Independent Banker - December 2023 - 29

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impressive given the very flat yield
curves in 2018-19.
Not all bad news
Just as it appears we're building out
a case that earnings are going down
the drain, here's some welcome news:
Things still look quite good for the
community banking industry overall.
Earnings for the first half of 2023 are
about in line with the similar period
for 2022, even as funding costs have
taken off. Interest rate risk postures
for community banks appear to be
very well balanced, according to
Stifel. So, overall, the higher rates
that you're paying for deposits have
basically mirrored the improved
yields on interest-bearing assets, at
least in the last four quarters. Net
interest margins improved initially
in 2022 after the Fed commenced its
rate-hike cycle.
Two other elements of banking
fundamentals are working well:
credit quality and capital levels.
These measures are akin to the
offensive line on a football team, in
that you only hear about them when
things aren't going well.
Noncurrent loan rates and
net charge-offs in 2023 remain
minuscule. The FDIC reports the
average community bank leverage
ratio (CBLR) for those who elected to
use the CBLR reporting methodology
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0%
Historical portfolio margins
Community bank investment portfolios
Spread
TEY
COF
Source: Stifel, FDIC
was 12.1% as of June 30. Both
contributed to net income increasing
quarter-over-quarter, even with the
funding headwinds.
Here we are
By the looks of things in the table,
there are still some challenges
ahead. The net take, or spread, of
the bond portfolio yields over the
COF is barely half of its long-term
run rate, and we're probably not
finished yet. Portfolio TEYs have
improved since the nadir in 2021,
although the pace of improvement
has been tortuously slow, since
depositories have been collectively
on buyers' strikes for two years.
If deposit betas hold consistent with
past eras in which fed funds has met
or exceeded 5%, it's entirely possible
that overall COF would approach
3% for the industry. The chance
of this improves in the " higher for
longer " scenario.
Education on Tap
Bank management webinar this month
Marty Mosby, director of enterprise and risk management analytics
for Stifel, will present his quarterly webcast that will discuss the
current operating environment and competitive advantages for
community banks. One hour of CPE is offered. The event is Dec. 5 at
1 p.m. Eastern. To register, contact your Stifel sales rep.
Still, given that community
banks are relatively insulated from
further rate shocks, it appears that
time could be on your side. For the
2023 holiday season, the boundary
that portfolio managers should be
most concerned with is their own
midsections, not their bond portfolios'
net interest margins.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
independentbanker.org // 29
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Independent Banker - December 2023

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