Yield on Assets—How Low Can it Go?
How does net income look for 2013? Even if your budget is showing satisfactory earnings you might not be out of the woods yet.
Earnings could be temporarily propped up by higher yielding loans and investments put on the books in years past. Unsustainably low provision for loan losses could also be skewing the picture.
Consider doing a long-term forecast to see how the business model performs after higher yielding loans and investments mature. We would recommend a forecast of at least three years. This does not need to be a three year budget; simply use high level operating expense assumptions in years 2 and beyond.
If you are not sure you want to invest the time to create a long-term forecast, minimally invest 15 minutes in your next ALCO meeting working through an estimate of new business profitability using the New Business Calculator. Populate this with rates on loans and investments that are currently being booked (not year-to-date yields) for a preview of where earnings could be headed once higher yielding loans and investments mature. The earlier you can spot trouble ahead, the sooner you can act to head it off.
