The document provides an overview of recent economic and banking trends and issues:
1) The economy lost momentum in August as stocks declined, bond yields fell, and GDP growth was revised down, though unemployment improved slightly.
2) Central banks will maintain low interest rates and use other tools like quantitative easing to support the economy.
3) Community banks are slowly recovering but still face challenges with low loan growth and changing business models.
Scott Minerd, Chairman of Investments and Global CIO, analyzes global macroeconomic trends most likely to shape the investment environment in 10 charts.
Winter officially begins today with the arrival of the Winter Solstice. Recall that solstice means “standing-still sun;” and on December
21st at 5:47 p.m. (EST) the sun will “stand still” over the southern Pacific Ocean (Tropic of Capricorn). At that time the sun’s rays
will be directly overhead, giving the impression that the sun is truly standing still.
“It’s tough to make predictions, especially about the future.” So said Yogi Berra in an era gone by. Yet, every year, during the week of the Epiphany, we make predictions about the year ahead, write them down, and lock them up in our safety deposit box to be read the following year. This year was no exception. Accordingly, last week we opened the lockbox and placed this year’s predictions in it and retrieved last year’s list.
Annie Williams Real Estate Report - November 2019Jon Weaver
Sales prices for condos/townhomes set a new high for the second month in a row. The median sales price for condos/townhomes was up 12.8% year-over-year. It was up 3.8% from September. The average sales price for attached homes gained 10.6% year-over-year. It was up 2.7% from September.
Annie Williams Market Trends Nov-Dec 2014Jon Weaver
The Federal Reserve has ended quantitative easing, again. What does that mean for mortgage rates? For the moment, nothing. The Fed isn’t expected to raise short term interest rates until the middle of next year.
Also, the Fed has a very limited ability to affect long-term interest rates.
The presentation deals with assessing the value of an acquirer's shares when a seller will receive buyer shares as consideration in a merger. Even when the buyer is an SEC-registrant with reasonable liquidity in its shares the calculus often is not straightforward.
“Our friend Percy Wong of Bank of America recently observed that the ‘only crowded trade was on the sidelines,’ which we felt summed up the current summer, and the mood amongst most of our clients, perfectly. Indeed, there is a lot to digest, what with a) fears for one's job/business following a tough past three years, b) very haphazard economic data, c) the emergence of new risks (e.g., sovereign bond risk amongst European signatures) and d) the new reality of global economic growth no longer being driven by the United States but instead by emerging markets. No wonder so many investors are looking to take cover, whether in the form of bonds (with US 2-year yields now at a record low 0.48%) for investors who believe that fiat currencies will hold their own, or gold for those more skeptical on the ability of paper money to withstand its value, even in a deflation.
Mercer Capital's Bank Watch | December 2019 | 2020 Outlook: Good Fundamentals...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Mercer Capital's Bank Watch | June 2022 | Bond Pain and Perspective on Bank V...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Scott Minerd, Chairman of Investments and Global CIO, analyzes global macroeconomic trends most likely to shape the investment environment in 10 charts.
Winter officially begins today with the arrival of the Winter Solstice. Recall that solstice means “standing-still sun;” and on December
21st at 5:47 p.m. (EST) the sun will “stand still” over the southern Pacific Ocean (Tropic of Capricorn). At that time the sun’s rays
will be directly overhead, giving the impression that the sun is truly standing still.
“It’s tough to make predictions, especially about the future.” So said Yogi Berra in an era gone by. Yet, every year, during the week of the Epiphany, we make predictions about the year ahead, write them down, and lock them up in our safety deposit box to be read the following year. This year was no exception. Accordingly, last week we opened the lockbox and placed this year’s predictions in it and retrieved last year’s list.
Annie Williams Real Estate Report - November 2019Jon Weaver
Sales prices for condos/townhomes set a new high for the second month in a row. The median sales price for condos/townhomes was up 12.8% year-over-year. It was up 3.8% from September. The average sales price for attached homes gained 10.6% year-over-year. It was up 2.7% from September.
Annie Williams Market Trends Nov-Dec 2014Jon Weaver
The Federal Reserve has ended quantitative easing, again. What does that mean for mortgage rates? For the moment, nothing. The Fed isn’t expected to raise short term interest rates until the middle of next year.
Also, the Fed has a very limited ability to affect long-term interest rates.
The presentation deals with assessing the value of an acquirer's shares when a seller will receive buyer shares as consideration in a merger. Even when the buyer is an SEC-registrant with reasonable liquidity in its shares the calculus often is not straightforward.
“Our friend Percy Wong of Bank of America recently observed that the ‘only crowded trade was on the sidelines,’ which we felt summed up the current summer, and the mood amongst most of our clients, perfectly. Indeed, there is a lot to digest, what with a) fears for one's job/business following a tough past three years, b) very haphazard economic data, c) the emergence of new risks (e.g., sovereign bond risk amongst European signatures) and d) the new reality of global economic growth no longer being driven by the United States but instead by emerging markets. No wonder so many investors are looking to take cover, whether in the form of bonds (with US 2-year yields now at a record low 0.48%) for investors who believe that fiat currencies will hold their own, or gold for those more skeptical on the ability of paper money to withstand its value, even in a deflation.
