Things Looking Up In spite of the buzzkill of the previous section, a community bank’s universe just performs better when short rates are below long ones. Regardless of which part of the balance sheet you’re responsible for, it’s easier to price in relative risk/reward. For well over a year, the highest‑yielding bank‑suitable bonds have been CMO (collateralized mortgage obligation) monthly floaters. That’s fun for a while, but that’s not how financial instruments are supposed to work longer‑term. Lower risk (i.e. lower duration) is supposed to produce lower yields. I also suspect that “betas” for community bank deposits will be friendly into 2025. Interest rate models weren’t built for 2022‑23, in which overnight rates spiked 525 basis points (5.25%) in just 16 months. The initial bulge in net interest margins (NIMs) started to shrink early in 2023 and are now about where they were before the tightening cycle began. From conversations I’ve had with community bankers, anecdotally and otherwise, cost of funds should begin to retreat. Deposit managers have demonstrated their ability to manage NIMs through plenty of rate cycles and rate shocks, and I see no reason to doubt their capabilities now. The big picture is the industry has held up remarkably well through a generation‑high interest rate environment that resulted from Fed tightening activity, and inflation, that most of today’s Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed‑income broker‑dealer for community banks. Balance Sheet Webcast in November ICBA Securities and its exclusive broker, Stifel, will host their Quarterly Bank Strategy webinar on Nov. 7 at 1 p.m. EST. Several strategists and economists will make presentations, and up to 1.5 hours of CPE are offered. For more information and to register, contact Jim Reber or your Stifel rep. community bankers have never managed through. I’m looking forward to the return of a number of fourth‑quarter traditions in 2024: sweatshirts, football, leaves, crisp air and an interest rate environment that supports the community banking model. FMSI www.fmsiconsulting.com 913.955.3355 FMSI is a small business founded and located in Kansas, specializing in assisting community banks to succeed, a mission consistent with core CBA values. We have partnered with community banks for nearly 25-years providing core advisory services including asset/ liability, investment, and liquidity management. FMSI advisors actively assess market conditions and bank balance sheets of different size, mix, and capital levels. Market conditions are constantly changing presenting opportunities and challenges for CBA member banks. Interest rates are increasing for the first time in nearly a decade and now is a perfect time to partner with a trusted, industry leader. Establishing an FMSI relationship provides confidence your bank is optimizing the balance sheet, deploying necessary strategies, maximizing profitability, and managing balance sheet risks. FMSI is a Kansas CBA Endorsed Provider 7 In Touch
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