2024 ISSUE 1 Continuing the Climb for Our Communities
INVESTMENT PRODUCTS Municipal Bonds Mortgage-Backed Securities Govt. & Agency Bonds Corporate Bonds Brokered CDs Money Market Instruments Structured Products Equities Mutual Funds ETFs FINANCIAL SERVICES Public Finance Investment Portfolio Accounting Portfolio Analytics Interest Rate Risk Reporting Asset/Liability Management Reporting Municipal Credit Reviews Balance Sheet Policy Development and Review Comprehensive SOLUTIONS 888-726-2880 FBBS believes the success of your team is the future of our firm. MEMBER FINRA & SIPC. INVESTMENTS ARE NOT FDIC INSURED, NOT BANK GUARANTEED & MAY LOSE VALUE. MIB is a key partner of First Independent Bank. Due to the nature of that relationship, we often have questions about the programs and services we utilize. Chris is knowledgeable about everything MIB offers, so we can count on getting information we need from a conversation with Chris. If he doesn’t know the answer, he knows who at the bank to ask and will promptly get back in touch with an answer or solution. WHY ? Jack Muench, President First Independent Bank of Aurora, MO Lending Services Operational Services Audit Services* MEMBER FDIC Audit Services are offered thru MIB Banc Services, LLC, a subsidiary of our holding company. 800-347-4MIB mibanc.com * Chris Bryan with customer Jack Muench www.FBBSinc.com
Creative Planning provides a full suite of investment, tax, estate planning and trust services capabilities through our team of in-house CPAs, attorneys and CFP® professionals. We support you as you deepen client relationships and solve a wide range of financial challenges. We offer a simple and seamless process that is easy to implement and allows you to access our services only when you need them. If you’re ready for a new approach, it’s time to get Creative. Call for a complimentary guide and to schedule a consultation. We look forward to supporting you. Clay Baker, CFP® 314.882.6940 Clay.baker@creativeplanning.com Wealth management solutions for your community bank customers Broaden your services. Deepen client relationships. Enhance your bank’s reputation.
INSIDE THIS ISSUE 6 16 22 23 P.O. Box 1765 Jefferson City, MO 65102 573.636.2751 | miba.net Editor: Matthew S. Ruge Executive Director ©2024 The Missouri Independent Bankers Association | The newsLINK Group, LLC. All rights reserved. The Show-Me Banker Magazine is published six times a year by The newsLINK Group, LLC for The Missouri Independent Bankers Association and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of The Missouri Independent Bankers Association, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. The Show-Me Banker Magazine is a collective work, and as such, some articles are submitted by authors who are independent of The Missouri Independent Bankers Association. While The Missouri Independent Bankers Association encourages a first-print policy; in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at 855.747.4003. Published for the Missouri Independent Bankers Association 5. Save the Date: 47th Annual Convention & Expo 6. PRESIDENT’S MESSAGE Looking Forward to a Great 2024 7. ICBA Live 2024 8. FLOURISH Continuing the Climb for Our Communities 9. MIBA Upcoming Events 10. FROM THE TOP Why Instant Payments Need To Be a 2024 Priority 12. A VIEW FROM THE CAPITOL Basel III Hurts Banks, Businesses and Individuals 13. LEGAL EAGLE SPOTLIGHT Interest Rate Pressure and Risk of Defaults Dictates Review of Collateral and Loan Documents 14. MIBA Lobbying Report 15. Bankers Name Tightening Margins, Cybersecurity as Top Challenges MADE IN THE USA 16. Spread the Wealth Some Bond Sectors Performed Better Than Others in 2023 18. Congratulations MIBA! 2023 MarCom Awards Winner 19. A BACKGROUND ON Jennifer Lawton, CRCM 21. Mark Your Calendar!! Directors and Officers Conference 22. MEET YOUR MISSOURI BANKER Tyler Gordon 23. Support Your Community with a Source of Equity in the Form of Grants 24. Mid-Winter Seminar Ixtapa 2024 26. Community Bankers for Compliance Program 27. Welcome to Our Newest Bank Members 27. New Associate Member 28. 2023-2024 MIBA PAC Honor Roll 29. News From You 31. Upcoming Webinar Schedule 4 | The Show-Me Banker Magazine
September 9-11 2024 SAVE DATE 47th Annual
PRESIDENT’S MESSAGE Mark Laune MIBA President Peoples Savings Bank Hermann, MO “We are reading information from regulators about risk and commercial real estate and how banks need to stay on top of this segment of our portfolios.” Writing this article makes me think about what 2024 will be like for us as bankers. It will surely be different than 2023, as the FED has indicated that rates could fall several times in 2024 and that their inflation goal is getting closer to being met. We are reading information from regulators about risk and commercial real estate and how banks need to stay on top of this segment of our portfolios. Liquidity will still be a hot topic, and it appears that banks with large AOCI balances are getting some relief with the markets adjusting for upcoming rate declines. After the large deposit inflow from the past few years, banks have looked at their investment portfolios as more of an income generator and less of a liquidity tool. This will be challenging for the investment officers as they need to look closely at their own portfolio and where the holes and needs will be, not only looking at the highest return but what will be the best returns possible in 3-7 years. Strategies will need to be discussed, documented and followed to get the best returns possible in the future. Staying shortterm and getting the best return now may not help in the long run. Rates moving up the past couple years and now forecasting to move downward is different than banking has been for the past decade as rates were low for quite some time. This will make for some very interesting times and discussions among banking executive teams during 2024. Looking forward will be a must, and planning for changes and outcomes will be required. Strategic planning is always important, but in today’s financial landscape, it means more to the desired outcome for each bank. Communicate with your teams, share thoughts, ideas and outcomes. This will be the time some banks will rise to the top. The bankers that are more mature (older) remember when rates would fluctuate regularly both up and down. For some of the younger bankers, they are accustomed to rates being low and stagnating; these recent rate hikes were their first taste of rate fluctuations. Now, they will be working with a falling rate environment. This could all be new to some of the younger team members. Include them in your planning and discussions; they are the future of our industry. Looking forward to a great 2024 for MIBA and all the Missouri banks and bankers! ■ Looking Forward to a Great 2024 6 | The Show-Me Banker Magazine