Mercer Capital's Bank Watch | December 2019 | 2020 Outlook: Good Fundamentals...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Mercer Capital's Bank Watch | June 2022 | Bond Pain and Perspective on Bank V...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Mercer Capital's Bank Watch | November 2022 | Community Bank Loan Portfolios ...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Ride the Short Duration Wave - June 2019iciciprumf
Triggers to watch out for -
Current situation in the Fixed Income space
Our Outlook on what lies ahead
Segment of the yield curve, which stands to benefit
Read the full document to know more.
In October, the Greek Government Bond Index recorded an annual high while also coming very close to reaching its September 2014 level. Improvement was also evident in the Corporate Bond Index, which increased by 2.56% in October relative to the previous month. On a Year-to-date (YtD) basis the index recorded a 2.35% gain.
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Annie Williams Real Estate Report July-Aug 2017Annie Williams
Two major changes in the mortgage market go into effect this month, and both could help millions more borrowers qualify for a home loan. First, the three major credit reporting agencies will drop tax liens and civil
judgments from consumer profiles if the data is not complete. Specifically, the data must include the person’s
name, address, and either date of birth or social security number. It seems many profiles do not have all this data. This alone could raise FICO scores by as much as 20 points for affected consumers. Second, mortgage giants Fannie Mae and Freddie Mac are allowing borrowers to have higher levels of debt and still qualify for a home loan. The two are raising their debt-to-income ratio limit to 50 percent of pretax income from 45 percent.
Borrowing costs for middle-market debt issuers generally declined during the third quarter, despite a modest increase in leverage levels and little change in benchmark rates. The Fed, as expected, left benchmark interest rates unchanged in the third quarter, but did announce a program to gradually reduce its balance sheet from $4.5 trillion (a result of recessionary quantitative easing) to $3 trillion over the next three years. Thus, the prevailing combination of low borrowing costs, high leveragability and a generally benign default rate outlook, presents an attractive backdrop for issuance. This "perfect storm" of market conditions provides a compelling (albeit narrowing) window for middle-market issuers.
Pacific Asset Management is sub-advisor to the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT)*
2014 has seen the consensus of higher Treasury yields and economic activity fail to materialize. Lower rates and risk premiums have led to strong returns year-to-date. In this commentary, Portfolio Managers David Weismiller, Michael Marzouk, and Bob Boyd discuss the current market environment, outlook, and portfolio positioning.
*Effective but not available for sale at this time. Go to www.advisorshares.com for more information.
Introduction of GST in the Rajya Sabha has significance because it could have been passed in the Lok Sabha also. However, Rajya Sabha is where the government does not have majority and since it’s a constitutional amendment that requires two thirds majority, convincing all the parties is a key milestone and to that extent, introduction and subsequent passage of the bill in the Rajya Sabha will be important.
•Earnings Data for 8 core industries including mining, infrastructure and electricity was received which indicated a growth by 5.2% which augers well. However, one needs to see if this is a onetime occurrence or will it continue. Also, since rainfall was moderate, by the end of July, rural consumption is expected to be strong. To that extent, GDP is likely to grow anywhere between 7.5-8% this year. The government’s earlier projections in the budget carry an upward bias.
Mercer Capital's Asset Management Industry Newsletter | Q2 2012 | Focus: Trad...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Mercer Capital's Bank Watch | October 2021 | Value Drivers in FluxMercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
The Robb Fleischer’s Real Estate Report – Local Market Trends San Francisco includes monthly updates regarding mortgage rates, market statistics, sales momentum, pricing momentum, trends at a glance, foreclosure statistics and more.
Capital Markets Insights – Late Fall 2018Duff & Phelps
What’s been an increase in growth and acquisition-related financings and recapitalization transactions? Read the fall edition of Duff&Phelps’ Capital Markets Insights.
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www.pcbb.com www.bancinvestment.com
2. BANK ACTIVITY
Economic and Banking Summary
In a blink of an eye, summer and the month of August has come to an end. It was yet another
month of surprising momentum shifts and unpredictable headwinds, making ALCO more eventful
than this year’s summer vacation.
Wall Street continues to whimper and wail. S&P was down -6.83% and the Dow followed by -
6.23%. Fixed income yields continue to slide with 10yr Tres. dropping 43bps for the month.
Consumer confidence surprised market expectations by posting a higher than expected 2.5 point
increase to 53.5% in late August. Despite this positive surprise, consumer sentiment incurred a
downward revision by .7 points the very same day. GDP was revised down by 0.8% points to
1.6% indicating an economic recovery that is losing steam. To counter that, the employment
report came out and was more positive than expected. Non-farm payroll employment changed
little (-54k) in August despite the runoff of Census workers. The headline Unemployment Rate
went from 9.5% to 9.6%. The real positive in the data was that the past month was revised
upward, private-sector payroll employment continued to trend up modestly (+67k) and temporary
Help workers increased by 16.8k, a sign of potential future hiring.
August 10th’s FOMC minutes were similar as the previous with inflation subdued, financial
markets more supportive of growth, and agreed to maintain the target range of 0 to ¼ percent
Fed Funds rate. The quantitative easing discussion picked up steam and the FOMC decided to
reinvest their mortgage prepayments into Treasuries. While this will help lower intermediate
yields, the real significance is that this is really the first time we have seen a long term concerted
effort to utilize the Fed’s balance sheet. Normally, economists have not considered the balance
sheet as a long-term tool of monetary policy.
