Independent Banker - January 2023 - 29

Next: Advice on lending during a recession 
" And that is due to your liabilities
still having relatively low sensitivity
to rate changes. What a lot of
community banks are coming
around to realizing is that being in
position for a 2022-type rate cycle is
great, but what does that do to your
2023-24 posture? "
" Jim, I'm inferring from your
question that you're suggesting
we're exposed to rates falling,
and that's also what our model
concludes. The problem for us is that
we don't have any organic means of
fi xing that quickly. As I said, we're
not turning over many assets at the
moment, either loans or bonds. "
" I'm glad we're having this
conversation. There are several
strategies community banks are
using to take advantage of the
current rate environment, improve
current earnings and lessen exposure
to a slowing economy. And these
don't require the need to raise
new cash. "
" Let's hear it. "
" First, a sale of certain bonds with
immediate investment into certain
others. This strategy goes by several
names: bond swap, income deferral
or loss/earnback. It's certainly
easy to fi nd bonds that you own at
unrealized losses. The trick is to
fi nd ones that can be sold effi ciently.
Your brokers can give you some good
advice there. "
" What's in it for Community Trust
Bank? Taking a big loss at the start
of the year isn't something that's in
our 2023 budget. "
" Here's why the timing may be
good. Now that year-end is behind
us, and liquidity has returned to the
bond market, it's possible to improve
your book yields by 3% or more
with the bonds you buy. So you start
making back that loss immediately,
and we have most of the year to
start catching up. In the meantime,
There are several strategies community
banks are using to take advantage of the
current rate environment, improve current
earnings and lessen exposure
to a slowing economy.
you'll lock in today's yields, which
are probably higher than they'll be
on average over the next several
years. The higher income, I should
add, will come in handy to help pay
for more increased loan reserves, if
you should need them, or to off set
higher cost of funds. "
" Makes sense. We'll take a look
soon. What is the second strategy? "
" Simply to execute a 'received
fi xed, pay fl oating' interest rate
swap. You can quickly address your
exposure to falling rates without
buying or selling anything. You can
structure a swap to either shorten
liabilities or extend assets, and it's
your call. Community banks are
doing this all the time. "
" Jim, what do examiners say
about this 'derivative' business? "
" It's common enough that by
now regulators are used to seeing
it as part of risk management. Your
swap counterparty will document
that you're lessening exposure to
downward rate movements. So what's
not to like about that? "
" Sounds like we've got some work
to do, but I'm a little less nervous
than a few minutes ago. You can bet
we'll keep our eyes on our liquidity
position, and we've ramped up our
credit monitoring in case we do have
a slowdown. But I like where we
stand, and I'm glad we had this chat. "
" Always a pleasure, Charlie, and I
hope you meet all your 2023 goals. "
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
Education on Tap
ICBA LIVE 2023
ICBA Securities and its exclusive broker Stifel will present several
Learning Labs at ICBA LIVE in Honolulu this March. For more
information and to register, visit icba.org/live
independentbanker.org // 29
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Independent Banker - January 2023

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