ICBA LIVE 2024 ICBA LIVE is the annual destination for thousands of community bankers, solution providers, and experts to exchange strategies and resources. Join us for three days of inspiration, learning, growing, and connecting. Share and gain ideas from your peers to power your potential as leaders in your bank and community. Learn more and register icba.org/LIVE2024. HELPING COMMUNITY BANKS FLOURISH
FLOURISH Where I’ll Be This Month I’ll first meet with the ICBA Nominating Committee to continue our leadership journey, and then I’ll head to Atlanta for a showcase from ICBA’s sixth ThinkTECH Accelerator program. I recently came across a quote from the Pulitzer Prize-winning poet Theodore Roethke: “Over every mountain, there is a path, although it may not be seen from the valley.” As an avid hiker myself, it resonated because as you look up toward the climb ahead, you may not see the route, but you know it’s there — not unlike the situation we face in community banking today. As we enter 2024, we see a steep climb amid so many headwinds, including volatile interest rate and supervisory environments, emerging regulatory reforms, constant pressure on margins and more. Yet, with every step on the journey, we just get stronger. As we look back on 2023, we felt the impact of numerous challenges — failures of large, risky banks, fluctuating interest rates, increased competition and more — and we not only survived but thrived. We championed new solutions like FedNow. We successfully advocated for the vast majority of community banks to be exempted from the FDIC’s proposed special assessment. We expanded our innovation programs, creating a center for community bank innovation. These previous experiences have positioned our strength, and today, as we climb toward that next peak, we’re honing new skills. Each step is an investment in the future to further fuel the community banking model. Our national campaign goes hand in hand with this work. By telling the compelling stories of the ways in which you make a difference, we’ll continue to bolster the work you do. In advocacy, education and innovation, we are working alongside you to power your potential and help you surmount the trials you face along the journey. And while this climb may be difficult, it will lead to new opportunities. As I reflect on my career, I realize some of the greatest learning moments were in the most challenging situations. That’s how I know community banks will find a way as an industry, as a network of community bankers, to find the right next step to provide for our communities. Hikers will stand at the bottom of the peak and realize it looks a lot higher than it did when they were farther away, but they made the climb. As we take our first steps into 2024, it’s that same “bring it on” mentality that will continue to bring us strength and guide us. We’re ready to see what lies ahead, embrace the challenge and create forward momentum. Because while the path from the valley to the summit may be circuitous, community bankers will always continue the climb for the good of their customers and communities. ■ Continuing the Climb for Our Communities Rebeca Romero Rainey ICBA President and CEO @romerorainey 8 | The Show-Me Banker Magazine
Your business is your biggest investment. So why not give yourself the best chance to succeed? Everyone loves a good deal. But saving money on cheaper IT solutions can actually cost you more. How? Frequent downtimes. Unexpected expenses. Zero customer trust. The good news: it doesn’t have to be this way. Don’t let low-cost IT services equal lost revenue. Scan the QR code now to discover the secrets cheaper IT providers are hiding and how you can avoid falling into their trap. SEE BENEATH THE SURFACE. $ Everyone loves a good deal. But saving money on cheaper IT solutions can actually cost you more. How? Frequent downtimes. Unexpected expenses. Zero customer trust. The good news: it doesn’t have to be this way. Don’t let low-cost IT services equal lost revenue. Scan the QR code now to discover the secrets cheaper IT providers are hiding and how you can keep your company smooth sailing. The TRUTH behind IT “savings” 07 FEBRUARY Leadership Division at the Blues WEB.MIBA.NET/EVENTS 15 MARCH APRIL 11 Essentials of Banking -Part III MIBA Office - Jefferson City Enterprise Center, St. Louis Columbia, MO MARCH Essentials of Banking - Part I 1st Quarter Community Bankers for Compliance 07 FEBRUARY 08 APRIL 16 Directors College Virtual Only Virtual Only Virtual Only Essentials of Banking -Part II
As we kick off the new year, our budgets have been set and our plans developed. But you know what they say about the best-laid plans: They change. Fortunately, community banks thrive on their ability to respond to market drivers, and in 2024, those demands point to instant payments. We’ve been monitoring developments with FedNow since it was announced. When it launched last July, there were only 35 participating banks, but in a few short months, more than 100 institutions were on board. And demand for the solution is rising: An October study from the Association for Financial Professionals revealed that over 75% of businesses plan to use real-time payments in the next five years. Clearly, our customers expect instant payments, and this growing demand is the reason FedNow needs to be at the forefront of our project lists. In fact, we have already shifted plans at my bank, moving FedNow up as a priority. It’s time to start dipping a toe in the water and be open to learning to get comfortable with the product so that when we’re ready to send, we have a good understanding of how it’s going to work. Even so, I had concerns about adding