In terms of our industry, we are getting more of a “middle class.” While the problem bank list has
increased to 829, it has been the slowest increase in new banks added since the crisis began.
Except for those banks, the majority of community banks are starting to get back on their feet with
2Q showing an improvement in earnings and a slow down in asset quality problems. Loan growth
has been next to non-existent, so the last several months have been marked by more resources
devoted to generating earnings. Capital has become more plentiful with several notable deals in
the market giving other bank groups hope.
As we head into September, it is strategic planning time with many banks working on trying to
generate more fee income, being opportunistic when it comes to M&A and working on raising
capital. Other common projects include reducing the size of the branch network, increasing the
online banking platform, getting on a profitability system, customer segmentation and joint
venturing in order to generate quality loan growth.
Finally, it is worth noting that a significant number of banks are taking a look at how to restructure
their depository line up. Retail account types such as high-yield checking and even free checking
cost banks money that are hurting earnings. Most major banks have now instituted minimum
service charges, have transitioned account to an all electronic channel or have required other
activity in which to make a profit. In addition, many banks are trying to prepare for what to with
their business checking now that many banks will start to pay interest on this account type by
mid-2011.
While we are not sure where profitability heads next year, we can tell you that we cannot
remember a time when the basic banking business model was so much in question. If there was
ever a need to think strategically in the history of banking, it would be now.
Chris Nichols
President & CEO
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3. BANK ACTIVITY
Lending Activity
The most recent Fed survey had positive news for banks seeking loan volume: “On balance,
demand for C&I loans from large and middle-market firms and from small firms changed little in
the July survey.” The Fed’s senior lending officer survey in July represents the first time in three
years that demand has stopped falling.
However, the news is not all good for community banks. The problem is that national and large
regional banks are rolling out the red carpet for qualified borrowers, lowering rates and offering 5
to 25-year fixed rate loans. In this rate environment, community banks are finding it difficult to
commit funds at historically low rates, or taking interest rate risk by extending duration.
We can help banks better understand the market and price their loans on a floating equivalency.
If you want to price loans on our hedge platform we can permission you on our model without
costs -let us know and we’ll set you up. We also offer a hedging program designed for
community banks (no derivative accounting and easy to deliver to the borrower) to allow our
banks to compete against national and larger regional competitors.
The benefit of using our hedge pricing platform is that bankers can see why/how Bank of America
intends to make money offering 20-year fully amortizing loans at 5.00% fixed.
Ed Kofman
Managing Director - Derivatives Desk
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4. BANK ACTIVITY
Certificate of Deposit Issuance
Overall bank activity in the brokered deposit market was down for the month of August, but this is
a historically light month for issuance. Though volumes were down, issuance was steady
throughout most of the month. Treasuries continue to rally, and yields are hitting historic lows.
Funding costs are following the markets lead, and banks are able to raise deposits at historic
lows as well. The short end did not move much as rates have pretty much bottomed out in this
area of the curve. Short term funds are still trading at all in cost levels lower than the traditional
standard fees for these terms. There has been an extreme lack of issuance inside of one year as
the majority of issuers are taking advantage of these extreme lows and locking in longer term
funding.
With the summer coming to an end and the month being a quarter-end month, we anticipate
issuance to increase in September. There isn’t much room for rates to fall further, and rates
should begin to stabilize on the long end. Now is a good time to lock in funding as the lack of
names in the market brings less competition for deposits, thus cheaper funding.
Don Saunders
Managing Director - Brokered CD's
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5. BANK ACTIVITY
Fixed Income
Historical and current spreads vs. Treasuries for MBS and Agencies are listed below.
MBS Agencies
15Y 30Y 2Y 5Y 10Y 30Y
5YR High 312 238 182 159 175 168
5YR Low 72 54 -16 2 -5 25
5YR Avg 133 124 37 46 46 51
1YR High 143 105 31 38 47 50
1YR Low 97 54 -16 2 -5 25
1YR Avg 118 76 13 25 29 40
90 Day High 128 91 27 37 36 50
90 Day Low 106 54 9 9 16 25
90 Day Avg 117 74 19 25 27 37
30 Day High 129 91 17 30 31 30
30 Day Low 111 54 10 18 16 25
30 Day Avg 118 76 13 24 22 27
Last 121 82 17 25 27 28
Data Source: Bloomberg
Fixed Income: Trading activity picked up in August as bankers took advantage of near historic
low yield levels selling short maturing bonds to book gains and reinvested funds in longer
duration bonds. Investors focused primarily on well - structured 2-5Y duration agency CMOs,
preferring locked-out structures which were hard to come by. 10Y and 15Y MBS continued to see
good demand despite the lofty premium dollar prices.
Treasury yields continued to decline with the 2Y reaching an all-time intra-day low 0.45% on
8/24/10. By the close of the month the 2Y fell 8bp vs. the previous month. The 5Y, 10Y and 30Y
fell 26bp, 44bp and 48bp respectively. Agency spreads did not give up too much ground with the
2Y widening 2bp, 5Y +6bp, 10Y +7bp and 30Y nearly unchanged. Agency MBS had mixed
results. The 15Y sector did well and widened only 2bp, while the 30Y sector suffered amid
growing speculation that a government induced refi wave may occur and concerns that lower
yield levels in general may spark greater re-fi activity. 30Y MBS spreads widened out 30bp.
