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

NOVEMBER 29, 2023

One of the lessons that was driven home at the recent American Banker Small Business Banking Conference in Nashville was the difference in marketing between large national banks and community banks, particularly deposit marketing. Most national and regional banks allocate marketing resources to recently acquired customers to get them to build deposit balances and purchase other products, while most community banks do not.

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South State Correspondent

NOVEMBER 29, 2023

Community banks are striving to increase loan yield and maintain their cost of funding (COF). Unfortunately, pressure on COF is expected to remain, and loans will reprice slower than expected as borrowers with below-market rates will wait until the last maturity day to refinance their credits. We have created and used a novel structure to take advantage of the inverted yield curve to allow community banks to increase net interest margin (NIM) and fee income on these existing fixed-rate loans.

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South State Correspondent

OCTOBER 23, 2023

Good commercial lenders use commitment letters and proposal letters to their advantage. A proposal letter (or letter of intent) expresses interest from the lender before credit approval is obtained. A commitment letter evidences the lender’s commitment to lend. It is only furnished after preliminary credit approval and typically contains the following language: lender commits to provide the loan on, and subject to, the terms and satisfaction of conditions set forth herein.

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South State Correspondent

OCTOBER 25, 2023

Halloween is approaching, so we might as well talk about death. Checks are dying and about to die quicker, given the rise of instant payments. In the next two years, many banks will have strategic plans to phase checks out, given their cost and reduction in frequency. Checks are getting to the point where they are too costly to process for the bank, business, and household.

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South State Correspondent

OCTOBER 25, 2023

After Brief Rally, Treasury Yields Head Higher Again Treasury yields are moving higher once again this morning as the Treasury’s expected announcement next week of increased auction sizes is starting to weigh on markets, and the lates PMI and new home sales offer little indication of a slowing fourth quarter economy. Presently, the 10yr is yielding 4.91%, down 20/32nds in price while the 2yr is yielding 5.09%, down 1/32nd in price.

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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 13, 2023

Most banks have still not committed to RTP® or FedNow SM for their commercial customers – a bank’s most significant single profit driver. Most banks ignore instant payments or are still worried about fraud and research. The irony is that of the estimated $25 trillion in B2B payments in the U.S., 33% are still made via check that contains more than $8B of fraud per year.

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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

AUGUST 3, 2023

Seasoned bankers call it “The Distributor Tactic,” and it is a little-discussed technique used for ages in banking to speed up the sales cycle to land commercial bank deposits and treasury management accounts faster. The key to this tactic is to know that very few commercial checking customers utilize any medium or high-value treasury management services at banks (see below).

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South State Correspondent

JUNE 30, 2023

Many banks pride themselves on superior customer service, and approximately 90% of all community banks believe that they provide an above-average level of customer service (the math cannot work that way). The reason bankers should want to provide an above-average level of service is to increase profitability, which translates to charging customers more in the form of higher loan rates, lower deposit rates, and more charged fees.

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South State Correspondent

JUNE 27, 2023

ISO 20022 is an international standard, a language for electronic data exchange between financial institutions, and was developed by the International Organization for Standardization (ISO). It’s a way for banks to speak with each other, and it started to be phased in during the first quarter of this year with the goal of a complete conversion by 2025.

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South State Correspondent

MAY 31, 2023

It is a dangerous troupe in banking that an omnichannel approach is best. The concept that we allow the customer to choose how they want to bank often enables the bank to be passive in its position and give up agency. Branching, for example, is too expensive to be all things to all people. In this article, we look at cell phone tracking data for about 1,000 branches across the industry to derive insights to help banks increase branch engagement and boost branch profitability.

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South State Correspondent

MAY 30, 2023

The yield curve is currently inverted, and the FOMC may take a pause at its next meeting in June. Uncertainty about the evolution of the economy and the path of future interest rates and the unusual inverted yield curve shape affords a prime opportunity for bankers to provide sound, trusted advice to clients. This is the time for bankers to offer loan structuring solutions to help customers solve business problems, mitigate risk, and manage balance sheets and cash flows.

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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 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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Lending Capital Management Tools 195

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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social media Community Bank Analysis Training 195

South State Correspondent

FEBRUARY 28, 2023

Many community banks today are willing to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV). Banks typically approve credits above 1.20x DSCR and below 75% LTV – with many loan-specific factors that may skew these acceptable levels. For competitive reasons, we see banks dipping to 1.10X DSCR, and some deals are approved at 85% or even higher LTVs.

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South State Correspondent

FEBRUARY 28, 2023

In our industry, many banks need to put more thought into the science and strategy of deposit promotions. This is, unfortunately, occurring as the number of deposit promotions is approaching a near-term high, and banks are throwing away money like an untargeted ad campaign. Not leveraging media, not having a current deposit pricing strategy, not leveraging relasticity data , and taking a “one-size-fits-all” approach undermine the average deposit promotion strategy.

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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

JANUARY 18, 2023

Retail Sales & PPI Reveal Softening Activity. Treasury prices are rallying some in early trading as overnight news from Japan is aiding the bid. The Bank of Japan decided not to widen the band on its Yield Curve Control policy for their 10yr bond from the current -50bps +50bps range. By not widening the range, and implicitly denying higher yields, foreign markets are reacting to the dovish action by rallying their local bonds as is the case here, but we do have some domestic news items that

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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

NOVEMBER 27, 2022

It was the famous England vs. France chess match back in 1834, where the French opened with a simple yet potent attack. England came out, moving a pawn to the center of the board. The French stopped the pawn’s advance and used the combination of their bishop, rook, and knights to counterattack England’s exposed players. The set of moves has become known as the “French Defense” or “The French” and is one of chess’s most famous opening moves.

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South State Correspondent

NOVEMBER 30, 2022

Banks have ceased using LIBOR to price assets and liabilities after 2021. The remaining LIBOR cash and derivative instruments will continue until June 30, 2023. At that point, all LIBOR settings are expected to be discontinued, and most legacy LIBOR contracts will be converted to a Fallback Rate (effectively, compounding daily SOFR plus a spread adjustment).

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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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