FedNow to an ever-growing technology list and how it may interfere with the other projects we have in the works, but two key points reassured me: 1. We don’t have to implement overnight. We can begin a formal exploration, determine the right partner to enable us and then get into full-scale implementation as timing fits. 2. In speaking to colleagues who’ve already made the leap to FedNow, I’ve consistently been told that onboarding was far simpler than they thought it would be. Early adopters are saying, “Don’t be scared; it’s not that tough.” Those points support decision-making for all of us. Once community banks get comfortable with a technology, they jump in to embrace what it offers — and ICBA and ICBA Payments are our partners on that journey. From working with core providers to advocate for a seamless implementation to offering solutions that can augment and support FedNow’s offerings, both ICBA and ICBA Payments stand ready to help community banks make the jump. Because — and make no mistake about it — it’s not if, but when, you will introduce FedNow. In our high-tech, high-touch model, being able to compete on instant payments is going to be a big part of high tech. We have to get involved to stay competitive. FedNow truly is community banks’ best chance to flourish in the payments space. ■ FROM THE TOP Derek Williams ICBA Chairman President and CEO of Century Bank & Trust Quote of the Month “TA leader takes people where they want to go. A great leader takes people where they don’t necessarily want to go, but ought to be.” — Rosalynn Carter, former First Lady, writer and activist Why Instant Payments Need To Be a 2024 Priority 10 | The Show-Me Banker Magazine
Basel III Hurts Banks, Businesses and Individuals Bank collapses last year spurred panic over potential failures and bank runs that could topple our already fragile economy. With record-high inflation and a president unwilling to curtail his spending, it’s reasonable to look for a safety net to protect Americans. However, the proposal from the Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC) places the burden of providing financial cushion on banks, businesses and individuals. The Basel III Endgame proposal, as it’s known, suggests hitting U.S. banks with higher capital requirements, often beyond what their internal risk management strategies deem necessary. For some of the more well-known banks, this would lock up an additional 20% of their cash. Not only does Basel III punish an entire industry for the mismanagement of a few banks, but these requirements pose significant challenges for small businesses and individuals. Forcing banks to sock away more money chokes their lending capabilities, meaning people who need loans will have a tougher time getting them. Those who can get loans will see higher interest rates — yes, even higher. Decreasing access to and raising the cost of capital sets back basic pieces of the American Dream, from buying a home to starting and maintaining a business. Consumers will likely turn to alternative forms of funding with less regulatory oversight and often zero capital requirements, defeating the purpose of the rule changes. Simply put, Basel III is an overreaction to the issue of bank failures. Throughout the COVID pandemic, governments shut down economies around the world, and banks managed to weather the storm. Poorly managed banks may create isolated crises, but Basel III would throw out carefully constructed bipartisan efforts to address these circumstances. Last summer, Sens. Scott Brown and Tim Scott (R-SC) announced plans for the Senate Banking Committee to hold its first markup hearing in almost four years to bolster bank executive accountability. Sen. Scott also worked with Sen. Sherrod Brown (D-OH) to introduce the Recovering Executive Compensation Obtained from Unaccountable Practices (RECOUP) Act. This bill holds bank executives financially responsible for failures. Additionally, I’ve offered legislation guaranteeing noninterestbearing transaction accounts in the case of a systemic risk exception. This would work to prevent or mitigate bank runs in situations that threaten our financial stability. I’ve also introduced a bill making the Federal Reserve’s Bank Term Lending Program (BTFP) facility permanent. BTFP is an emergency lending program designed to provide banks and other lenders with liquidity, providing for a financial cushion, when necessary, without cutting off access to capital for businesses and individuals year-round. I fear the architects of Basel III understand the destructive implications of their proposal and aim to claim greater power and control over the United States banking system. We have the largest and most successful financial system in the world, yet proponents of Basel III Endgame would send us into the same economic disarray we see in Europe. Our banks don’t need their standards. ■ A VIEW FROM THE CAPITOL Congressman Blaine Luetkemeyer Missouri’s 3rd Congressional District 12 | The Show-Me Banker Magazine
LEGAL EAGLE SPOTLIGHT Interest Rate Pressure and Risk of Defaults Dictates Review of Collateral and Loan Documents By Jason Kathman and Zachary Fairlie, Spencer Fane LLP In December, both Fitch and S&P Global projected default rates for leveraged and high-yield loans will continue to rise in 2024.1 Against that backdrop, lenders would be wise to check in on the status of their collateral and loan documents and, if necessary, shore up any discovered issues. More specifically, lenders with multiple loans to the same borrower, or affiliated borrowers, with different kinds of collateral should double-check that their loan documents contain enforceable cross-collateralization language and that the liens created pursuant to their collateral documents are properly perfected. Finally, lenders should take this opportunity to test (and potentially revise or add) the financial covenants in their documents to better understand the effects of the high-interest rate environment on their borrowers. Cross-Collateralization is King Cross-collateralization — the mechanism by which a lender secures multiple credits to the same borrower and/or affiliated borrowers across the assets of said borrower and/or affiliated borrowers — can be a powerful tool to ensure sufficient