Looking ahead, MBS prepayments are expected to increase as the refi index jumped for a 4th
consecutive week and reached levels not seen since early 2009. However, the impact should be
lessened due to many mortgage originators experiencing constrained capacity, extending loan
lock-out periods to 90 days and instituting tighter underwriting standards. Additionally, with
approximately 25% of mortgage holders underwater on their existing home loans, a weak jobs
market and high fees and points associated with refinancing should dissuade some folks from
doing so.
Maxine Lew
Director - Fixed Income
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6. BANK ACTIVITY
Credit & Risk Management
When evaluating this decade’s rate experience, we can see 3 times where market rates have
changed by at least 4 points (over a 2 year time horizon). Two of these changes have been to the
down side (falling rates) and we are now awaiting the uptick in market rates. As we can see from
history, this uptick has the potential to be in the range of 4+ points (over a 2 year time horizon).
Rolling 2 Year Change in Index
(July ‐ to ‐ July)
‐6.00 ‐4.00 ‐2.00 0.00 2.00 4.00 6.00
Fed Effective
5Y Swap
10Y Swap
2002 2003 2004 2005 2006 2007 2008 2009 2010
This uptick has the potential to impact bank earnings from three perspectives.
First on the funding side, banks will need to be diligent in holding the line on deposit pricing which
may prove difficult. Many banks are currently flush with customer excess liquidity and that excess
liquidity will tend to cycle out of the bank as alternative instrument options (non-bank) will become
more prevalent as rates start to rise.
Second on the loan side, earnings will be restrained by existing loan floors that are embedded in
adjustable and/or variable rate loans. Short-term market rates will need to move upwards by at
least 2 points to return these assets to an upward adjusting rate loan.
Third and most importantly, as rates rise (especially over the next 3 points), there will be a
significant and negative impact on rate risk assumed by individual borrowers. Unfortunately, as
rates rise (which is good for bank earnings as adjustable rate produce additional interest income)
credit quality will likely fall. Higher debt service payments (due to rising rates) will place additional
strain/stress on credit quality by increasing debt service on borrowers and forcing some
borrowers into default at a time where secondary sources of loan repayment (collateral) will still
be suffering from the lingering impact of declining collateral values, all of which will increase loan
losses.
Prudently managed banks will incorporate note level ALM results (derived from their up 3 & 4
point rate shocks) into their note level Loan Stress Testing models to determine both expected
levels of non-accrual loans as well as charge-offs/provisions associated with these loans. Once
the value of non-accrual loans and loss/provision has been determined, these values need to be
incorporated back into ALM models to determine the impact on; earnings, earnings sensitivity and
capital. If these integration steps are not incorporated into bank risk assessment processes, then
capital plans will be material distorted as significant amounts of risk will not be measured.
Doug Hensley
Managing Director
5 of 23
7. BANK ACTIVITY
Funding
The following are some items that are frequent concerns today when we talk with bankers:
1. The bank is liquid
2. Investment and lending opportunities are difficult
3. The bank needs to earn more money
The first item is becoming more of an issue for banks in general. One reason is related to
regulatory and operational pressures as banks are typically carrying more on-balance sheet
liquidity than in the past. Another reason is the difficult economic climate of today which affects
both assets and liabilities – excess liquidity is not just an asset driven event. The results are
clearly seen as the average loans to assets ratio has fallen below 70% of TA. Several years ago
it was not uncommon to see banks with ratios over 80%. Not today. The reality is banks will
likely have more conservative loans to assets ratios going forward, and this will affect the asset
yields of banks, perhaps permanently.
The second item is similar to the dilemma banks were facing in 1992-1995 when we were in a
recession and interest rates were low. Holding fed funds sold as an asset typically resulted in a
negative spread vs. the funding held against it, and pursuing investment and lending activity to
boost yields was not without risks. Unlike the last time when interest rate risk was the primary
concern, many banks today are also contending with capital, asset quality, and underwriting
issues or concerns. Some banks are choosing to make or purchase loans, while others are not.
This brings us to the third item - making more money. For most bankers, this traditionally means
finding ways to move forward with lending and/or investing activity. This is a strategy that comes
naturally to bankers, but banks must carefully manage the risks that come with this, especially in
today’s environment. One of the most overlooked ways for a bank to increase its income (in any
banking environment) is to make improvements in funding performance. Banking is rather simple
at its core, as banks buy money on one side of the balance sheet and sell it on the other. How
banks do this is important, as a characteristic of banks that fail or experience difficulty is often an
elevated cost of funds. If your money selling activity is constrained, or if it results in elevated risk,
then doesn’t it make sense to reduce your cost of buying money?
For the banks that make funding performance a priority, the results can be dramatic. Over the
last 18 quarters, one of our Liability and Strategic Coach clients in a competitive market was able
to save (increase revenue) a cumulative $76 million due to it having lower funding costs than its
national $1-3 billion TA peer group average. Currently, the bank is saving about $5.6 million per
quarter compared to this peer group. The bank works very hard to ensure that its superior
funding performance continues, and is careful not to take its eye off the ball which can be so easy
to do. By having lower funding costs, the bank has been able to maintain a less intensive asset
risk profile historically which is paying huge dividends today.
Whether your bank is able to achieve results like this, or if it simply moves from the 70th COF
percentile to the 50th, the performance improvements go directly to your bottom line, and can help
reduce the overall risk profile of your bank.
