EASING INTO THE FALL At Long Last, Some Rate Relief BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES I don’t know about you, but I’ve always looked forward to the early days of autumn. I’m of a certain vintage who remembers when September and October ushered in a break from summer heat (which seems to be later in the calendar these days), and there was a certain excitement around the back‑to‑school activities. Football fans eagerly await gridiron season, which is now in full swing, and baseball playoffs make their return. And this for 2024: rate cuts by the Fed! It’s been a while, but the tightening cycle that started in early 2022 has finally run its course. It appears the price stability mandate has been met sufficiently for the focus to turn to maximum employment. The rate cut in September marks the first time in 4.5 years that the target rate of fed funds has dropped. This adds still more anticipation for an exciting fall. Is Your Bank Ready? But maybe we’re getting ahead of ourselves. Let’s first take stock of where most depositories stand as the fourth quarter of 2024 begins. Earnings will not be a record for the community banking industry this year, as margin pressure has taken the froth off bottom lines. Some positives are that credit quality remains outstanding despite some headline warnings. A lot of the consumer/auto/credit card delinquencies, which are on the rise, seem more to be problems for non‑banks. The fear of commercial real estate’s market breakdown hasn’t happened yet either. Another piece of the earnings puzzle is interest rate risk. Community bankers have told me on many occasions since 2022 that they’ve had to get current, and informed, and creative, about managing their liabilities, which they admit had been on autopilot for years. Suddenly at the same time, the Fed was hiking at its fastest pace in over 40 years, and depositors were demanding higher rates or, even worse, moving to non‑bank alternatives. Collectively, the industry shifted from being very asset‑sensitive to about neutral between 2020 and today. What’s Next? So earnings are, well, meh, but delinquencies are still very low, and we think rate risk is under control. What to do about all this? If the bond market and the Fed are to be believed, and I’m not saying they are, we will finally see the interest rate curve assume a positive slope. And that’s when the fun should really kick in. But (there’s always a “but” in these columns) be warned: Multiple rate cuts, and a normal yield curve, will probably have less upside this time around for community banks, at least initially. In a “bull steepener,” which is what we’re likely to experience, short rates fall, and longer rates fall less or longer rates rise. Either way, since most community banks’ portfolio’s effective durations are longer than normal, the price appreciation of your current bonds may not be what you’re hoping for. (To put some numbers on it, a typical bank’s duration is now about 4.3 years versus about 2.5 years back in 2020, according to Stifel.) 6 In Touch
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