collateralization. In addition to providing more buckets for security, crosscollateralization can also ensure general compliance with all terms (e.g., timely payments, covenant compliance, etc.) for all loans that are secured by the same collateral by including cross-default provisions. Knowing whether your loan documents have sufficient provisions is important, and if you do not have these provisions, it may be time to insist on including them at the appropriate time for an amendment. Even if your loan documents have crosscollateralization provisions, be sure to review the mechanics of the applicable provisions to make sure they function appropriately. Perfection is Premier Lenders should always strive to ensure that their liens are properly perfected. When the risk of defaults rises and the accompanying pendent risk of bankruptcy looms, the importance of making sure that liens are properly perfected is elevated. This is primarily because if a lender is not perfected when its borrower files bankruptcy, the lender becomes practically an unsecured creditor. Section 544 of the Bankruptcy Code provides that upon the filing of a bankruptcy, a Chapter 7 trustee (or a debtor in possession in a Chapter 11 case) is provided the status of a hypothetical judgment creditor with a judgment lien. Further, section 544 also provides that a Chapter 7 trustee (or debtor in possession in a Chapter 11 case) can use that status as a judgment lien creditor to “avoid” any unperfected lien. Unfortunately, rushing to perfect the liens after discovery (by filing forgotten UCC-1 financing statements or untimely continuation statements, for example) may not necessarily solve a lender’s problem because section 547 of the Bankruptcy Code provides that even if a lien was perfected prior to bankruptcy, it may still be “avoidable” if the perfection was done within the 90 days prior to the bankruptcy filing. Section 547 of the Bankruptcy Code provides generally that certain “transfers” performed within the 90 days immediately preceding a bankruptcy filing are avoidable. Generally, unless certain exceptions apply, the filing of a UCC-1 (or other means of perfecting a lien) in the 90 days prior to the bankruptcy filing will be considered a “transfer” for purposes of section 547. Thus, lenders should take care to ensure that their liens are properly perfected and, if not, move expediently to rectify any issues related to perfection. Time to Shine a Light on the Lite Covenants In recent years, loan documents have become increasingly light on financial covenants. Nevertheless, now is the time to review and analyze those financial covenants and the effects of the high interest rate environment on those covenants. Common financial covenants include Debt Service Coverage Ratio (DSCR), Interest Coverage Ratio (ICR), Loan to Value (LTV) and Debtto-Equity Ratio (D/E ratio). Although the effect of higher interest rates on the first two covenants mentioned is obvious (i.e., higher interest rates lead to higher interest costs and therefore higher monthly payments), the effect of higher interest rates on the latter two covenants may not be as obvious. As The Show-Me Banker Magazine | 13
MIBA LOBBYING Report Andy Arnold Arnold & Associates The Missouri General Assembly gaveled in for the 2024 legislative session on Jan. 3. House and Senate leaders made the usual first-day speeches outlining their vision for the 2024 session. With nine open Senate seats, over 30 open House seats and, at present, 10 House and Senate members running for statewide office, this year will see members jockeying for press attention and position on the major issues before the August 2024 primary. Legislation to raise the cap on the “MO Bucks” linked deposit program was prefiled and introduced in both the House and Senate. Rep. Terry Thompson’s version, HB 1803, is on the move, having already been heard and voted DO PASS by the House Financial Institutions committee. The next step is a referral to House Rules, with House floor debate following shortly thereafter. Once the bill clears the House, we start the process over in the Senate. MIBA Executive Director Matt Ruge, Andrew Arnold and I are working with others to push the linked deposit bill across the finish line this year. We are also monitoring other legislation and will continue identifying legislation that could impact MIBA for you moving forward. As before, we thank you for your continued confidence and for the opportunity to serve your interest with the Missouri state government and the Missouri General Assembly. ■ interest rates rise, assets whose value is tied to cash flow (i.e., CRE assets) will decrease in value due to higher discount rates applied as a result of higher working average cost of capital calculations. Lower asset values, in turn, could likely trigger issues with LTV covenants. Similarly, lower valuations of assets will likely cause issues with D/E ratio covenants. Plan of (or Plan for) Attack As suggested, lenders should first review their loan and collateral documents to ensure that their documents are consistent with their understanding of the collateral package. Likewise, care should be taken to check that the liens granted in the collateral documents have been properly perfected, that the lenders have proof of the proper filings and that there have been no lapses in the UCC filings. Finally, lenders should check and test the financial covenants in the loan documents to understand the effects of the present economic environment on their borrower and their collateral. In the event a lender discovers an issue, the loan covenants may present an opportunity for the lender to engage with its borrowers to discuss the issue and provide an avenue for resolving the identified concerns and issues. ■ Jason Kathman and Zachary Fairlie are partners on the Spencer Fane Bankruptcy, Restructuring, and Creditors’ Rights team. They can be reached at jkathman@spencerfane.com and zfairlie@spencerfane.com, respectively. 1 Default Rates to Rise in U.S. and Europe as Weaker Growth Offsets Rate Cuts; Default, Transition, and Recovery: Higher Rates For Even Longer Could Push The U.S. SpeculativeGrade Corporate Default Rate To 5% By September 2024. 14 | The Show-Me Banker Magazine