If you are interested in learning about your bank’s potential, or better yet, getting started on
improving your bank’s performance, please give us a call.
Greg Judge
Liability and Strategic Consulting
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8. BANK ACTIVITY
Loan Pricing and Customer Profitability
Data mining to find profits
While the primary purpose of our Relationship Profitability services is to identify the profitability of
every customer, product and relationship officer at the bank, a side benefit is our ability mine the
customer data for additional profit opportunities. The following are a few items we routinely look
at.
Waivers on deposit service charges – Is the bank waiving fees to its best or worst customers?
It is common to find that over half of the customers who have had their fees waived are not
profitable to the bank. While having the customer’s profitability certainly makes this analysis
easier, it is also possible to simply view the customer’s overall relationship and make a high level
judgment about the worthiness of waiving these fees.
Deposit fee structure – With the changes in the overdraft fee assessments combined with the
current low rate environment, free checking account products currently ranked toward the bottom
of the list. As such, we routinely analyze the cost / benefit of applying service charges on these
accounts. For the average $500 million commercial bank we estimated that there is a $.5 million
to $1.5 million annual income opportunity to implementing service charges while not incurring
significant attrition risk.
Cross Sell opportunities – Cross sell ratios generally range between 2.1 and 2.7. However this
number alone doesn’t readily show the underlying opportunities. Consider that over 50% of the
customers have only one account with bank and that 20% - 25% of the customers did not have a
checking account. Effective cross selling is essential in retaining more customers as studies
show that the more products a customer uses, the lower the likelihood they are to leave and there
are numerous opportunities. Data mining for cross sell opportunities should be a top priority at
every bank.
Utilization of floors - While we are normally strong proponents of utilizing floors in loan pricing
strategy, we believe that in this interest rate environment the strategy of setting the initial rate to
the floor will erode long term profitability. For example, take a loan priced at Prime + 1% with a
floor of 5.5%. With Prime at 3.25%, the computed interest rate of that loan is 4.25%. However,
with the floor, the initial rate for that borrower is at 5.5%. In doing so, the bank has placed a credit
premium on this loan of 2.25% (5.5% floor less Prime of 3.25%). As market interest rates
increase, the implied credit premium decreases to 1%. Yet the borrower’s actual credit risk profile
may or may not have changed. In addition, the bank’s net interest margin will suffer when market
interest rates start to rise. Not only will this loan act as a fixed rate loan for the first 125bp point
increase, it will continue to be priced at only 1% over Prime for the life of the loan. The bank
would have been better off pricing that loan at 2.25% over Prime, thus holding the credit premium
constant over the life of the loan. Should that borrower’s credit quality change at some later date,
the bank and the borrower can renegotiate terms at that time. At a minimum, an analysis should
be performed to understanding the bank’s utilization of floors and how much of an increase in
rates is required for these loans to move off of their floors.
Loan renewals – How many loans are coming up for renewal in the next 6 months? With a tight
credit market and deteriorating credit quality, an increase in loan rates may be warranted. Simply
quantifying and understanding the impact of increasing spreads by 25bps – 100 bps on upcoming
maturities is a worthy exercise for any ALCO group. For the average $500 million community
bank, it is not unusual to see 10% - 20% of the portfolio renewing on annual basis, thus resulting
in significant opportunities to reprice the portfolio in a short amount of time.
7 of 23
9. BANK ACTIVITY
Loan Pricing and Customer Profitability
While overlaying customer profitability data on all of these analysis increases the power of the
analytics, these analysis can still be done without the profit calculations. Doing so may yield
significant profit opportunities.
Probabilities of Default Month in Review – PD’s have remained mostly unchanged from the
previous month. However, as we will be incorporating a recent review of cure rates and vintage
performance, users can expect to see PD’s come down in BIG’s model in the near future.
Kim Jackson
Managing Director
Mike Middleton
Managing Director
8 of 23
10. BANK ACTIVITY
Loan Pricing and Customer Profitability
Prime 2yrswap 5yrswap 10yr swap
3.25% 0.69% 1.64% 2.62%
Yields
Lending Class Prime 2yr 5yr 10yr
Ag - farm land 5.02% 5.33% 6.02% 6.26%
Ag - production 4.86% 5.17% 5.83% 6.07%
Construction -Commercial 6.12% 6.64%
Construction multifamily 6.12% 6.69%
Construction Residential 6.12% 6.79%
Construction Other 6.12% 6.94%
Consumer 5.02% 5.33% 6.02% 6.26%
Hotel 5.63% 5.98% 6.75% 7.03%
Industrial 5.07% 5.39% 6.08% 6.33%
Manufactured Housing 5.07% 5.39% 6.08% 6.33%
Mixed Use 5.07% 5.39% 6.08% 6.33%
Multifamily 5.12% 5.46% 6.16% 6.41%
Office 5.12% 5.44% 6.14% 6.39%
Retail 5.12% 5.44% 6.14% 6.39%
Self Storage 5.02% 5.33% 6.02% 6.26%
Other 5.12% 5.44% 6.14% 6.39%
Spreads
Lending Class Prime 2yr 5yr 10yr
Ag - farm land 1.77% 4.64% 4.38% 3.64%
Ag - production 1.61% 4.48% 4.19% 3.45%
Construction -Commercial 2.87% 5.95%
Construction multifamily 2.87% 6.00%
Construction Residential 2.87% 6.10%
Construction Other 2.87% 6.25%
Consumer 1.77% 4.64% 4.38% 3.64%
Hotel 2.38% 5.29% 5.11% 4.41%
Industrial 1.82% 4.70% 4.44% 3.71%
Manufactured Housing 1.82% 4.70% 4.44% 3.71%
Mixed Use 1.82% 4.70% 4.44% 3.71%
Multifamily 1.87% 4.77% 4.52% 3.79%
Office 1.87% 4.75% 4.50% 3.77%
Retail 1.87% 4.75% 4.50% 3.77%
Self Storage 1.77% 4.64% 4.38% 3.64%
Other 1.87% 4.75% 4.50% 3.77%
For information regarding our Loan Pricing Model or Customer Profitability Services, please
contact Kim Jackson, Mike Middleton or Janet Leung at 877-777-0412,
info@bancinvestment.com
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11. BANK ACTIVITY
BIG Metrics
Texas ratio trend lines for Q2 leveled off slightly from Q1 as the nationwide Texas ratio average
fell to 39.4% from 41.1% a quarter ago. The state of Washington had the highest Texas ratio but
even there, the level declined slightly from Q1.The state of Michigan, last quarter’s Texas ratio
“leader,” improved to 5th place, while the lowest Texas ratio in the nation was found in
Massachusetts, which has had the lowest ratio for the past 5 quarters. For the record, Texas’
Texas ratio was 30.7% in Q2, putting the Lone Star state in 35th place overall.
