South State Correspondent

FEBRUARY 22, 2024

Banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 12% for the average community bank. However, for the average bank, their cost of capital is between 9% and 14% depending on the bank’s equity liquidity with an average of 12.5%. Why is that? One answer is that banks have the wrong strategic planning time horizon.

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South State Correspondent

JANUARY 16, 2024

There are many historical examples of some sophisticated and some less sophisticated entities imploding from the risk of derivatives. Barings Bank, Orange County (CA), Enron, Long-Term Capital Management, and other entities misused derivatives or didn’t understand the difference between hedging and speculating. Some bankers will soon hear about another example of banks using derivatives that, unfortunately, will lead to losses.

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South State Correspondent

JANUARY 17, 2024

In our last article ( HERE ), we highlighted the methodology around why banks should calculate and drive value through customer profitability and product profitability. We focused mainly on customer profitability and used risk-adjusted return on capital as a proxy for profitability. In this article, we wanted a different approach to arrive at the same conclusion but in a slightly different context.

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South State Correspondent

DECEMBER 13, 2023

Most market participants are focused on just one monetary policy tool available to the Fed – short-term, federal funds rates. However, the other critical monetary instruments available to the Fed are quantitative easing and tightening (QE and QT, respectively). While the Fed’s current actions on QT have been deemed long-term, slow-moving, and compared to watching paint dry, after years of QT, the impact is real and is affecting money supply and bank’s cost of funding (COF).

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South State Correspondent

DECEMBER 14, 2023

In banking, there is often a discussion about “who are our best customers?” Some banks rank customers against current profitability, others against lifetime profitability, and some use a technique called “RFM,” which stands for “Recency,” “Frequency,” and “Monetary.” This article explores the methodology and shows you what this analysis means for a typical bank.

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South State Correspondent

OCTOBER 19, 2023

If you want to know if your bank has an alignment problem, ask ten co-workers, ”What is your bank’s brand value proposition? If 80% or more say close to the same thing – that is fantastic, and you are likely in the top 1% of bank performance. If 60% of your co-workers say the same thing, move on, as that is good enough not to prioritize bank alignment.

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South State Correspondent

OCTOBER 12, 2023

Many parents have dealt with the issue of how to divide Halloween candy among siblings. It takes work. If all houses gave out the same candy, it wouldn’t be a problem. But houses give out different sweets. Further, trick-or-treaters have different preferences. Whatever the case, candy, and preferences are not all the same. As a result, candy is distributed unevenly, forcing parents concerned with equality to employ some game theory.

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South State Correspondent

OCTOBER 9, 2023

In two articles in the past few weeks ( here and here ), we discussed how the “higher-for-longer” interest rate environment will affect the community bank sector – continued increase in the cost of funds (COF), steady yields on loans, and a decrease in net interest margin (NIM) will put severe pressure on ROE for new loan originations. Community banks must improve the performance of their existing portfolio.

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South State Correspondent

SEPTEMBER 4, 2023

We analyzed the loan performance (return on equity, loan yield, fee income, and loan size) of hedged borrowings in a large group of community banks and compared this to the community bank industry averages. We conclude that loan-level hedging offers community banks a strong competitive advantage in the current interest rate and competitive commercial loan and deposit environment.

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South State Correspondent

SEPTEMBER 6, 2023

We have discussed the importance of bundling or packaging deposit account services to speed up customer choices, increase profitability, and enhance deposit performance. However, many banks still offer just two choices, whereas if they offered three, they would increase profitability. In this article, we examine how behavioral deposit pricing works and how to use it to your bank’s advantage.

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South State Correspondent

AUGUST 28, 2023

Bankers need to consider the term structure of rates, also known as the yield curve shape, when structuring and pricing commercial loans to maximize return and reduce risk. Many bankers and borrowers are convinced that a recession is imminent, but the current term structure of rates does not necessarily establish this conclusion. The yield curve’s predictive power is not causal; instead, there is a weak relationship between short and long-term rates, and it is not just the slope of the c

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South State Correspondent

JULY 19, 2023

Our previous article discussed how the banking industry is taking advantage of interest rate swaps to offer borrowers lower rates, allowing banks to earn higher yields, generate substantial fee income, and protect deposit relationships. Of the largest 250 banks, 90% are using interest rate swaps, and because these largest 250 banks hold 83% of all loans, interest rate hedging tools are widely used in approximately 75% of the loan marketplace.

