Independent Banker - October 2018 - 39

Next: Pushing back on megabank deregulation
round of liquidity will cost more than
you're used to paying. (This subject
was addressed in June's Portfolio
Management column.) Fortunately,
with the yield curve continuing to
flatten, community banks can, for
the moment, avail themselves of longer-term
deposits at attractive levels.
Borrow and swap
The strategy is a two-step approach.
First, the bank taps a wholesale liquidity
source that has a very short-term
duration but a longer-term maturity.
Two examples of this are floating-rate
FHLB advances (typically based on
30-day LIBOR) and insured money-market
deposits that will float based
on LIBOR or prime. As of this writing,
the starting rate for such products with
a five-year term is around 2.1 percent.
Next, the borrower will turn the
floaters into fixed rates by executing an
interest rate swap with a third party.
Thanks to the aforementioned flatness,
it only costs about an additional
60 basis points, today, to lock in the
rate for five years and to hedge away
the risk of further increases. This is a
very nominal additional cost for the
significant increase in duration.
Education on Tap
Webinar series
continues
ICBA Securities and its
exclusive broker, Vining Sparks,
present the next segment
of their 2018 webinar series
on Oct. 16. Tom Mecredy of
Vining Sparks Community Bank
Advisory Group will present
" M&A and Community Bank
Valuation Update. " One hour
of CPE is available. To register,
visit www.viningsparks.com
Economic outlook
webinar
Vining Sparks strategists Craig
Dismuke and Dudley Carter
have scheduled their thirdquarter
" Economic Outlook "
webinar for Oct. 9. They will
discuss and analyze the most
recent Fed statements and
actions, and will comment on
the macroeconomic trends that
determine GDP.
To register, contact your
Vining Sparks sales rep or visit
www.viningsparks.com
Long-term benefits
To the community banker who says,
" I'd rather have 2.1 percent versus 2.6
percent as my cost of borrowing today "
(which would earn him/her a Master
of the Obvious diploma), I would reply
that this advantage is only sustainable
if the Fed isn't actively trying to snuff
out inflation, which it clearly is.
Remember also that locking in your
cost of funds on this batch of liquidity
frees your community bank to loan or
invest out on the curve. While much
has been made of the flatness of the
Treasury curve, all other sectors still
have some degree of steepness. This is
especially true of " off the run " mortgage
securities and bank-qualified munis.
So 2018 is the year when it's cool
(and beneficial) to take a hard look at
your funding options. With many community
banks ahead of their earnings
projections, perhaps it is timely to lock
in some costs that appear to be poised to
rise. Here's to the bottom-up approach
to financial management. Cheers!
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Independent Banker - October 2018

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