Maintaining the spread between interest income and interest expense, deposit growth, liquidity and cybersecurity leads a list of community bankers’ top concerns, according to an annual survey. Several of these concerns spiked from their rankings in the 2022 survey, an indicator of how much the banking environment has changed over the last year. The findings are part of the 2023 Conference of State Bank Supervisors (CSBS) Annual Survey of Community Banks (PDF). The survey, now in its 10th year, is conducted annually by CSBS and state bank regulators. More than 450 community bankers — those running institutions with less than $10 billion in assets — answered questions about the challenges and opportunities they face in the industry. The report also contains extensive comments from five community bankers from around the country on survey topics. Key Challenges Among both internal and external risks, cybersecurity was the top challenge for community bankers, with almost 93% of surveyed bankers naming it an “extremely important” or “very important” risk. This was followed by net interest margins, with nearly 89% of bankers reporting them as extremely important or very important. Rising interest rates and inflation have driven up the cost of funds — almost 87% of bankers listed the cost of funds as extremely important or very important in this year’s survey, up substantially from the 48% it garnered last year. Closely related top challenges include core deposit growth (nearly 84% in 2023 versus 38% in 2022) and liquidity (more than 83% in 2023 versus 35% in 2022). Liquidity had not been named a top five challenge since the 2019 survey. In 2023, liquidity and other top challenges largely stem from the sharp fall in deposits from federal-stimulus-related, COVID-19era highs. A drop-off in deposits means banks are more reliant on more expensive sources of funds, such as brokered deposits, advances from the Federal Home Loan Banks and other borrowings. While the cost of deposits and personnel expenses have increased, most respondents say these challenges — though likely to persist — are manageable. Technology and Competition Technology continues to present challenges as well as opportunities for community banks. While 59% of bankers say the adoption of new and emerging technologies is extremely important or very important, impediments include cost, cybersecurity risks and implementation challenges. Limitations of core service providers — companies that provide banks with back-office services such as payment processing — are another consideration. About two-thirds of all respondents said they rely on core service providers for digital banking products and services, and most are not seeking partnerships with other digital providers, such as fintech firms. Less than half of all banks surveyed have a relationship with a fintech firm. Of the banks that do use them, fintech firms support mobile banking and lending products the most. Survey respondents noted that the competition for most products and service lines — especially small-business loans — is increasingly coming from other community banks. This represents a shift from prior year surveys. Commercial real estate loans and transaction deposits are other products for which competition from other community banks is particularly strong. Respondents expect relationship lending — the bread and butter of community banks — to grow more than transactional lending at their institutions in the future, which suggests small business and commercial real estate loans will maintain or increase in importance for these institutions. Looking Ahead The CSBS Annual Survey of Community Banks offers a snapshot of the opportunities and challenges facing small banks. In addition, the survey offers insights beyond those we can glean from other data sources and, over its 10 years, has allowed us to see how banks respond to changes in the economic and regulatory landscape. The survey is also supplemented by the quarterly release of the CSBS Community Bank Sentiment Index (CBSI). Although the latest CBSI reading suggested that overall sentiment is improving, we continue to closely monitor credit quality, liquidity and overall profitability in the banking system. ■ BANKERS NAME TIGHTENING MARGINS, CYBERSECURITY AS TOP CHALLENGES By Carl White, Senior Vice President of Supervision, Credit and Learning Division, Federal Reserve Bank of St. Louis Carl White has more than 35 years of experience in the Supervision Division of the Federal Reserve Bank of St. Louis. He is currently senior vice president of the Supervision, Credit and Learning Division. The Show-Me Banker Magazine | 15
As we have navigated the holiday season and hopefully had some time to wrap up some gifts as well as a successful 2023, let’s now spend a few minutes looking into pockets of relative value in the bond market. To get there, we should remind ourselves of the vagaries and ironies of fixed-income investing. In my 35 years of portfolio management participation, I’ve noticed some recurring themes and doctrines, which have both positives and lessthan-positives: • Higher rates = lower prices. • Selling bonds at a loss, versus a gain, has positive cash flow implications. • Community banks buy more securities in lower rate periods. • Higher coupons have less price volatility than lower coupons. • Yield spreads usually widen when rates fall. Let’s stay with this last bullet point for a minute. In practice, this means the value of a “risk” asset, which we’re defining here as anything other than a treasury note, will improve less than a similar duration treasury, given a drop in rates. There are several reasons for this reaction. One is that rates fall when investors expect the economy to slow down, so presumably, credit quality will become sketchier. Another is that the lower market rates translate into greater call risk since the likelihood of a bond ending up “in the money” to be redeemed increases. Usually, Not Always The corollary to the preceding paragraph is that spreads narrow as rates rise. In the year just completed, in which Treasury yields fell thanks to a fourth-quarter rally, we saw an amazingly diverse set of returns for the various bond sectors that community banks like. Most of the mortgage sector, for example, saw their spreads