Independent Banker - September 2024 - 32

PORTFOLIO PORTFOLIO MANAGEMENT
Too much of a good thing?
Balance is key when it comes to capital and profitability.
By Michael Benedict
s the days grow shorter and we
transition to fall, management
focus frequently begins to shift from
the current calendar year to the year
ahead. As part of that process, it is
helpful to explore the challenges and
opportunities each presents.
Though much could change
over the remaining months of
2024, the year to date can easily
be characterized as one of relative
stability when compared with the
dramatic shifts we've experienced
over the past several years.
Balance sheet composition has
largely normalized, funding costs
have slowed their ascent, liquidity
and credit metrics generally remain
on solid footing, and industry capital
continues to build at a healthy clip.
But as other challenges have
receded, profitability has stepped to
the forefront. According to the FDIC
quarterly bank profile, community
bank net interest margin (NIM) fell
12 basis points in the first quarter
of 2024, while annualized return on
assets (ROA) and return on equity
(ROE) were below 1% and 10%,
respectively, and the proportion of
banks that were unprofitable was the
highest of at least the past five years.
Finding the right balance
Strong capital levels are essential
for maintaining a resilient banking
system, but carrying excess capital
makes it challenging to generate
sufficient returns on that capital.
Growth strategies may help improve
A
ROE, but an inverted yield curve
makes it difficult to generate enough
spread to improve NIM or ROA. As
such, strategies that both improve
profitability and utilize excess capital
may provide a dual benefit at a time
when help is hard to come by.
Though portfolio yields have
steadily moved higher over the past
two years, industry averages are still
well below current market rates.
As such, portfolio repositioning
strategies are one path available to
virtually everyone that can provide
the dual benefit referenced above.
Though many banks have
historically been reluctant to realize
losses on security sales, the strategic
rationale for doing so has rarely
been stronger:
While rate cuts are not a done
deal, the Federal Reserve has held
32 // ICBA Independent Banker // September 2024
Artwork by Master1305/Adobe

Independent Banker - September 2024

Table of Contents for the Digital Edition of Independent Banker - September 2024

Contents
Independent Banker - September 2024 - Cover1
Independent Banker - September 2024 - Cover2
Independent Banker - September 2024 - Contents
Independent Banker - September 2024 - 2
Independent Banker - September 2024 - 3
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