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,…
5 New Year’s Resolutions For Any Sized Bank That You Must Get Right in 2023
A potential economic slowdown, slower rate rises, an inverted yield curve, and deposit stress likely make 2023 a trying year compared to 2022. Banks will need to balance these short-term challenges with longer-term strategic goals. For any banker looking for clarity, we present five New Year’s resolutions, no matter your size, that provide a roadmap…
NIM and Its Relationship to ROA in Banking
Despite reaching the highest profitability in over a decade in 2022, US banks overall trade at a discount to other sectors as measured by P/E or P/Book, and approximately 53% of US banks have earned less than their cost of equity over the last five years. The high profitability for banks in 2022 was propelled…
How To Take Advantage of the Yield Curve When Loan Structuring
The yield curve is currently inverted after the FOMC’s last rate increase of 75 bps. The inversion will be more pronounced with next week’s additional rate increase, expected to be 50 bps. The yield curve shape is an excellent opportunity for community bankers to provide sound risk mitigation and balance sheet management advice to borrowers. …
The Effects of Inflation on CRE Cashflow
At a cursory observation, one would conclude that the effects of inflation on a real estate project are neutral. If owners can pass increased costs to tenants, they can keep inflation from decreasing NOI or cash-on-cash return. However, closer analysis and lessons from history demonstrate that to counteract inflation’s free cash flow-destroying effects, revenue must…