I’m hopeful that those New Year’s Resolutions are intact and having their desired effects. In taking one more look back into 2025, it dawns on me that the further we got into the year, the better the bankers’ comments were about their bank’s performance. The industry seems to be hitting on all cylinders (to use a hackneyed expression), but it seems to be true. Between continued solid credit quality metrics, reasonable loan demand and an interest rate scenario that looks to favor continued margin expansion, prospects are encouraging for a successful year for community banks. ICBA Successes Late last year, ICBA President/CEO Rebeca Romero Rainey and ICBA Chairman Jack Hopkins had a conversation about the state of the industry, and they also talked about the momentum in the industry. Legislation on mortgage “trigger leads,” proposals to lower the leverage ratios for community banks, and tax exemptions on 25% of ag and rural lending through the ACRE Act are all expected to help profitability. Also, making the 2018 Tax Cuts and Jobs Act marginal tax rates permanent for both C corps and S corps has provided clarity about portions of the balance sheet that have tax-affected assets — namely, municipal bonds. There is no debate that the Act has helped community bank earnings, though the composition of high-performance portfolios has shifted away from tax-frees into taxable instruments. You can view Rebeca and Jack’s conversation at www.icba.org. Bond Portfolios Are Helping It was documented here last year that portfolio yields are at a many-year high, thanks to the harsh doses of interest rate therapy in 2022-2023, and the slow-to-recede levels of market rates ever since. Community bankers continue to say they’re able to roll out of bonds yielding 1% or less that are finally, mercifully maturing, and whatever the proceeds are used for, net interest margins are improved. Which brings up the second half of this NIM equation. Deposits grew at community banks by about 4% last year, which is near the long-term run rate, and costs of funds have retreated in the past 18 months. Industry-wide, FDIC calculated community bank COFs have fallen by about 30 basis points (0.30%) since mid-2024. The net margin between bond portfolio yields and costs of funds is now over 1% for the first time in about three years. Yield Curve Thoughts Yes, Virginia, there is a Santa Claus. The same is true for the other 49 states and the District of Columbia. For community banks, it came in 2025 in the form of a steep(er) interest rate curve. We closed out the year with the “2s to 10s” spread around 67 basis points (0.67%), which is the best we’ve seen in four long years. Recall too that the average slope for the full 21st century so far has been right at 100 basis points, and it’s entirely possible we’ll get there sometime this year. Community Banks Set for a Robust 2026 By Jim Reber, President and CEO, ICBA Securities, MIBA Endorsed Vendor Off and Running 16 | The Show-Me Banker Magazine
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