Pub. 3 2013-2014 Issue 5

18 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE “The key to making the correct selection is to factor in all of the key areas of vendor management, especially in light of available guidance from the FFIEC.” Are You Monitoring Interest Rate Risk Effectively? I nterest rate risk (IRR) is of increasing con - cern for community banks and will be top of mind for bank regulators during 2014. Rates remained at all-time lows throughout 2013, and community banks have generally benefited from a reliable, low-cost source of funds, signifi- cant levels of liquidity, and improved credit quality. DEREK CRISWELL, PARTNER FRED PETERSON, PARTNER MOSS ADAMS LLP However, the industry continues to face significant margin compression, with yields on interest-earning assets declining in recent years, which has resulted in lower net interest margins and an overall lower level of community bank earnings. In response community banks have had to think outside the box, focusing efforts on explor- ing new sources of noninterest income, altering their asset mix toward higher-risk vehicles and implementing cost containment strategies. Ad- ditionally, many community banks have taken on more IRR than in the past through investing in higher-yield, longer-term assets with fixed rates to increase profitability. Extendingmaturities on interest-earning as- sets will yield higher returns in the short term. However, interest rates will inevitably rise, and