The First Step For Raising Deposits
If you are looking for insight into how artificial intelligence can help in banking, we give you the Unified Deposit Formula that can be used for raising deposits. Before using machine learning, we, like most bankers, thought about deposit pricing along a single dimension – price and sensitivity. However, it turns out that price and…
Understanding The Current Yield Curve Shape
After last week’s FOMC rate increase of 25 basis points, the yield curve is more inverted than at any time in the previous 30 years. The current yield curve presents various challenges for community bankers for revenue generation and risk management. In this article, we will outline the significance of the yield curve shape and…
Deposit Pricing Basics Part 1: The Concepts
The art and science of optimized deposit gathering is a declining skill set among bankers. Banking schools don’t teach it, conferences don’t showcase it, and internal bank educators no longer train in the discipline. It is ironic as no other banking endeavor can build long-term franchise value like deposit gathering. Further, deposit gathering and its…
Should You Adjust Loan Pricing Due To Rising Funding Costs?
Rising funding costs and decreasing liquidity at community banks are causing managers to change pricing methodology for new credits. This makes some sense, as in other industries, if your input pricing goes up, you often adjust your end pricing. We estimate that 25% to 50% of community banks have a policy requiring minimum yield or…
15 Ways We Are Using ChatGPT in Banking
No doubt you have heard other bankers talking about ChatGPT. This AI-powered digital assistant, technically called “generative AI,” has taken banking, and society, by storm. In three months, it has become the primary tool of many bankers, helping make banks more efficient across the organization. Our innovation working group, called Spark, has been playing with…
4 Ways To Quantify Loan Prepayment Protection in 2023
In a previous article (here), we discussed why commercial loan prepayment protection would be a critical return on asset (ROA) driver for community banks in 2023. We outlined the four main reasons why prepayment provisions increase profitability for banks. We also discussed the four standard prepayment provisions for commercial loans (step-down, lock-out, defeasance, and symmetrical…
1Q 2023 Loan Pricing Update
2022 will go down as one of the worst years for community bank loan mispricing when viewed on a spread basis. Rapidly rising rates crushed performance as many banks held a fixed rate constant and/or booked a fixed rate loan at a misguided level. Even though many loans were booked at below-par value (more information…
Why Prepayment Penalties Matter in 2023
Prepayment penalties on loans always drive value. However, in 2023, loan prepayment provisions will be essential tools for commercial banks. Loan prepayment provisions lower prepayment speeds (especially in a stable or declining interest rate environment) and drive higher return on assets (ROA) for banks. In this article, while we have discussed how to sell prepayment…
Retail Sales and PPI Reveal Softening Activity
Retail Sales & PPI Reveal Softening Activity Treasury prices are rallying some in early trading as overnight news from Japan is aiding the bid. The Bank of Japan decided not to widen the band on its Yield Curve Control policy for their 10yr bond from the current -50bps +50bps range. By not widening the range,…
The Big Mistake When Pricing Deposits
Many banks work hard to have a low-cost deposit base only to undermine their efforts. One of the biggest mistakes bank make when pricing deposits is advertising an above-market rate, thereby shortening deposit duration and increasing negative convexity for that one account and the whole product offering. This subtle distinction might be lost on many…
What Drives ROA?
In a previous article (HERE), we analyzed industry performance and demonstrated that the average five-year net interest margin (NIM) and return on assets (ROA) are unrelated. The correlation coefficient (R2) between these two variables is NEGATIVE 0.02 (essentially no explanatory relationship). This lack of connection has been a general observation in the banking industry for…
Bond Portfolio Trends: Fourth Quarter 2022
Examining Bond Portfolio Trends: Fourth Quarter 2022 Beginning in May 2012, we started tracking portfolio trends of our bond accounting customers here at SouthState|DuncanWilliams. At present, we account for over 130 client portfolios with a combined book value of $13.96 billion (not including SouthState Bank), or $107 million on average per portfolio. Twelve months earlier,…