If you like data, you’ll love BIG Metrics. Give us a call today for your free tour.
Michael Stinson
Vice President – BIG Metrics
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12. Real Estate Market Trends - Special Report
Overview
According to the Bureau of Economic Analysis, for the first time in 4Y growth was generated in consumption, fixed Office
investments, exports, inventories and government expenditures. Wrapping up the 1H, GDP grew an annualized 2.4% 1
in the 2Q down from 3.7% in the 1Q. Real estate properties performance continued mixed, with multifamily properties gain
leading the pack and retail still languishing. The 2H of 2010 may not look as brightly as the economy wanes. reported
propertie
Mutifamily Market
The multifamily sector surfaced from its bottom, following a 2nd quarter of rising rents and posting the 1st quarter of
falling vacancies in over 2Y. Net absorption totaled over 46k units, the largest quarterly gain in occupied space in 10Y
of which 70% stemmed from existing buildings. However, completions remained 57% vacant, up from 53% in the 1Q,
as asking rents topped existing properties by 15%. 1 in 10 new properties were at least 30% vacant.
Performance may not grow in a linear fashion as long as job growth remains questionable. NY exemplified this
behavior this quarter, with both vacancy and rents rising. As for the next several years, expect net absorption to
continue around 100k units and annual completions to remain well below 100k units.
Quarterly Cap Rates 2006-2010 National Quarterly Conditions
Period Cap Rate Rent %Δ Vacancy Rate
Present Qtr 2Q 10 7.30% Q3 09 $971 -2.0% 7.9%
Market Low 1Q 06 6.14 Q4 09 964 -0.7 8.0
Market High 3Q 09 7.60 Q1 10 967 0.3 8.0
Q2 10 973 0.6 7.8
Top Markets Bottom Markets Y 09 964 -2.9 8.0
Net
Charleston 4.8% Las Vegas -3.9% Y 10 978 1.5 7.8 and
Colorado Springs 4.4 Tacoma -3.0 Y 11 995 1.7 7.2 completi
Columbia 4.3 Westchester -2.3 Y 12 1,021 2.6 6.7 vacancie
witnesse
US Aggregate Revenue Growth -0.1 Y 13 1,052 3.0 6.4
Regiona
asking
Source: Reis, Inc.
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13. Real Estate Market Trends - Special Report
Office Market
fixed Office vacancies rose in 49 of 82 markets, falling from 60 in the 1Q and 67 at the end of 2009. The market dropped Overall,
% 1.4mm sq. ft in occupied space in the quarter. However, submarkets with business districts posted a net absorption benefit
operties gain of 2.6mm sq. ft. as some businesses attempt to catch the bottom and lock in lower rent prices. Only Pittsburgh net
reported a YOY rise in revenue / sq. ft, although some submarkets reeled in growth over 10%. Overall, nearly half of all
properties saw asking rents drop with effective rents falling another 80bp. 65 of 82 markets took on declines.
of
Y Quarterly Cap Rates 2006-2010 National Quarterly Conditions
Q, Period Cap Rate Net Absorption Rent % Δ Vacancy Rate
Present Qtr 2Q 10 7.37% Q3 09 -19.2 $22.87 -2.2% 16.6%
this Market Low 2Q 07 6.22 Q4 09 -13.9 22.43 -1.9 17.0
to Market High 1Q 10 8.23 Q1 10 -10.8 22.25 -0.8 17.3
Q2 10 -1.4 22.07 -0.8 17.4
Top Markets Bottom Markets Y 09 -79.0 22.43 -8.9 17.0
Pittsburgh 2.2% Orange County -13.9% Y 10 -14.3 22.01 -1.9 17.7
New Haven 0.4 San Jose -13.7 Y 11 29.6 22.18 0.8 17.3
Charleston -0.2 Phoenix -12.6 Y 12 48.5 22.63 2.0 16.8
US Aggregate Revenue Growth -6.9 Y 13 59.5 23.29 2.9 16.1
Retail Market
Regional & Super Regional
Net absorption continued in the negative, dropping 2.2mm sq.ft. for neighborhood
and community shopping centers as demand remained muted. With this in mind, Vacancy Rate
completions totaled only 355k sq. ft. (the lowest quarterly addition in 10Y) leaving 3Q 09 8.6%
vacancies up only 10bp, the lowest rise since the end of 2007. 31 of 80 markets 4Q 09 8.8
witnessed a rise in vacancies in the quarter while rents dropped in 67.
