In Part I (HERE), we got all Warren Buffet against the backdrop of Jimmy Buffet and explored how rising rates were starting to impact deposit balances. We questioned whether “surge balances” are in fact a thing and if they are, is this the time that we will see an exodus of balances move into other asset classes like fixed income, equities, real estate and capital spending.
Banker To Banker
The Federal Reserve held off in raising rates at its November meeting, preferring to assess the results of the presidential election and allow time to make further progress on their twin goals of full employment and price stability. Since that November meeting, the results of the presidential elections have convinced markets of future expected inflationary pressures resulting from fiscal stimulus in the form of tax cuts and increased government spending. Furthermor
If you are like most banks, you probably don’t have big dollars allocated in your budget for advertising and of those dollars, probably less is focused on digital and probably nothing invested in mobile. That would be a mistake as the performance of bank mobile advertising has dramatically improved over the last several years. “Mobile is eating the world” is a common refrain and many banks are pursuing a mobile first strategy where all other delivery pipes like call centers, branches, ATMs and online applications support mobile banking.
Here at CenterState Bank, we specialize in Florida. Now, Florida has a lot of things going for it, but it has at least two major things going against it. One is an unspoken rule that if you own a bar or restaurant with an open-air patio, you have to have some guy impersonating Jimmy Buffett on a stool wearing a flowered shirt singing for tips. These guys are everywhere, and if you live here, it gets old. The other major drawback is that hunting for the highest rate on your deposits is a national pastime only eclipsed by baseball and trying to stay out of sinkholes.
Yesterday, we announced our second merger of the year with the purchase of Gateway Financial. Gateway is a three bank holding company and totals $8880mm in assets and nine branches located in central Florida. Combined, that makes us $6.5B in assets with 85 branches spread throughout Florida and cements our position as the second largest community bank headquartered in Florida. In this post, we discuss what this transaction looks like and detail why we did this.
In Part I of this post (HERE), we discussed the Gambler’s Fallacy and how the loan process itself can inject bias into a bank’s decisioning. In particular, we looked at how the order of how loans are reviewed for credit makes a difference. This sequence bias comes from an inherent cognitive belief in humans that want to assume the world is less random than it is. Flip a coin enough times, and every time the result is heads in a row it is natural to assume that tails are due.
For the first time since 2013, the Federal Reserve’s monetary policymaker expectations and the market’s expectations are similar. The swap’s market now show an approximate 1.07% implied rate at the end of 2017 (purple rate below). This means two rate hikes next year which are what the Fed’s “dot plot,” or survey of policymakers shows (green line below).
Historically community banks have been hesitant to use derivatives, mostly interest rate swaps, to manage credit, interest rate, and sales risk. Derivatives have been historically stigmatized and even more so after the last recession. Interest rate hedges have predominantly been used by larger and more sophisticated banks. However, approximately 15% of all commercial banks now report some form of a derivative on their balance sheet, and 9% report interest rate swap exposure.
The goal of credit underwriting is to make prescient decisions. All credit has an outcome – either it pays as agreed or it does not. The role of the underwriter is to best predict that outcome which is why it is critical to limit the amount of bias inherent in any decision. While we have looked at overt bias in credit underwriting in the past (HERE for example), in this article we look at a particular bias inherent in all bank’s processes and why it matters.