Page 28 - Fall 2025 - Single Pages

BASIS POINTS

The rule of three

Bond portfolio yields are

at multiyear highs.
BY JIM REBER

Vidi…
Being most decidedly not a professional
Nonetheless, por�olio income has
journalist, I’m all for using tricks and devices to develop themes in my
slowly made a comeback, and it’s hoped
columns. This month, I’m relying on the “rule of three,” a literary technique
there is some staying power built into the
that suggests that topics with three iden�fiable components can produce
clarity or improve the effec�veness of the piece. Personally, I’m a fan of current structures. Average dura�ons
“hook, line and sinker,” “of the people, by the people, for the people” and remain elevated (s�ll over four years), and
the ever-popular Larry, Curly and Moe. mild rate shock tests (+/- 100 bps) indicate
por�olio cash flows should remain reasonably stable. These are metrics
that seem to be built for a slow-to-fall rate environment, which is precisely
What really spurred this thought process is that community bank bond what the Federal Reserve, economists and market indicators are
por�olios are now yielding a nice round 3% on a tax equivalent basis. projec�ng for 2026.
While that may not sound like much, it’s been many years since they’ve
been at that level. Let’s dive into what makes up these bond collec�ons to
see how they have evolved this decade. Another point of note is that sector weigh�ngs really look pre�y similar to
2018. At both measuring periods, treasuries/agencies were around 15% of
Veni… the total, all mortgage-related products were around 50%, and municipals
The sample informa�on for this column is from S�fel’s bond accoun�ng were about 22%. What is interes�ng is the top quar�le seven years ago
popula�on of more than 400 community banks whose average por�olio had a full 41% muni alloca�on, and today it’s only about 14%. The main
size is about $208 million.
culprit, as has been well documented, is the tax relief that became law in
2018 and reduced tax-equivalent yields for many bank investors.
To put into perspec�ve what a grind it’s been to get back to even a 3%
yield, consider that the last �me it was anywhere near this close was way
back in 2018. Even then, that was a chore, as overnight rates, which Vici
averaged all of 77 basis points (0.77%) between 2010 and 2022, peaked at I am speaking with some conjecture here, but the near-term prospects for
2.50% in late 2018. bond performance are pre�y solid. Everyone, including the Fed, agrees
that rates are somewhat restric�ve, and chairman Jerome Powell is in no
It’s surprising to me how long rates were depressed in the a�ermath of the par�cular hurry to aggressively drop them, even if one or two cuts are s�ll
Great Recession.
in the 2025 numbers. That would give community banks some more �me
to layer in bonds at levels they’ll be glad to own later.
Another headwind for bank profitability in the recent past is how quickly
cost of fund rose rela�ve to por�olio yields. One major cause of this
deteriora�on was that bond dura�ons extended drama�cally in 2022–23, More inference is that the cost of funds, even if the Fed remains pa�ent,
and very few purchases occurred during the big run-up in market yields. should con�nue to decline. The second quarter of 2025 was the fourth
The spread between por�olios and the related cost-of-carry shrunk by well straight period of declining deposit costs for community banks, and
over 100 basis points between 2020 and 2024 (see table below). coupled with the expected con�nued improvement in por�olio returns,
net interest margins for at least the rest of the year look to be a�rac�ve.
To conclude: The backdrop of 3% por�olio yields seem to bode well for
“faster, higher, stronger” community bank performance.
__________________________

Jim Reber is president and CEO of ICBA Securi�es, ICBA’s
ins�tu�onal, fixed-income broker-dealer for community banks.
ICBA Securi�es is an ACB Preferred Solu�ons Provider.

Arkansas Community Banker | 28 | FALL 2025