1Q 10 8.9
Regional and super regional malls hit the 7th consecutive quarter of both falling 2Q 10 9
asking rents and yet another record vacancy rate (9%).
Quarterly Cap Rates 2006-2010 National Quarterly Conditions
Period Cap Rate Net Absorption
Rent Rent % Δ Vacancy Rate
Present Qtr 2Q 10 8.58% Q3 09 -4.4 $16.89 -7.0% 10.3%
Market Low 2Q 07 7.74 Q4 09 -2.5 16.75 -0.8 10.6
Market High 2Q 09 9.97 Q1 10 -2.5 16.62 -0.8 10.8
Q2 10 -2.2 16.53 -0.5 10.9
Top Markets Bottom Markets Y 09 -22.1 16.75 -3.7 10.6
Louisville 1.1% Providence -7.8% Y 10 -6.9 16.42 -2.0 11.3
Memphis -0.3 Orlando -7.6 Y 11 -1.6 16.30 -0.7 12.0
Denver -0.9 Rochester -7.5 Y 12 17.9 16.37 0.4 11.9
US Aggregate Revenue Growth -3.7 Y 13 32.2 16.62 1.5 11.3
Source: Reis, Inc.
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14. Real Estate Market Trends - Special Report
Industrial Market
dropped Overall, industrial performance will gain from growth in the global economy and port cities will be among the first to
sorption benefit. For some markets, like Dallas and Houston, the turn around will begin in the latter half of this year with positive
ttsburgh net absorption. As for the rest, the 2H will slow compared to the first half as the domestic economy wanes.
all
Top Markets 2009 National Quarterly Conditions
Baltimore -1.1% Net Absorption Rent %Δ Vacancy Rate
Jacksonville -1.5 Y08 -1.7 $4.65 -1.1% 10.2%
Pittsburgh -1.9 Y09 -72.7 4.35 -6.5 11.4
US Aggregate Rent Growth -6.5 Y10 -16.7 4.18 -3.9 11.8
Bottom Markets 2009 Y11 43.9 4.19 0.2 11.5
Miami -9.6% Y12 71.8 4.28 2.1 11.1
Palm Beach -9.4 Y13 82.4 4.39 2.6 10.9
Tampa - St. Petersburg -8.8 Y14 109.3 4.52 3 10.6
Source: Reis, Inc.
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18. LONG TERM MARKET EXPECTATIONS
TREASURIES NOW as of 8/31/2010
Current Treasury Curve
1YR 0.24
2YR 0.48 3.30
3.20
3YR 0.70
5YR 1.33
2.45
10YR 2.47 2.47
1.70
1.33
0.95
0.70
0.24 0.48
0.20
1YR 2YR 3YR 5YR 10YR
TREASURIES 1Y FORWARD as of 8/31/2010
1YR 0.72 1Y Forward vs. Now
2YR 0.93
3YR 1.28 3.20
2.75
5YR 1.91
10YR 2.75 2.45
2.47
1.91
1.70
1.33
1.28
0.93
0.95
0.72 0.48 0.70
0.24
0.20
1YR 2YR 3YR 5YR 10YR
TREASURIES 2Y FORWARD as of 8/31/2010
2Y Forward vs. Now
1YR 1.15
2YR 1.56
3.20
3YR 1.91 3.00
5YR 2.50 2.50 2.47
2.45
10YR 3.00
1.91
1.56
1.70
1.33
1.15
0.95
0.48 0.70
0.24
0.20
1YR 2YR 3YR 5YR 10YR
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19. OTHER IMPORTANT DATA
LIBOR MARKET EXPECTATIONS
1YR 2YR 3YR 5YR 10YR
LIBOR 6M Forward 0.60 1.07 1.82 3.03 3.14
LIBOR 1Y Forward 0.72 1.19 1.98 3.19 3.18
LIBOR 2Y Forward 0.95 1.58 2.31 3.51 3.24
LIBOR 6M Forward
LIBOR 1Y Forward 2Y Forward vs. 1Y Forward vs. 6M Forward
LIBOR 2Y Forward
4.25
3.24
3.25
3.18
3.14
2.31
2.25
1.98
1.82
1.25
0.95
0.72
0.60
0.25
1YR 2YR 3YR 5YR 10YR
BALTIC DRY INDEX - 1 YEAR HISTORY
Last Price 2713
High 11/19/09 4661
Average 2979
Low 7/15/10 1700
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20. OTHER IMPORTANT DATA
OIL PRICES (INFLATION) - 5 YEAR HISTORY
Last Price 71.84
High 7/03/08 145.29
Average 74.61
Low 12/19/08 33.87
UNEMPLOYMENT RATE (JOBS PICTURE) - 5 YEAR HISTORY
Last Price 9.6
High 10/31/09 10.1
Average 6.5
Low 10/31/06 4.4
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21. OTHER IMPORTANT DATA
GDP (UNDERLYING ECONOMIC GROWTH) - 5Y HISTORY
Last Price 1.6
High 3/31/08 5.4
Average 1.0
Low 12/31/08 -6.8
1 MONTH LIBOR (APPROX. BANK FUNDING COSTS) - 5Y HISTORY
Ask price 0.25781
High 9/07/07 5.82375
Average 2.98330
Low 3/01/10 0.22813
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23. KEY UPCOMING DATES
FOMC MEETING DATES FOMC VOTING MEMBERS
01/28/09 0.00- 0.25% Risk to Growth 1 Ben Bernanke (Chairman)
03/18/09 0.00- 0.25% Risk to Growth 2 James Bullard
04/29/09 0.00- 0.25% Risk to Growth 3 William Dudley
06/24/09 0.00- 0.25% Risk to Growth 4 Elizabeth Duke
08/12/09 0.00- 0.25% Risk to Growth 5 Thomas Hoenig
09/23/09 0.00- 0.25% Risk to Growth 6 Donald Kohn
11/04/09 0.00- 0.25% Risk to Growth 7 Sandra Pianalto
12/16/09 0.00- 0.25% Risk to Growth 8 Eric Rosengren
01/27/10 0.00- 0.25% Risk to Growth 9 Daniel Tarullo
03/16/10 0.00- 0.25% Risk to Growth 10 Kevin Warsh