widen. The genesis of the wider-spreads/higher treasuries dynamic was, of course, the demise of several large banks beginning in March. Silicon Valley Bank, in particular, with its $200 billion-plus of mortgagebacked securities (MBS), caused that sector to have some indigestion through the summer as the FDIC’s bridge bank gradually disposed of the assets. Still, yield spreads were wider at the end of the year, partly the result of depositories in general not purchasing many bonds of any color or flavor. The MBS sector, in this column, includes traditional fixed-rate pass-throughs, collateralized mortgage obligations (CMOs) and even adjustable rate pools (ARMs). In the counter-intuitive world of bond investing, mortgage pools’ underperformance in 2023 would seem to indicate a pocket of value heading into 2024. Munis for the Bid? You may ask, “If MBS are cheap, what’s expensive?” On the other side of the pastperformance spectrum are municipal securities. The muni market has other machinations going on that resulted in relatively low yields and spreads by the end of last year. Demand for munis is determined not so much by institutional investors but by the retail sector. Well over 60% of existing muni bonds are owned by individuals either directly or through municipal bond funds. Appetite for retail munis has generally grown over time as SPREAD THE WEALTH Some Bond Sectors Performed Better Than Others in 2023 By Jim Reber, President and CEO, ICBA Securities 16 | The Show-Me Banker Magazine
baby boomers retire, and except for temporary “headline” sell-offs such as those related defaults by Detroit or Puerto Rico some years ago, demand has been steady and growing. Recent credit-quality performance in the sector has been solid. The supply side of the municipal market is another story. According to the Federal Reserve, the entire muni market grew by only $50 billion between 2010 and 2022, or barely more than 1%. More recently, in 2023, there were a number of issues postponed into the future, presumably to chase lower interest rates. The amount of new paper issued in 2023 was over 20% less than in 2021. While some of that was due to fewer calls being exercised, the continued supply shortage has pulled down tax-equivalent yields for institutional buyers, including community banks, into “through the curve” levels. For maturities out to 10 years, investment-grade munis could yield up to 50 basis points (.50%) less than benchmark treasuries. Cogito, Ergo I Swap? The previous two sections would seem to suggest a tidy bond swap strategy. The first step in any simultaneous purchase and sale is to find the most efficient securities to sell. Those would be the ones with the lowest return to the buyer, otherwise known as a “take-out yield.” Bonds that have lower returns than treasuries are hard to come by, but that’s exactly where shorter municipals were trading at the end of 2023. Securities to replace them? I’d start with some kind of MBS. Recently, strategists from Stifel have been suggesting “hybrid ARMs,” which have reasonable yields today and the possibility of maintaining them Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Upcoming Webinars ICBA Securities and its exclusive broker Stifel will present 16 webinars throughout 2024. There will be several tracks, including balance sheet management, enterprise risk and economic outlooks. We will again offer CPE credits for these events. Be on the lookout for announcements. in the future even if rates fall. Most of them come with offering prices below par, which is another rarity. Ultimately, the theme of this column is that opportunities are abound for your bond portfolio at the start of the year. Some sectors look historically expensive, while others seem to offer uncommon value. Acting early in the year can get momentum started for a prosperous 2024. ■ “Acting early in the year can get the momentum started for a prosperous 2024.” The Show-Me Banker Magazine | 17
Congratulat ons MIBA! To view this year’s winners, please scan the QR code. https://enter.amcpros.com/ marcom/winners/ 2023 MarCom Awards Winner Since its inception in 2004, MarCom Awards has evolved into one of the largest, most-respected creative competitions in the world. This year, there were over 6,000 entries from throughout the United States, Canada, and over 43 other countries in the competition. MarCom Awards is an international creative competition that recognizes outstanding achievements by marketing and communication professionals and recognizes the creativity, hard work, and generosity of industry professionals. MarCom’s Hon able Ment on award is granted to those entries that meet the high expectations of the judges. Honorable Mention recipients are recognized for their excellence in terms of quality and creativity. We are very pleased to announce that The Show-Me Banker was awarded the MarCom Honorable Mention for print media. 18 | The Show-Me Banker Magazine
A BACKGROUND ON Jennifer Lawton, CRCM Vice President of Compliance and Loan Administration Peoples Savings Bank Jennifer Lawton, CRCM, is the vice president of compliance and loan administration at Peoples Savings Bank, located in the small idyllic town of Hermann, Missouri. Her career path has not been traditional, but Jennifer feels like her choices have led her to the place she wants and needs to be. She was born in Linn, Missouri, and moved to a 200-acre farm in Vienna, Missouri, at the age of 12. “The farm was in the middle of nowhere,” Jennifer recalled. “It was quite an adjustment to go from living in a town to being out in the country.” The night that Jennifer graduated from Vienna High School, she decided to follow her future husband to Hermann, Missouri, and she has never looked back. She got a job as a laser programmer, and after some time, she decided that she needed to find a job that had more of a career path. Jennifer started working at a local bank that was called Bay Hermann Berger Bank at the time. She worked there for five years in many roles. Then, a friend reached out to her and told her about an open position at Peoples Savings Bank. Jennifer pursued the lead, was hired for the job and found her career path. “I was blessed by coming to Peoples Savings Bank because I’ve really had a lot of help in growing my career,” she said. As Jennifer looks back at her 23 years at Peoples Savings Bank, she is super thankful for the work ethic her mother, Renilda Howard, has instilled in her. Jennifer stated, “The quote ‘I’m a strong woman because a strong woman raised me’ fits perfectly.” She is also thankful for those individuals who have taken the time to teach, mentor and help her build a career. Among those, Mark Laune, president and CEO of Peoples Savings Bank, has been vital to Jennifer’s career path. “Mark helped me build my career. Even while he was building his own, he was helping. Mark would say, ‘Here’s a path. Why don’t you take it?’ He’s taught me a lot about banking in general.” Jennifer said. Another person she is thankful for is Tom Walkenbach, who served as the chief lending officer and a compliance officer at the bank before his retirement. He taught Jennifer a lot about loans and compliance, and oddly enough, he sparked Jennifer’s passion for compliance. “I am also very fortunate to have a great Board of Directors at the bank I work for. I really could not ask to be involved with a better group of people. Their leadership and guidance have meant a lot,” she said. In her current position, Jennifer oversees a great team of people who help her make sure everything moves forward as it should. There is also a lot of monitoring, reviewing, and training that falls under Jennifer’s purview, as well as putting out fires when needed. Jennifer wears many hats and, in her own words, is a “jack of all trades.” The Show-Me Banker Magazine | 19
Mother and daughter: Renilda Howard and Jennifer Lawton Traveling and adventure In leading her department, Jennifer tries to instill in her employees a strong business sense and a passion for the industry. If all goes to plan, 15 years down the road, she would like to retire and know that there is a strong group coming behind her to take over. “I feel we’ve done a really good job in building our compliance program. I’m very proud of the people I work with and the way they step up to get things done,” Jennifer said. “We have a lot of people to lean on, and we all work well together.” There are a few pieces of advice that she shares with these employees: 1. Do not be afraid to make mistakes. We are all going to make them, and all you can do is learn from them, learn how to fix them and try not to make them again. 2. Do not expect your mentor or someone you know to show you everything. You must have your own curiosity. I can lead you to the water, but you are the one that has to drink. So, you need to take the initiative and learn all that you can. 3. Take responsibility for your actions. I think there’s a lot to be respected when somebody can stand up and say, “I messed up, I’m sorry. Here’s what I’m going to do to fix it.” Being accountable is so important. After her career was well established, Jennifer decided to go back to college and earn her degree. She earned her associate in accounting from Southern New Hampshire University, has received her CRCM, and has attended The Missouri School of Bank Management and the Graduate School of Banking. When asked about membership in MIBA, Jennifer said that the bank has been a member for as long as she has worked there and well before that. “I think MIBA is a great organization for helping banks, especially when it comes to advocating for the industry at the state level and in Washington, D.C.,” Jennifer stated. “I made a trip to Washington, D.C., with another banking organization this past October. It was very interesting to see the ins and outs of how things work there. I realized just how important advocacy is.” Jennifer is happy to share her claim to fame: Her grandpa Everett Mantle and Mickey Mantle were cousins. Mickey is known for being one of the best players in the history of baseball. Peoples Savings Bank staff from left to right: Amanda Korman, Connie Lauer, Toni Weaver, Jennifer Lawton, Jenna Schaefer, Larissa Lensing and Marissa West 20 | The Show-Me Banker Magazine
Jennifer and her husband, Max, have been married for 32 years. She lovingly refers to him as “Mad Max” because he is a hunting and bow-fishing fanatic. They enjoy spoiling their nieces and nephews and spending quality time having fun. When Jennifer is not working, she enjoys settling down with a good book. It is also important to her to learn something new every day. Her biggest hobby, though, is traveling. “I just love to get out and go — it can just be a dirt road I’ve never been down before. I will turn down it just to see what is there. I like the adventure,” she said. In closing, Jennifer had a few last words for her fellow bankers: “I would highly encourage bankers to use their voice and advocate for community banks. I know a lot of us are overwhelmed between family life and work, but even if you could find one or two things to put your voice out there, it’s going to help. I encourage everyone to be an advocate.” ■ Jennifer and Max Lawton April 23-24, 2024 Mark Your Calendar!! Directors and Officers Conference Location: The Lodge of Four Seasons, Lake Ozark, MO Directors Presidents CEO’s and COO’s Bank Officers Bank Attorneys Who Should Attend: The Show-Me Banker Magazine | 21
Where are your main bank and branches located? What is the market like? The main bank is located in Brookfield, MO, with additional branches located in Milan, Eagleville, Kearney and North Kansas City. Verimore Bank has two markets. There is a rural market and a Kansas City Market. I work at the main branch in Brookfield in the Rural Market doing mostly ag and commercial loans. Our market is very competitive with numerous banks in the other market. Brookfield is a small town in a rural area with a population of 5,000 and has six banks. What is something unique about your bank? At Verimore Bank, we pride ourselves on providing excellent customer service and being involved in the community. I am currently involved with Linn County Cattlemens, Lions Club, Knights of Columbus and sit on a few other community boards. We believe that being involved in our community and knowing the needs of the community truly makes us a community bank. How did you get started in the banking business? A banking career was never on my radar growing up or even while I was attending