Every year we analyze the historical cost of funding earning assets (COF) for all banks in the country. We perform this analysis on every bank from 1990 to the present to understand the drivers of COF, how banks can improve performance by controlling their COF and how funding costs will behave in the future.
Tag: Cost of Funds
In a recent article we published on Where Your Deposit Balances Are Going, we might have underplayed the looming competition for deposits particularly from money market mutual funds (MMF) and online-only banks. Our article failed to highlight an important signal that has only been present since April of this year. As such, our use of second-quarter data, in retrospect, didn’t adequately capture the risk that many community banks are and will be facing.
For any bank not convinced that we face a period of inflation and rising rates, last week was an eye-opener. The 10-year Treasury jumped 21 basis points and the probability higher rates increased. Since rates began to rise in December of 2015, we have now seen a 1.50% increase in rates with four more increases currently built into the market. Outside of the market, the Fed’s Open Market Committee (FOMC) expects another three to four increases in 2019.
We are in a period of rising rates. Since December of 2015, the Fed Funds Target has increased 75 basis points (bps). This is similar to the first set of rate increases that started back in early 2004 and ended in the third quarter of 2004 where the Fed Funds Target Rate also went up 75 bps. Back then, banks increased their cost of funds a scant four basis points.
Here at CenterState Bank, we specialize in Florida. Now, Florida has a lot of things going for it, but it has at least two major things going against it. One is an unspoken rule that if you own a bar or restaurant with an open-air patio, you have to have some guy impersonating Jimmy Buffett on a stool wearing a flowered shirt singing for tips. These guys are everywhere, and if you live here, it gets old. The other major drawback is that hunting for the highest rate on your deposits is a national pastime only eclipsed by baseball and trying to stay out of sinkholes.
Money-market mutual funds have been one of the most popular products for investors but recent changes have made the product less so. A couple years ago (HERE), we wrote about the tactical opportunity that banks had for capturing inexpensive deposits from institutional and corporate investors. The tactic worked beautifully as banks that focused on pitching their money market deposits and CDs saw an influx of funding back in late 2014 and 2015.
Most community banks do not use LIBOR (London Interbank Offered Rate) to set loan or deposit rates, yet LIBOR is probably the most important index for community banks. In fact, while Prime and some form of Treasury indices are much more prevalent as a loan index for community banks, LIBOR is far more important for community banks in setting loan yields and determining deposit rates.
If you handle deposits or look to issue a certificates of deposit special in the near-term, then you should read this because most banks get their callable certificates of deposit (CD) valuation completely wrong and, as a result, underutilize the product to help lower the funding cost of the bank. For the record, we are not advocates of any CD that markets on rate, as a majority of time a customer’s predilection for rate is highly correlated to low or negative lifetime value.
Long an issue of banks and public policy is the fact that more than half of American’s under save and 25% of households have no material savings at all. Yet, Americans spend more than $70B annually on various lotteries. The crossroads of that fact set is the reason why Congress passed legislation that in December of 2014 allows banks and credit unions to offer accounts that are eligible for randomly selected “savings promotion raffles” so long as their state of domicile doesn’t prohibit it.
As of December 2014, there were 6,518 FDIC insured financial institutions. Of the total number of insured financial institutions, 1,872 were less than $100mm in total assets while 3,477 were less than $200mm in total assets. At the top of the asset range, there were only 36 institutions with assets greater than $50B, and those 36 institutions account for 71% of all assets ($11.06B), 63% of all loans ($5.23B), and 69% of all deposits ($8.2B). The above data speaks to the concentration in the banking industry with all of its attendant problems for consumers, regulators an