November 18, 2023 / VOLUME NO. 288

A Cinderella Story?

It would be a gross understatement to say that 2023 has been a challenging year for the U.S. banking industry. When the Federal Reserve began raising interest rates to fight inflation in March 2022, it resulted in sizeable unrealized losses on low yielding securities that many banks purchased during the pandemic, when the economy was awash in funds. Those bond losses contributed to the failure of three large banks earlier in the year and set off a liquidity crisis that reverberated throughout the industry.

But as we look forward to the Thanksgiving holiday, could there be better days ahead?

Many economists have been predicting a recession to begin in the fourth quarter of this year or the first six months of 2024 as the Federal Reserve’s monetary policy grinds growth to a halt. That might still happen, but this week’s favorable inflation report injected a note of optimism into the national conversation about the economy. The year-over-year inflation rate in October was 3.2%. Core inflation — which excludes volatile energy and food costs — rose 4.0%, the smallest 12-month change since September 2021, according to the U.S. Bureau of Labor Statistics.

The biggest risk facing the industry heading into 2024 is still an economic slowdown that results in an increase in credit costs and restrains top-line growth. But a brighter future emerges if inflation continues to decline, which would enable the Federal Reserve to keep rates steady for the foreseeable future and perhaps even start cutting them. Higher rates could cause underwater bond portfolios to worsen and depress net interest margins even further. Stable rates, on the other hand, would allow those unrealized bond losses to stabilize and margins to bottom out. 

“In a perfect world, you could flatline your margin — meaning getting it to stick at whatever level it’s at — and then get enough average earning asset growth that you could begin to rebuild your net investment income dollars off of that base,” says R. Scott Siefers, a senior research analyst at Piper Sandler & Co. “That’s sort of the Cinderella story.”

No doubt many bankers would be happy with such a fairy tale ending. 

• Jack Milligan, editor-at-large for Bank Director

2024 Bank M&A Survey: On the Hunt for Deposits 

Bank Director’s 2024 Bank M&A Survey finds a muted appetite for deal making — including prospective failed bank acquisitions — but a desire for low cost deposits could be a motivating factor. 

“Eighty-five percent of respondents say an attractive deposit base would be one of their top attributes in an acquisition target in the current environment, compared with 58% who said as much a year ago.” 

• Laura Alix, director of research for Bank Director

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Banks can employ innovative solutions to train new and junior commercial underwriters in an increasingly remote world.

Why Community Banks Are Delisting From Exchanges

Many banks have decided to voluntarily delist and deregister from major exchanges as a way to maximize shareholder value and significantly reduce reporting complexity.

How to Win the Race for Small Business Accounts

Digital account opening is fast becoming an expectation for small- and medium-sized businesses.

The Right Questions for 2024: Cross the Bridge or Walk the Plank?

The tide seems to be shifting for rates and asset quality, giving bank directors many reasons to be concerned about 2024 and beyond.