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South State Correspondent

JULY 19, 2023

If you are looking to see the future of how banks will utilize artificial intelligence (AI), look no further than marketing. Even if you are not a bank marketer, this article is worth a read to understand AI’s capabilities. Bank marketing AI is ground zero to showcase the transformation that is already taking place. We have spent countless hours researching and testing countless applications to provide you with our fourteen favorites that will boost your bank’s capabilities and alter your

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South State Correspondent

MAY 22, 2023

We have used the term “second-order thinking” in our writings, and some bankers were curious about what exactly we mean. The term came to popularity in banking after Howard Marks wrote his seminal work on investments – The Most Important Thing. The “most important thing,” as described in the book, is the ability to drill down in order to get to the heart of an issue.

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South State Correspondent

MAY 23, 2023

Lending is getting riskier. Due to higher rates, inflation, and a slowing economy, the three essential credit metrics – probabilities of default (POD), POD rate of change, and POD volatility- have all materially increased from 2022. In this article, we look at what is happening at the state level, look at 30 common industries where credit risk is rising, and 30 industries where credit risk is the lowest.

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South State Correspondent

MAY 2, 2023

Last week, we published an article [ here ] discussing how fair value accounting for assets and liabilities may have prevented the failure of Silicon Valley Bank, even if sound risk mitigation practices were not resolutely embraced by management. We argued that valuing assets at historical value or measuring net interest margin (NIM) is not only a static view of cash flow but also backward-looking.

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South State Correspondent

MAY 3, 2023

Adjusting pricing for deposit tiering according to account size is essentially a tradition in banking. A typical bank’s money market accounts often have six tiers ranging from $2,000 to $100,000. The question that always comes up is whether you have suitable tiers and the correct number of tiers. Are you using your tiers to drive profit by giving low rates, or are the tiers just confusing your customer and driving-up operational cost?

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South State Correspondent

MAY 3, 2023

Last week, we published an article [ here ] discussing how fair value accounting for assets and liabilities may have prevented the failure of Silicon Valley Bank, even if sound risk mitigation practices were not resolutely embraced by management. We argued that valuing assets at historical value or measuring net interest margin (NIM) is not only a static view of cash flow but also backward-looking.

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South State Correspondent

APRIL 1, 2023

While banking returned to some semblance of normal, many banks continued under short-selling pressure. In this article, we recap the latest data on deposits and banking in order to give you an updated picture. Deposit Balances The Fed’s H.8 report, published last Friday, provides an interesting snapshot of the banking system’s assets and liabilities through March 22.

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South State Correspondent

APRIL 3, 2023

In recent articles ( here and here ), we discussed why banks that take the interest rate movement risk demonstrate lower performance as measured by return on assets (ROA). Empirical evidence, historical bank failures, and common sense teach us that many risks do not translate to higher yields. The second article compared and contrasted community banks’ pay-for-risk and relationship business models.

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South State Correspondent

APRIL 3, 2023

Banking has now arrived at a speed that it cannot handle. While there have always been problems in banks’ asset-liability models (ALM) and liquidity stress test models, the current environment exacerbates this problem. Recent bank failures hurting public perceptions, the current market trends of higher rates, Quantitative Tightening, digital banking, social media, and a flight to safety have increased the difference between model and observed liability durations.

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South State Correspondent

MARCH 19, 2023

Most bankers are familiar with the concept of risk-return tradeoff, which states that potential return rises with an increase in risk. Low-risk assets pay lower potential returns, whereas high-risk assets pay higher potential returns. Further, some bankers are taught early in their careers that they are in the business of taking risks, and banks would not earn profits without it.

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South State Correspondent

MARCH 21, 2023

You have undoubtedly heard or seen the various commercials and likely have even received phone calls about Employee Retention Credit, or ERC. The need for a known, reliable brand creates an excellent opportunity for community banks to help small business customers while building deposit balances. We introduced our ERC Assist program several months ago so that we can attest to the efficacy of this product.

