Uncle Sean's Update - 12/30/22

​Happy Friday!
 
Happy New Year!!!  Here is the Uncle Sean Update for 12/30/22:
 

• WOW – what a crazy year!  No wild predictions for 2023 from me; but due to the very light news this week, Uncle Sean will give some “off the rails” commentary with some macro level financial analysis and counterparty risk highlights that we are looking at from the FedFis Financial Analysis Team going into 2023:
  • Rate Increases and Inflation (shocking, right???) - We went from essentially a zero interest rate environment to 425 bps increases from the Fed in about nine months to battle inflation that is still arguably way out of control.  This has resulted in a host of issues, but many of which are simply a re-balancing from the historic pandemic stimulus era:
    • Deposit implications - Starting to see some institutions offer deposit rates of 3.00% - 4.00% with no stipulations as the deposit glut runs off and bankers look at favorable Net Interest Margin (NIM) finally.  Not to mention the fact that banks are making north of 4% just by parking idle cash at the Fed.
    • CRE – Remains a bit of an unknown as the labor market remains extremely tight (for now) and workers mostly want to remain remote; but is offset in specific regions as large corporations continue to relocate to favorable tax states (Texas is booming and not just because of oil / energy).
    • C&I – Many corporations are feeling the strain of higher loan rates while at the same time battling labor conditions and inflationary material costs.
    • 1-4 Residential Mortgage and Personal Loans – The interest rate environment is creating havoc in the RE market which had run way too hot during the pandemic “work from anywhere” shut down phase (recall low housing inventory, labor, and lumber supply); and Credit Card delinquency rates are on the rise but are still below pre-pandemic levels.
    • Agricultural pressures – Continued drought conditions (Mississippi river flow), cybersecurity threats (think big picture for counterparty risk - Ag is considered critical infrastructure in the U.S.), Avian Flu record for 2022 and continued spread by wild migratory birds, and in some sectors we still have labor issues (narrowly avoided Rail strike which was made considerably worse by Mississippi river flow implications) pushing commodity prices.
  • AOCI for Securities portfolio - Many banks who bought securities with excess liquidity during the pandemic stimulus craze are now looking at material Accumulated Other Comprehensive Losses for AFS securities and equity concerns if they have to sell in the near term for liquidity (see comments about deposit rates above).  This could potentially have an impact on M&A activity as well for 2023.
  • And a few more unknown / uncontrollable variables that we are paying attention to:
    • How long will the Fed hold rates at 5+%; the war in Ukraine; State electricity grids as we continue to move to more renewable / rechargeable energy (California and Texas – are you listening???  LOL); FinTech bankruptcies (I’m looking at you “legacy FBO” model); and of course, regulatory concerns are always top of mind (Crypto, CRA, and third party / BaaS compliance)
  • But it’s not all gloom and doom – LOL!!!  Bankers (especially us more “seasoned” folks) are VERY good at navigating interest and inflationary risks via recurring ALCO meetings and Asset/Liability Management (ALM) simulation models; and are typically very in tune to geo-political and other commodity sensitive risks as well.  Not to mention the fact that bank capital levels are at all time high’s.  In summary, Uncle Sean is somewhat optimistic for 2023 even if it’s primarily because the re-balancing in 2022 sucked!  😊

 

• BMTX and First Sound Bank have agreed to mutually terminate their merger citing the current regulatory environment in relation to a fintech acquiring a bank; and a different economic model with interest rates being materially higher.
  • In a separate press release, BMTX went a little further stating they have signed a letter of intent (LOI) with a new sponsor bank “and is working towards a transfer of deposits to the new sponsor bank in the first half of 2023. This prospective new sponsor bank is Durbin exempt and will pay BMTX variable deposit pricing with better overall economics in the current interest rate environment than the current fixed rate agreement.”
    • Not overly surprising since Customers Bank (existing sponsor bank for BMTX) is $20B in total assets and obviously subject to the Durbin restrictions on interchange; and BMTX has been transparent about this for several months (reference BMTX IR Deck 3Q2022 page 10).

