Page 31 - October 24, 2024 Bulletin

period of falling rates punctuated with shorter periods of yield margins to a record low. Banks should be actively positioning
retracements. This means banks should be focused on buying their balance sheets to protect margin before rates move lower.
longer durations (assuming their risk profile allows that) and This generally means becoming more liability sensitive with
bonds with good call protection and prepayment protection. longer, more fixed rate assets and shorter liabilities. Banks should
The goal is to build a diversified portfolio with stable cash flow review their most recent interest rate risk reports to determine if
by adding higher yielding bonds that will maintain that yield the change in margin income and economic value of equity in a
even as rates fall. The last thing banks need during this easing falling rate environment are acceptable. If not, the time to make
cycle is a lot of callable bonds that will get called away or MBS/ adjustments to the balance sheet is now.
CMO that will experience significant levels of prepayment risk
if rates fall. The focus should be on good structures with stable
cash flows and avoid chasing yield in non-traditional, riskier
securities. Ryan W. Hayhurst is President of The Baker Group, a broker/
dealer focused on helping community banks manage their
Interest Rate Risk investment portfolios and interest rate risk. Contact: 800-937-
2257, ryan@GoBaker.com.
Most community banks experience margin compression as rates
fall and margins are already at the lowest level they have ever
been entering an easing cycle. During the 2000 and 2007 easing
cycles, community banks lost an average of 40bp of margin as
rates fell and they lost 75bp in 2019-22 as the pandemic drove

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