Pub. 11 2020 I Issue 4 Winter 13 West Virginia Banker Dale Sheller is senior vice president in the Financial Strategies Group at The Baker Group. He joined the firm in 2015 after spending six years as a bank examiner with the Federal Deposit Insurance Corporation. Sheller holds a bachelor’s degree in finance and a master’s degree in business administration from Oklahoma State University. He works with clients on interest rate risk management, liquidity risk management and regulatory issues. Contact: 800-937-2257, dsheller@GoBaker.com. Helping Community Banks See What’s Possible Finding opportunities for community banks to grow becomes more challenging every month, but somehow it’s what we do, and what we do well. Using the power of partnerships we help community banks compete. • If you have a problem or idea, call us. • We can help community banks reduce and manage risk. • We work with our clients to address friction points, working for improved performance. If you are interested in new solutions to your problems, give us a call. L-R: Leesa McShane, Rose Washofsky, Gary Shook, Jo Ellen McKinley OUR TEAM IS READY TO HELP cbbonline.com | 800-822-1039 CBB_WVaBankersAssoc-Ad_7-5x4-625.indd 1 10/7/20 1:17 PM there is likely more to come. Institutions who could extend asset yields before rates hit zero will fare better in the near term, but a prolonged low-interest-rate environment will eventually take its toll on all. Fighting Margin Compression The quickest way for institutions to fight margin compression is through lowering their deposits rates and overall cost of funds. Most bankers have aggressively cut deposit rates as banks have already unwound about half the increase to their cost of funds experienced during the previous Fed tighten- ing cycle. Most of the room left to cut will be on CD rates, which saw the most significant increase in the last few years. If you are worried about deposit runoff, should you continue to lower rates, consider replacing those deposits with cheap wholesale funding? Yields on earning assets have fallen since year-end 2019 for two reasons: lower interest rates and excess liquidity on the balance sheet. As of June 30, 2020, the average community bank held approximately 8% of total assets in interest-bear- ing balances. Most of those dollars were likely held at the Federal Reserve, earning 10 basis points. Most of that excess liquidity came in so fast that some bankers haven’t had suffi- cient time to strategize on where to deploy it. Staying Fully Deployed Holding on to too much cash and waiting for rates to go up is not the conservative play. Margins can’t afford it. If quality loan demand is available, make the loan; if not, you need to earn more than 10 basis points. Take a long look at your liquidi- ty position and decide how much you can deploy into the investment portfolio. No one loves today’s bonds yields, but don’t compare them to where they were a year ago. Instead, compare them to the alternative, which is holding them in low earning cash. We can pull only so many levers to fight margin compression, and we need to start as soon as possible. The quickest way for institutions to fight margin compression is through lowering their deposits rates and overall cost of funds.