy chugs along, bank stocks have lagged. This is at a time of record industry profits. 3 In the first half of 2018, the XLF, an ETF tracking the nation’s largest institutions, underperformed the S&P 500 by more than 6%. Perhaps the market sees a forward operating environment for Financial Institutions which is becoming more difficult than the recent history? Institutions in an asset sensitive position today perhaps have the most on the line. Despite record current earnings, these institutions face the possibility of multiple earning headwinds should rates fall due to a recession. Margin, by definition would decrease in a flat or falling rate environment, threat number one. Loan losses could increase, threat number two. Finally, a changing balance sheet mix, driven by fewer loans in a slowing economy, most likely detracts from asset yield. A triple threat. While not calling for a recession, we have begun to shift thoughts, if not strategy to the next economic chapter. The time to assess and address viable risks, (i.e. “do something”) is when there is time to do something. Adjusting product pricing, balance sheet duration and mix all take time. From an asset liability perspective, it can take time to identify, quantify, discuss and act to mitigate risks. Dusting off more rigorous, forward starting and multi-year down rate shock scenario analyses makes sense, as does a quality Third Party review of your model and process. Active participation by Management in developing, reviewing (and ultimately implementing) model assumptions, with Board review, sets the tone for confidence in strategic decisions made in the future. Turbulence Ahead - Disengage Auto Pilot By Brett Patten, Vice President – BOK Financial Institutional Advisors BOK Financial Institutional Advisors provides third party asset liability reviews, modeling, consulting, decay rate studies, and investment portfolio strategy and can be reached at 866.440.6515 or learn more at www.bokfinancial.com/institutions. 1 http://www.nber.org/cycles 2 https://fred.stlouisfed.org/series/UNRATE 3 https://www.fdic.gov/news/news/press/2018/pr18030.html Bank dealer services offered through Institutional Investments, Bank of Oklahoma which operates as a separately identifiable trading department of BOKF, NA. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. Civilian Unemployment Rate