college. After graduating from Northwest Missouri State University, I started working for the Livingston County Soil and Water Conservation District, which later evolved into working for USDA-NRCS. While working, I continued to help with the family cattle operation, where we backgrounded and finished cattle. A few years after graduating college, my wife and I started our own cow/calf operation where Verimore Bank was able to provide the financing for us to get started. A couple of years later, my loan officer called out of the blue, wondering if I was interested in a career in the banking world. After several discussions with my wife and family, I decided that a career in banking was the right fit. I haven’t looked back since. What is the most important thing you have learned from this career so far? The hardest and most important thing I have learned is that I am not going to be able to help everyone. I have learned to handle these tough conversations with honesty and respect in order to maintain a good working relationship with my customers. What is the most interesting thing you have learned from this transition to the banking industry? The most interesting thing I have learned is how much my experience in agriculture would help in the world of ag lending. Being raised on a farm and working with producers outside of banking allows me to better understand a producer’s operation. Tell us about the bank’s community investment efforts. Verimore Bank is heavily involved in our community through scholarships, donating gifts to families during the holidays and donating/sponsoring community organizations (Lions Club, Rotary, etc.). One community involvement that I am very proud that Verimore Bank is involved in is Meals on Wheels. Every Thursday, two bank employees deliver meals for the local senior center to folks who are unable to leave their homes. What’s your favorite thing about your bank or banking in general? My favorite thing about being in the banking career is when I can help someone make their dreams a reality. Whether that is getting their first car, home or farm, it is a rewarding feeling shaking a customer’s hand after a closing, knowing a dream of theirs has come true. If you didn’t have a career in banking, what other career would you choose? When I started college, I had planned to follow my dad’s footsteps and be a veterinarian. If I had to do it all over again, I would be a veterinarian. I have always had an interest in livestock, and having a cattle operation of my own has been rewarding as well. ■ MEET YOUR MISSOURI BANKER Tyler Gordon Loan Officer, Verimore Bank 22 | The Show-Me Banker Magazine
In 2018, the Gathering Tree in Springfield, Missouri, opened the doors at the first Eden Village, consisting of 30 manufactured homes that provide permanent, supportive, affordable and sustainable housing in a gated community to the chronically disabled homeless. Residents have access to a full range of supportive services such as case management, mental health, medical and dental, financial literacy and basic budgeting, employment and job skills. A key funding source for the project was a $750,000 grant from the Affordable Housing Program (AHP) facilitated by Central Trust Bank. In total, Eden Village has received $2.5 million in AHP grants for three phases of the project. The Affordable Housing Program is part of the Federal Home Loan Bank of Des Moines (FHLB Des Moines or the Bank) and is an extension of the bank’s mission as a financial cooperative to support institutions and enterprises that improve quality of life and create prosperity in the communities they serve. Every year, the Federal Home Loan Bank of Des Moines sets aside 10% of our earnings to support the affordable housing program. Since the program’s inception in 1990, more than $895 million of private funds have been provided through grants to create affordable housing opportunities for over 127,000 families and individuals. In 2023, FHLB Des Moines gave an additional $25 million back to our members to invest in their communities. The Affordable Housing Program provides assistance in two ways. The first is through the Competitive Affordable Housing Program. This specific program supports projects that include the purchase, construction or rehabilitation of affordable home ownership or rental housing units. The program also promotes partnerships between our member financial institutions and local housing providers to apply for grant funds. Applications for the competitive program can be made for varying amounts based on project need and are accepted, then awarded on an annual basis. In 2024, housing providers can apply for a grant of up to $3 million for their housing project. Second, affordable housing funds are also used to help with down payment and closing costs for income-eligible owner-occupied households through Home$tart® and the Native American Homeownership Initiative (NAHI). Home$tart and NAHI allow eligible households to receive $15,000 and $25,000, respectively, for down payment and closing cost assistance. Since 1990, more than $161 million has been provided to help over 33,500 families through the Home$tart and NAHI programs. Members of FHLB Des Moines are able to use another tool, a community investment advance, to support housing and economic development projects that benefit the community at large. Amounts for these discounted advances are based on per project basis. Meeting the credit needs of local communities is being a good neighbor and is also good business. Since its inception, the affordable housing program of the Federal Home Loan Bank of Des Moines has grown to be an important and engaged partner for strengthening community-wide vitality across Missouri. As the Federal Home Loan Bank of Des Moines grows in service to its members, the Affordable Housing Program will also grow in purpose-driven support that ignites economic opportunity. ■ For more information, contact your relationship managers, Phil Everitt at peveritt@fhlbdm.com and Rich Weaver at rweaver@fhlbdm.com, or visit us at www.fhlbdm.com. SUPPORT YOUR COMMUNITY WITH A SOURCE OF EQUITY IN THE FORM OF GRANTS By Federal Home Loan Bank of Des Moines The Show-Me Banker Magazine | 23
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