2024 Journal of Community Bank Case Studies

2024 COMMUNITY BANK CASE STUDY COMPETITION

responsiveness to rapid changes in the financial landscape and safeguards the bank’s liquidity under a variety of market conditions (Robertson et al, personal interview, 21 Mar 2024). b1Bank tests all borrowing lines annually, including those from the Federal Home Loan Bank (FHLB) and the FRB Discount Window. Zach Smith said, “Anything that we don’t actively use, we test on an annual basis. So, any of our Fed funds lines, FHLB, or brokerage CEs, we would test those out as part of our contingency funding plan” (personal interview, 21 Mar 2024). Funding sources, its pros and cons Based on annual reports, b1Bank leverages a variety of funding sources such as FHLB, subordinated debts, and lines of credits with other banks - each with unique benefits and drawbacks. One key source is FHLB Advances, which provides a borrowing capacity of $1.8 billion, with $211.2 million utilized as of 2023 (“b1Bank Shareholder Information”). The advantages include a substantial borrowing limit and the ability to stabilize interest expenses but may introduce rate volatility and stringent collateral demands that limit operational flexibility. Another key source is subordinated debt, which the bank issued $25 million in 2018 to support general corporate activities and enhance Tier 2 capital (“b1Bank Shareholder Information”). The debt issues feature a fixed interest rate until 2028 before transitioning to a floating rate, maturing in 2033. The long-term funding provides additional funds for the bank’s financial base and regulatory capital requirements while offering predictable costs during the fixed-rate period. However,

Even though FCCB has maintained a ratio consistently

higher than that of its peers, the bank is still within optimal ranges in most years.

it comes with higher interest costs due to its subordinated nature and future cost uncertainties due to the floating rate period. Lastly, b1Bank maintains lines of credit with other financial institutions, such as a $5 million line with First National Banker’s Bank, mainly for short-term liquidity management (“b1Bank Shareholder Information”). Interest rate risk (IRR) management & IRR model Even before the Silicon Valley failures, b1Bank constantly monitored rate forecasts. To hedge extremely uncertain movements in interest rates in the last three years, b1Bank chose to become rate-neutral (Melville et al, personal interview, 21 Mar 2024). When the bank failures occurred, b1Bank was slightly asset sensitive but at the end of 2023, they were slightly liability sensitive. Maintaining rate neutrality—sometimes being slightly above or below—enables the bank to respond swiftly and efficiently to rate changes. The flexibility

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