Tag: ALM

How Your Bank Can Pick Up 40 Basis Points of Margin

Improving Net Interest Margin
IMPROVING MARGIN

Community banks face intense competition from different institutions and various industries.  There is currently a market phenomenon that is creating an unusually challenging environment for community banks that compete for real estate financing. This phenomenon is creating an advantage for some lenders in the amount of seven to 42bps, and community banks must be aware of this aberration if they want to win more quality borrowers.

 

Swap Spreads

 

What Bankers Need To Know About The Yield Curve

Interest Rate Training
INTEREST RATE TRAINING

Bankers should consider the shape of the yield curve when structuring and pricing loans to maximize return and reduce risk. The shape of the yield curve can also help lenders understand borrowers’ needs and better position the bank against competitors.

Tracking Community Banks’ Cost of Funding Trends

Deposit Management

Every year we analyze the historical cost of funding earning assets (COF) for all banks in the country.  We perform this analysis on every bank from 1990 to the present to understand the drivers of COF, how banks can improve performance by controlling their COF and how funding costs will behave in the future.

Here Is A Simple Fund Transfer Pricing Method For Banks

FTP In Banking

Funds transfer pricing (FTP) has been an important tool for financial institutions for several decades. The methodology was introduced to banks in the early 1980s to help allocate corporate costs among business lines. Since then, the mechanism has been central to also helping allocate risk among business units. For instance, if your bank has interest rate sensitivity, what portion of the risk is driven by fee lines (f.e. mortgages), loans and deposits. In this article, we look at the concepts of FTP and detail how banks can use the methodology to better manage risk.

 

Where Your Deposit Balances Are Going

Deposit Management

Go to any bank conference, bank investor gathering or analyst meeting and the hot topic is the slowdown in deposit growth. As the economy keeps rolling and the Federal Reserve continues to raise rates, the topic of a bank’s increasing cost of funds, slowdown in deposit growth and the jump in liability interest rate sensitivity are on everyone’s minds.

10 Tactics To Dampen Deposit Betas

Lowering Deposit Costs

Cost of funding for community banks has risen notably, but the banking industry’s rising deposit betas is creating a greater challenge for community banks.  Deposit beta is the change in funding costs divided by the change in interest rates.  Rising deposit betas may require some community banks to change their focus on customers, products and ALM assumptions or risk a reduction in NIM and profitability. In this article, we highlight the current and projected state of deposit betas and then outline ten of the best tactics for dampening or even lowering the beta at your bank.

 

This Concept of Preferred Habitat Theory Will Improve Bank Performance

Taking Advantage of the Yield Curve

Sometimes things are not as they appear.  Consider the classic optical illusion of the three-prong image below.  The prongs are confusing and it is hard to tell where one prong starts and stops. Combine this concept with “preferred habitat theory” that says that bankers prefer certain maturities or “natural habitats” over others. Preferred habitat theory explains why banks don’t make unhedged 30-year fixed rate loans. In this article, we look at how illusions and preference for natural habitats come together to often mislead bankers.

Why Banks Should Limit Their CD Offerings

Driving Better Liability Performance - Deposit Structuring

As a general statement, banks offer too many options for certificates of deposits (CDs). Consider that the average bank offers 12 different maturities, some “specials,” plus several different tiers of pricing within each maturity. We have seen banks with as many as 42 different CD options which is inefficient for every party. The problem is too many CD offerings can increase a bank’s cost, confuse its customers and, worst of all – damage its overall deposit performance. In this article, we look at a counterintuitive strategy for increasing deposit performance.

Community Banks Are Less Able To Withstand A Flattening Curve

Swaps and Hedge To Help Net Interest Margins

For all banks, the flattening yield curve is impacting profitability. The difference between the Two-Year swap and the Ten-Year swap rate is around 12 basis points. For banks over $15B, this flattening moves net interest margin (NIM) lower and then improves past the one year mark. However, for community banks under $15B, the flat curve not only moves net interest margin down, but this lower profitability becomes worse over time.

Here Are Your Largest Bank Deposit Competitors

Deposit Competition

At a recent Community Bankers of Georgia convention, a late night argument ensued over which banks are going to present the biggest deposit challenges for the next year. Now, granted you have to be a banking geek to really care about this on a Friday night, but it is an interesting question as the answer could help your bank more effectively defend its deposit franchise. In this analysis, we turn to the data to construct a “Deposit Threat Score” to hopefully provide your bank with insight into what your deposit future could hold.

 

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