Wednesday, June 17, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Natalie Regan • Aaron Stoffer • Chuck Honeywell |
| US Treasury Market | |||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 06/10/20 | 0.13 | 0.17 | 0.19 | 0.18 | 0.17 | 0.22 | 0.33 | 0.56 | 0.75 | 1.31 | 1.53 |
| 06/11/20 | 0.14 | 0.17 | 0.18 | 0.19 | 0.19 | 0.22 | 0.32 | 0.51 | 0.66 | 1.19 | 1.41 |
| 06/12/20 | 0.14 | 0.16 | 0.18 | 0.18 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
| 06/15/20 | 0.15 | 0.18 | 0.19 | 0.17 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
| 06/16/20 | 0.14 | 0.17 | 0.19 | 0.18 | 0.21 | 0.22 | 0.34 | 0.56 | 0.75 | 1.31 | 1.54 |
Source: U.S. Department of the Treasury, as of 06/16/2020
“For cryin’ out loud!”
A favorite line of my mom’s (RIP), usually followed by the always daunting: “What were you thinking?!”
I sometimes find myself saying that to myself when I realize I missed an unbelievable opportunity; whether securing the right investment or in the way we fund our balance sheet. In March 2019, we wrote a piece in this space called “Markets in Transition” (you can read it here) and it called on clients to begin the process of “building a bridge” over the trough in rates that was surely coming our way. Some institutions missed that opportunity to buy high quality investments at yields that were 5X more than they are currently.
Luckily the market has gifted us another chance to positively impact our bank, and our earnings for the foreseeable future, if we will only act! In that earlier piece, we talked about the difficulty in doing what at first seems “nonsensical”. Buy bonds when loan demand was extremely strong, tighten credit standards, and shorten liabilities at every opportunity (even though consensus was that rates were going to the moon!).
Yesterday we talked about the excess liquidity in our banks and the fact that rates, on long term liabilities, are the lowest in our lifetime. If we believe that rates will eventually (I know, when?) normalize, then making the difficult decision to increase our already overly liquid balance sheets may be the single best way to influence our institutional earnings potential, ever.
Think about this, if we could borrow money for 10 years @ 1.35%, we would probably think to ourselves, “We have to find a way to make money on that or we are in the wrong business”. That is what we have in the Brokered Deposit market today, with the added bonus of being able to CALL it back from the depositor ANYTIME in the future. If you can just breakeven for a year or two, then the loans funded with these deposits after that initial period, will likely put your institution in a very competitive position, in terms of both loans and deposits.
Let’s go through an example:
For every $10 million in deposits (10Y term; callable after 6 months @ 1.20%; +0.15% transaction costs; all-in) the initial cost would be $150,000.
If it was called at the first opportunity, after 6 months, it would cost $142,442 in unamortized transaction fees, declining for every month the deposits are retained beyond the initial 6 month lockout.
If a bank could just break even for 2 years, then get just 2% spread for the last 8 years, the benefit would be $1.6 million over and above the costs.
So the question comes down to this, can we risk $142K to make $1.6M (at a minimum, $10MM @ 2.00% * 8Y). The point is clear, there is an opportunity to breakeven in the short term and maximize profitability in the long term. An institution might also be able to eliminate shorter duration liabilities now and lock in 10Y money today. It would cost more in the short run, but if the cost of wholesale money increases by an average of just 1% over the next 2 years (50 bp’s per year), the cost difference between rolling short term money and locking long term money today, disappears, “for cryin out loud”.
A favorite line of my mom’s (RIP), usually followed by the always daunting: “What were you thinking?!”
I sometimes find myself saying that to myself when I realize I missed an unbelievable opportunity; whether securing the right investment or in the way we fund our balance sheet. In March 2019, we wrote a piece in this space called “Markets in Transition” (you can read it here) and it called on clients to begin the process of “building a bridge” over the trough in rates that was surely coming our way. Some institutions missed that opportunity to buy high quality investments at yields that were 5X more than they are currently.
Luckily the market has gifted us another chance to positively impact our bank, and our earnings for the foreseeable future, if we will only act! In that earlier piece, we talked about the difficulty in doing what at first seems “nonsensical”. Buy bonds when loan demand was extremely strong, tighten credit standards, and shorten liabilities at every opportunity (even though consensus was that rates were going to the moon!).
Yesterday we talked about the excess liquidity in our banks and the fact that rates, on long term liabilities, are the lowest in our lifetime. If we believe that rates will eventually (I know, when?) normalize, then making the difficult decision to increase our already overly liquid balance sheets may be the single best way to influence our institutional earnings potential, ever.
Think about this, if we could borrow money for 10 years @ 1.35%, we would probably think to ourselves, “We have to find a way to make money on that or we are in the wrong business”. That is what we have in the Brokered Deposit market today, with the added bonus of being able to CALL it back from the depositor ANYTIME in the future. If you can just breakeven for a year or two, then the loans funded with these deposits after that initial period, will likely put your institution in a very competitive position, in terms of both loans and deposits.
Let’s go through an example:
For every $10 million in deposits (10Y term; callable after 6 months @ 1.20%; +0.15% transaction costs; all-in) the initial cost would be $150,000.
If it was called at the first opportunity, after 6 months, it would cost $142,442 in unamortized transaction fees, declining for every month the deposits are retained beyond the initial 6 month lockout.
If a bank could just break even for 2 years, then get just 2% spread for the last 8 years, the benefit would be $1.6 million over and above the costs.
So the question comes down to this, can we risk $142K to make $1.6M (at a minimum, $10MM @ 2.00% * 8Y). The point is clear, there is an opportunity to breakeven in the short term and maximize profitability in the long term. An institution might also be able to eliminate shorter duration liabilities now and lock in 10Y money today. It would cost more in the short run, but if the cost of wholesale money increases by an average of just 1% over the next 2 years (50 bp’s per year), the cost difference between rolling short term money and locking long term money today, disappears, “for cryin out loud”.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value