The word “rally” can be used for a number of purposes and in different contexts. For instance, it could mean a long-distance auto race over varying surfaces involving stages and checkpoints. It could mean a gathering of supporters to generate enthusiasm and momentum for an individual or cause; we’ve seen plenty of these during this election cycle. It can also refer to a comeback from some type of challenge. It may be an improvement in one’s health. It could be a spurt of energy to enable the completion of a task. Finally, it might be an analogy for sports or other competitions in which a participant or team overcomes a deficit to snatch victory out of the grasp of defeat. This final example is the general theme of this column. I hasten to say that the community banking industry, by most measures, is doing quite well. I’ve consistently heard from bankers across the country this year that “earnings are good.” So if there’s any catching up to do, it’s not in banking fundamentals. It has to do with – you guessed right – rising interest rates and the attendant drop in market values for your bonds. Here are a few ideas that may be worth considering as we approach year-end. Funding Options Suddenly, shockingly in some cases, community banks are having to consider using wholesale funds to manage their liquidity. This is an exercise that faded in relevance in 2019 as loan demand was beginning to wane, and has been in oblivion since. Not now: FHLB’s issued more debt in the third quarter than they did in the first two quarters combined, most of which was used to finance new advances to community banks. And with a little effort, a bank can lock down attractive (which I admit is relative) terms on longer-duration borrowings. Even with 5%-plus yields available on shorter assets, low-4% costs can be secured for FHLB floating rate advances swapped to fixed for five or so years. If you’re not inclined to execute a rate swap, traditional three- to seven-year advances are generally less expensive than brokered CDs. This is, in part, compliments of the inverted yield curve. “Income Deferral” This subheading is shorthand for “sell assets at a loss in this fiscal year, reinvest into higher-yielding bonds, and make back the loss before your original bonds mature.” All accountants worth their salt (I think I’m one of them) understand that pushing income into the future is a wise move from tax planning and cash flow standpoint. And, since all community banks own liquid assets at below-market rates (i.e., have unrealized losses) in a year in which they’re probably ahead of budget, the table is set for a classic holiday feast: tax swap. What makes this strategy viable in many cases is the ability to book a net-of-tax loss since selling bonds is considered an ordinary event for a community bank. When the proceeds are reinvested into tax-free instruments, the net loss is often recouped in short order. Your brokers are capable of modeling a number of possible transactions to determine the best course of FOURTH QUARTER RALLY SOME SUGGESTIONS ON HOW TO WRAP UP 2022 Endorsed Partner cbak.com 8 In Touch
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