04/29/10 0.00- 0.25% Risk to Growth
06/24/10 0.00- 0.25% Risk to Growth FOMC ALTERNATE MEMBERS
08/12/10 0.00- 0.25% Risk to Growth 1 Christine Cumming
09/23/10 2 Charles Evans
11/04/10 3 Richard Fisher
12/16/10 4 Narayana Kocherlakota
01/26/11 5 Charles Plosser
KEY UPCOMING ECONOMIC DATA
Date Indicator Date Indicator
9/1/2010 Construction Spending MoM 9/17/2010 Consumer Price Index
9/1/2010 ISM Manufacturing & Prices Paid 9/20/2010 NAHB Housing Market Index
9/1/2010 Vehicle Sales 9/21/2010 Building Permits & Housing Starts
9/2/2010 Pending Home Sales 9/22/2010 House Price Index
9/3/2010 Employment Report 9/23/2010 Leading Indicators
9/8/2010 Consumer Credit 9/23/2010 Existing Home Sales
9/9/2010 Trade Balance 9/24/2010 Durable Goods Orders
9/10/2010 Wholesale Inventories 9/24/2010 New Home Sales
9/13/2010 Monthly Budget Statement 9/27/2010 Chicago Fed Nat Activity Index
9/14/2010 Business Inventories 9/28/2010 Consumer Confidence
9/14/2010 Advance Retail Sales 9/28/2010 S&P/ Case Shiller Home Price Ind
9/15/2010 Capacity Utilization 9/28/2010 Richmond Fed Manufact. Index
9/15/2010 Empire Manufacturing 9/30/2010 Personal Consumption
9/15/2010 Industrial Production 9/30/2010 GDP Price Index
9/15/2010 Import Price Index 9/30/2010 Core PCE QoQ
9/16/2010 Producer Price Index 9/30/2010 Chicago Purchasing Manager
9/17/2010 U. of Michigan Confidence 9/30/2010 NAPM-Milwaukee
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24. DISCLAIMER
The information contained in this document is privileged and confidential. If the reader of this message is
not involved in trading or financial service activities, or responsible for delivering this message to the
intended recipient, you are hereby notified that any distribution or copying of this communication is strictly
prohibited. If you have received this communication in error, please notify the Banc Investment Group
immediately at 877-777-0412. This information does not constitute either an offer to sell or a solicitation of
an offer to buy any of the securities referred to herein. Offers to sell and solicitations of offers to buy the
securities are made only by, and this information must be read in conjunction with, the final Prospectus
Supplement and the related Prospectus or, if not registered under the securities laws, the final Offering
Memorandum (the “Offering Document”). Information contained herein does not purport to be complete
and is subject to the same qualifications and assumptions, and should be considered by investors only in
the light of the same warnings, lack of assurances and representations and other precautionary matters,
as disclosed in the Offering Document. This information may include certain assumptions and no
representation is made that it is accurate or complete or that any returns indicated will be achieved.
Changes to assumptions may have a material impact on returns. Past performance is not indicative of
future results. Price and availability are subject to change without notice. Past performance is no
guarantee of future results. Investment return and principal value of mutual fund investments may
fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost.
Mutual funds are not FDIC insured, not bank guaranteed and may lose value. Customers should rely on
their own outside counsel, regulator, or accounting firm to address specific circumstances. Additional
information is available on request. Banc Investment Group is a member of FINRA and SIPC, and the
sister company of Pacific Coast Bankers' Bank. This document cannot be reproduced or redistributed
outside of your institution without the written consent of the Banc Investment Group. Banc Investment
Group is the sister company of PCBB, and all securities are offered through BIG.
Source for data is Bloomberg, dealer provided documents and proprietary calculations or research. This
package is created specifically for independent banks as an added monthly service and provided by
Steve Brown, Chris Nichols and the rest of the team at Banc Investment Group.
340 Pine Street, Suite 401, San Francisco, CA 94104
ph. 877-777-0412
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