March 06, 2013Daily Rates & Viewpoints From the Officers & Staff of TIB.

Is NIM a Good Indicator of Performance?

Traditionally, bankers tend to focus on two indicators of profitability – ROA and NIM, while shareholders tend to focus (naturally) on ROE. As a result, both groups want to compare the bank to other banks on these three key ratios (for a start). It has always been a tricky job because the banks might have different structures, balance sheets, and business plans. Bankers got pretty good at customizing their peer groups to banks which looked like them. I think there’s a new variable that’s been added that can make banks that used to look like each other, now perform quite differently. That factor is the general increase in liquidity, particularly if that money is kept in short-term low yielding investments.

I first noticed this as I was talking to bankers about their NIM compared to state and national averages (from the FDIC Quarterly Banking Profile). Some banks that had always been above average, now were below average – and some banks that were below, now were above. I knew there could be several possible explanations for each bank, and looked into the factors for each. I first looked at loan yields to see if they had declined (from asset quality or price concessions). This was a factor for some, but certainly not all. Next was the impact of declining yields on securities. This was a factor for most banks – but if it was a factor for most banks, then the average should have declined, as well. I also checked to see if something unusual had happened to cost of funds (maturing or prepaying FHLB advances for example). This was a cause for just a few. This left the impact of increased liquidity.
Most banks have seen an increase in liquidity. How much of an increase and what they did with it had different impacts on NIM and ROA. Oddly, banks that had the biggest increases in liquidity (often some of the strongest) and were the most conservative (keeping the money in short-term liquidity in case it left the bank) were the ones who suffered the biggest declines in NIM and ROA. Those that invested the excess liquidity (and invested it the earliest) had the least negative impact. I’m not saying that one strategy is good and the other is bad – I’m just saying that to compare results, you have to take the difference into consideration. 
How do you take the differences into consideration? First, recognize it. The FDIC Quarterly Banking Profile provides loans to assets, but not what liquidity is and where it’s invested. The UBPR (Uniform Bank Performance Report) provides average FFS and interest-bearing balances. It also provides average yields for loans and securities. These last two comparisons are always useful and not influenced by short-term liquidity.
On another note, NIM has always had another reason why it doesn’t correlate well with ROA and ROE. It doesn’t include costs for the different asset types. For example, banks that make commercial loans tend to have higher NIM, but also higher operating costs. Banks with large securities portfolios tend to have a lower NIM, but also lower operating costs (so more of the lower margin makes its way to the bottom line). The Federal Reserve used to publish the average costs for each product type in its Functional Cost Analysis (which proved this point) but that was discontinued in 1999. Now, we can only guess at the amount of impact. There’s a corollary to this – there’s nothing worse than to be structured to make loans and then put the money into lower yielding securities (let alone virtually no earnings on short-term liquidity).


Greg Meadows Greg Meadows
Sr. Vice President
gmeadows@mybankersbank.com

Market Levels @ 7:47 AM CST

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.20% Dow Jones 14253.77
3 - Month LIBOR 0.27% NASDAQ 100 3224.13
1-Yr LIBOR 0.73% S&P 500 1543.50
1-Yr CMT 0.15% Spot Gold 1574.40
Prime 3.25% Spot Silver 28.78
3-yr LIBOR Swap/Offer 0.51% Spot Crude Oil 90.49
5-yr LIBOR Swap/Offer 0.95% CRB Index 291.42
3 Mo - Fed Fund Futures 0.13% 6 Mo - Fed Fund Futures 0.13%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.00% 180 - Days    
0.19% 2 - Year 0.30% 11bp
0.33% 3 - Year 0.42% 9bp
0.77% 5 - Year 0.91% 14bp
1.90% 10 - Year 2.10% 20bp
3.11% 30 - Year    
171 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FNMA 1 03/27/18 3/15 1.00% 1.00%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.35% 86 / 3.34
30-Yr GNMA 3.50% 2.13% 101 / 5.50
*Duration @ 12 month Historical CPR
Morning Commentary: David Terrell

The Dow continues to make new highs in this crazy world, while treasuries inch higher.  The 10 year note’s yield has climbed for four straight days now and is back above 1.90%.   The ADP employment report is part of what is spurring today’s action.  January’s report was revised higher, along with a better than expected February.  Factory orders declined for the 2nd time in three months, along with a downard revision the previous month.  Canada has pledged to keep its rate unchanged for some time after inflation slowed more than projected.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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