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.
Tag: Asset-Liability Management
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.
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.
At last we left off on the story of the Secured Overnight Funding Rate (“SOFR”), SOFR just started trading (HERE). At that time, we discussed the very first rate setting, the rare wonder of seeing a new index created and what bankers need to do to prepare for the possibility of using a new index in their investment and loan process. Now, as of last week, there is a newly created futures market.
Success in banking is simple. Offer the right product, to the right customers, at the right time. The timing now is perfect to accommodate borrowers who want long-term fixed-rate loans, and the timing is also perfect for banks to convert those fixed-rate loans to a floating rate asset to protect the bank. At CenterState we created a custom built loan product called ARC (Assumable Rate Conversion) program that is currently very popular with our own borrowers, and hundreds of banks across th
There has been much discussion lately about the flattening of the yield curve. Some economists and analysts believe that the yield curve could invert in 2018. Much of this discussion has been focused on trading strategies and the relationship between the shape of the yield curve and the strength of the economy. However, the flattening of the yield curve has real consequences for community banks and their loan portfolios. If the yield curve does continue to flatten in 2018, the dominant loan structure for community banks will be challenged.
The Bureau of Labor Statistics’ Nonfarm Payroll report for the month of May was weaker than most market participants predicted with just 38k jobs created. The unemployment rate, however, came in lower than expected at 4.7% and the average hourly earnings growth was reported at 2.5%. So how will the Fed interpret this data and how will the Fed’s actions affect your bank’s NIM and earnings? Between the two perceivable options of keeping interest rates at their curre
Now is the time for community banks to reconsider offering a three and six month certificate of deposit (“CD”) account.
You can always tell a good banker by the way they handle their deposits. When it comes to loans, it’s hard to discern expert level skills unless you know the market and know the credit. Deposits, however, are pure. When we analyze a bank, it is normally the first thing we look for as deposit pricing and structure is the one metric that tells you the most about the quality of a bank. A low cost of funds is just part of it. Almost equally important, and lost with most analysts, is the behavior or performance of a bank’s liability base with movement in interest rates.
If your bank only offers fixed-rate loans to 5 years, you are probably competing against every other bank in your region with an identical product. If you cannot differentiate the loan product or the officer selling the product, you will surely compete on price, or, worse - on credit structure – not an enviable position for a bank. Some banks decide that they will create a “special bucket” of longer-term fixed rate loans in o