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South State Correspondent

FEBRUARY 22, 2023

You can always tell a good banker by the way they handle their deposits. With loans, it’s hard to discern expert-level skills unless you know the market and the credit. Deposits, however, are pure. When we analyze a bank, it is typically the first thing we look for, as deposit pricing and structure are the metrics that tell you the most about the quality of a bank.

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South State Correspondent

FEBRUARY 20, 2023

Community bankers need to understand their competitive landscape. Who the competition is, what the lending competition is offering, their delivery channels, and service levels can help community banks differentiate their services and enhance their competitive advantage. Understanding the competitive banking landscape helps community banks set proper pricing, respond to rival marketing, and compete more effectively.

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South State Correspondent

JANUARY 11, 2023

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 inexperienced bankers, and it is worth a review – while the rate impacts an account, the mere advertising also affects the account.

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South State Correspondent

JANUARY 11, 2023

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 (R 2 ) 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 decades.

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South State Correspondent

JANUARY 3, 2023

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 by an increase in net interest margin (NIM), primarily due to rising interest rates as the Federal Reserve embarked on the most severe hiking cycle in the last four decades.

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South State Correspondent

JANUARY 4, 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 to accomplish both the short and long-term objectives of a top-performing bank.

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South State Correspondent

NOVEMBER 14, 2022

reIt is counterintuitive that you might want to advise borrowers to do a loan refinancing at this stage of the interest rate cycle. The FOMC has raised short-term interest rates by 3.75% in the eight months between March and November. The market is now forecasting an additional 1.25% in hikes by early next year. Borrowers and lenders continue to be surprised by the speed of these increases.

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South State Correspondent

NOVEMBER 15, 2022

the As interest rates go back up and volatility continues to remain high, banks’ cost of capital has undergone a significant shift up. Your cost of capital is essential to know for several reasons. Mostly, it gives your board and shareholders a yardstick in which to gauge a bank’s return. Produce over your cost, and you will be able to attract more capital.

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South State Correspondent

NOVEMBER 14, 2022

The FOMC has raised short-term interest rates by 3.75% in the eight months between March and November. The market is now forecasting an additional 1.25% in hikes by early next year. Borrowers and lenders continue to be surprised by the speed of these increases. As short-term rates have gone up, so has the cost of credit for all borrowers, especially those who want to borrow for shorter terms (up to five years).

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South State Correspondent

OCTOBER 5, 2022

Treasuries Rethink a Fed Pivot. Treasury yields are higher this morning as investors rethink the probabilities of a Fed pivot anytime soon. While the UK backed off from its inflation-inducing fiscal plan, the central bank of Australia hiked rates by 25bps when 50bps was expected, and the flight-to-safety trade around Credit Suisse Bank all aided the argument for a possible Fed pivot, there was enough push back in Fed speeches to dim the odds of a near-term pivot.

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South State Correspondent

OCTOBER 4, 2022

While we believe in “Wowing” your customers as a concept, we don’t believe in it as a strategic focus as a bank. The idea is too challenging to execute. However, we do believe that every banker should understand what “customer delight” (we will use interchangeably with “wowing”) quantitatively looks like so delight can be operationalized.

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South State Correspondent

OCTOBER 4, 2022

The Federal Reserve Open Market Committee (FOMC) has raised short-term interest rates by 3.00% in the six months between March and September. The market is now forecasting an additional 1.25% in hikes by year’s end, with the next move coming on November 3rd. Many borrowers and market participants have been surprised by the speed of these increases.

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South State Correspondent

OCTOBER 3, 2022

The Week Opens with Treasuries in Rally Mode. The week opens with Treasuries rallying on a combination of flight-to-safety and talk that yield highs for this cycle may be in place. Since touching 4% last Wednesday the 10yr yield has fallen to 3.68% this morning, up more than a point in price. The flight-to-safety component revolves around rumors that Credit Suisse Bank is facing capital concerns.

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South State Correspondent

SEPTEMBER 23, 2022

The Fed and Their Forecasts. Now that the FOMC meeting has come and gone, and the Treasury and equity markets have resumed their selling as a consequence, let’s take a look at those forecasts and see what they might tell us. A year ago, the Fed was declaring rates would be lower for longer, and that they wouldn’t be tightening rates until 2024, at the earliest.

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