Independent Banker - October 2019 - 35

Next: Credits have arrived as a result of ICBA's advocacy efforts
The liability side of a community bank has slowly and
quietly changed its tenor over the past decade. For some
years now, deposit growth has been left in the dust by loan
growth. While that in a vacuum is good news for net margins,
it has created some issues. One example is that only
about one-quarter of total liabilities are time deposits, a
record low. The corollary to that is large amounts of funding
could walk at any time.
Not surprisingly for community banks, most of the liability
picture shows some discipline. The number of brokered
CDs on hand has shrunk in the last decade. Public funds,
which some contend are reliable wholesale sources, have
consistently been the largest nonretail segment of liabilities.
And let's not forget the still-attractive funding costs, which
all-in remain well under 1%.
Welcome additions
Into this melee of deposit-gathering steps the bond portfolio.
As rates have fallen, community banks' cash flows
have increased, in some cases dramatically. This has helped
finance loan demand in a real-life example of just-intime
production.
As an indicator, in the month of June, total dollars
of bonds called by all of the government agencies were
$21.8 billion. That is more than double the amount called
in February. Also, prepayments on simple mortgage-backed
securities (MBS), including community bank staples like
15-year pass-throughs, have likewise more than doubled in
the last year.
This prepayment and call activity has caused effective
durations in investment portfolios to hit multiyear lows. As
of June, the average duration in community bank portfolios
was down to 2.7 years. For comparison, it was 3.4 years as
recently as 2016. To the uninitiated, it may not seem like
much of a difference, but the risk analyst knows that represents
a 20% drop in price volatility.
Fair and balanced
As mentioned before in this space, community banks have
pretty much eradicated rate risk from their balance sheets.
This is the result of a number of factors working in concert,
such as clarity of expectations by examiners, a historically
long low-rate environment from 2008 through 2015, and
commitment to a robust asset-liability committee (ALCO)
by community banks in general.
On top of this is the increased use of off balance sheet
tools that quickly and efficiently customize asset and liability
risk profiles to fit an institution's needs. Interest rate
swaps can now be executed on certain loan segments, a
defined portfolio of credits, or even an individual loan. The
Education on Tap
2019 webinar series continues
The next segment of the 2019 ICBA Securities
webinar series Community Banking Matters will
take place on Oct. 15 at 10 a.m. CDT. Michael
Erhardt, CPA will present Planning for the Year
End and the New Year. Free CPE is available. Visit
icbasecurities.com to register.
Manage your risk
ICBA Securities' exclusive broker Vining Sparks
offers a proprietary asset/liability risk model,
Risk Manager, which is ideal for community
banks of all profiles. There are three different
modules to choose from based on your balance
sheet's complexity. Risk Manager relies on user
input to maximize flexibility. Contact your Vining
Sparks sales rep or visit viningsparks.com for
more information.
same is true for the liability side of the ledger, and certain
capital components.
In fact, what remains seems to be exposure to falling
rates, which is a departure from historical norms. This
" asset-sensitive " posture
means that community
banks can purchase or offer
certain amounts of fixedrate
products or take on
some shorter-term liabilities
and actually improve
their earnings at risk (EAR)
and economic value of
equity (EVE) ratings.
And who's to argue with
success? According to the
FDIC, community banks
reported an estimated
$13.4 billion in earnings in
the first six months of 2019,
which is well ahead of the
record set last year. The
tug of war by management
ICBA Securities names
new director
South Dakota leadership
banker Jack Hopkins
has been elected to the
board of directors of
ICBA Securities. Hopkins,
the president and CEO
of CorTrust Bank in
Mitchell, S.D., has served
on a number of ICBA
boards and committees,
including its Executive
Committee.
teams for the proper mix of cost-effective deposits, quality
assets and complementary cash flow appears to show
advantage: community banks.
independentbanker.org Q 33
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Independent Banker - October 2019

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