 

• Ah – some good news!  Looks like everyone came to their senses and just in the nick of time as the IRS announced they would delay the $600 reporting requirement for third-party payment platforms for another year that would have required payment platforms such as Venmo, PayPal, or Cash App to send 1099-K tax forms to anyone receiving over $600.  There has been significant confusion as to how to accurately classify certain payments that result in a taxable gain versus reimbursements and/or personal transactions. 
  • Previously, such payment services only had to report users' income to the Internal Revenue Service if they had more than 200 transactions, exceeding $20,000 in revenue.
  • Listening closely, you can hear millions of Americans give a sigh of relief all at once - LOL!!!!  But be prepared as it is just a delay in its current form, not a reversal.

 

• The SBF / FTX saga is the gift that just keeps on giving…  Apparently certain Alameda wallets suddenly became active just days after Sam Bankman-Fried was released on $250M bail….  Wait, what, how???
  • This gets better…  Cointelegraph is now reporting that SBF has allegedly cashed out $684,000 from a crypto exchange according to an on-chain investigation from addresses associated with Alameda Research wallets.  Note that these are just allegations.
  • However - KEEP IN MIND that this could also be a simple case of approved actions from now CEO, John Ray for the purpose of selling less stable assets and acquiring more stable assets in order to secure creditor funds…  I sure hope that is the case, but I have to admit that anything related to SBF just smells fishy and deserves a double take (once bitten, twice shy).

 

• Farmington State Bank, d/b/a Moonstone Bank (FDIC 6149) announced they have more than sufficient liquidity to cover the material FTX deposit exposure held at the bank that was recently made public.  Moonstone is awaiting guidance from the Delaware Bankruptcy Court on where to transfer these funds.
  • A quick look at their call report data (source: FedFis) shows a huge jump in deposits from $12.5M to $84M from Jun 2022 to Sept 2022 and a corresponding leap in Fed Funds Sold to cover the liquidity exposure (in layman’s terms, they took the FTX money and parked it at the Fed for safe keeping awaiting a BK court order).

 

• And a little bit of reprieve from higher prices as about 70 million Social Security recipients will start receiving their increased 8.7% Cost of Living Adjustment (COLA) beginning next week.  This is on top of the 5.9% increase last year; and is the largest since 1982.

 
 
Random Uncle Sean Stuff:

• Don’t forget to eat black-eyed peas on New Years Day for good luck and prosperity for the new year!  I have to admit that Aunt Patty and I are not huge fans of black-eyed peas, so here is how we do it:
  • One can of black-eyed peas and one can of drained Ro-Tel.  Add about ½ pound of partially cooked bacon (because it makes everything better) and simmer until fully condensed down.  Then eat it with tortilla chips and it tastes a lot like Bean Dip!  Oh-yeah!!!!
• Finally, here are a few of the funnier quips from this year:
  • BSA / AML / FML…  😲
  • OFAC around and find out!!!  I still laugh every time I read that.
  • Sam “Bankrun-Fraud”
  • New leadership titles – Jack Dorsey as “Block Head” and Elon Musk as “Chief Twit” – those are just great!!!
  • And one of my favorites from our very own Bobby Button (and I’m only slightly paraphrasing) – If your fintech client thinks that SARs is only about the coronavirus, they probably need to brush up on their AML compliance.  LOL!!!!  😝

 
 
Have a GREAT weekend and Happy New Year!!!
 
Uncle Sean
 
 
Sometimes known as Sean Mayo – contact me directly for scope and pricing of custom reports / analysis projects at smayo@fedfis.com | 214-604-6961 – or you can contact FedFis Sales Team at 512-960-0911 | info@fedfis.com #FedFisHasTheData FedFis
 
FedFis, LLC disclaimer – The views and opinions of Uncle Sean are of his own and may not necessarily represent the views, endorsements, and/or opinions of FedFis, LLC – we all know he’s a little bit different; but that’s why we love him.