Easy Income Portfolio: December 2025 Edition

There is a great deal going on under the surface of monetary policy right now and community bankers need to understand it because it will shape the competitive environment we face over the next several years. The Federal Reserve cut the policy rate another quarter point at the December meeting and that made headlines. What mattered far more was something most of the mainstream press did not cover. Powell pushed through the cut with the weakest internal support he has had in years. The Bloomberg report calls the opposition silent dissents and that is a perfect description. These are the policymakers who are not willing to vote against the Chair yet are making it perfectly clear through projections and commentary that they think the current easing cycle has gone too far.

The dots tell the real story. A surprisingly large group of people inside the system are projecting higher rates than the official path. That is a red flag. It means Powell is losing the center of gravity of the committee. When this happens markets should assume policy becomes less predictable and forward guidance less reliable. Treasury volatility rises. Term premiums widen. Every community banker who has been struggling with funding costs does not need me to tell them what that means.

The December meeting also introduced something the article calls QE Eternity. The Fed is buying bills again and will probably continue doing so at least into April. Powell insists that this is about maintaining reserves, not easing. The distinction may be technically true inside the Eccles Building, but in the real world expanding the balance sheet boosts liquidity and encourages risk taking. Look around at private credit flows and stock market valuations and you will see the effects. Whether you think easing is good or bad is your business. What matters for us is that the Fed has moved into a posture where liquidity is abundant even though inflation has not returned to target and might not hit 2 percent until 2028.

There were three formal dissents at this meeting, the most since 2014, and the silent dissents make the division even wider. That matters because a divided Fed is a less forceful Fed. A new Chair will be in place in May. Markets will test that new Chair immediately. The Chair will need to rebuild credibility fast or the bond market will do the tightening for them. A more fractured committee means sharper moves in rates and more uncertainty in the forward curve. Community banks live in the real economy of loan demand, deposit pricing, liquidity management, credit conditions, and regulatory expectations. Interest rate uncertainty is the enemy of stable margins.

This brings us to a point that did not get enough attention in the Bloomberg report. The Fed is not only divided. It is divided at a moment when the cost of intelligence is collapsing. Sam Altman described what he called intelligence too cheap to meter. The cost of computation has fallen by more than a factor of 10 each year for the last five years. Banks were early adopters. Morgan Stanley and Bank of New York jumped in as soon as they saw the potential. They understood something many community banks are only now coming to grips with. The risk of not adopting AI is greater than the risk of adopting it. The largest institutions are already building internal agentic AI platforms that are automating research, coding, knowledge management, customer service, security review, fraud detection, and lending workflow.

This is not hypothetical. JPMorgan accounted for 37 percent of all published AI research by the major banks last year. Capital One accounted for 14 percent. Wells Fargo, Royal Bank of Canada and TD accounted for most of the rest. This is not academic output. These research programs feed directly into production systems within 2 to 3 years. That is lightning fast in this industry. It means the gap between the major institutions and everyone else will widen unless community banks use precision and partnerships to close the distance.

The McKinsey report puts a sharper edge on all of this. It estimates that agentic AI can ultimately produce up to 20 percent net cost reduction for banks. It also warns that the gains will not remain inside the industry. Competition and customer expectations will pass the savings through to households and businesses. That means margins will tighten. It also means we cannot sit still. The report identifies a global banking system at a major inflection point and every single structural pressure it highlights hits community banks harder than the megabanks.

Margins will compress. The rate environment that helped margins expand in 2023 and 2024 is normalizing. Credit costs will rise from historically low levels. Competition from fintechs, private credit, and payments firms is intensifying. Customer loyalty is evaporating. Only 4 percent of consumers now open accounts without shopping alternatives first. That is an enormous shift, and it strikes at the very core of the traditional community banking value proposition.

Stablecoins and real time payments are eroding fee income and the value of deposit friction. This is another slow burn risk for community banks because it changes the economics of liquidity. If customers can move money instantly at no cost the value of non-interest bearing and low interest deposits declines. If AI agents handle shopping and sweeping automatically the movement of funds accelerates. The relationship based stickiness many banks depend on becomes weaker.

The biggest structural threat is customer side AI. Once consumers and small business owners begin using personal financial agents that monitor rates, fees, rewards, lending terms, and refinancing opportunities in real time, loyalty disappears. Deposits will move daily. Loans will be refinanced more aggressively. Customers will no longer wait for a banker to call them back. This is the real competitive threat. The large banks will fight it with their own proprietary AI and enormous data sets. Community banks must fight it with precision.

Precision is the path forward. Precision in capital allocation. Precision in technology investment. Precision in customer engagement. And precision in M and A when appropriate.

At the capital level community banks need to evaluate risk weighted assets loan by loan and borrower by borrower. Low return on equity portfolios must be trimmed. Capital light fee businesses should be emphasized. Loan participations, credit risk transfers, and better pricing frameworks should be used to keep capital efficient.

At the operating level community banks should target 15 to 20 percent cost takeout over the next several years. That is achievable with AI supported underwriting, document review, BSA and AML monitoring, customer service automation, workflow orchestration, deposit onboarding, and exception clearing. These are immediate use cases. You do not need an 18 billion dollar tech budget to do this. You can use partners.

At the customer level community banks must rebuild a retail model suited to a mobile first environment. The branch will remain important for high trust interactions. But the first interaction with a prospective depositor or borrower is now digital. The first product decision is now digital. The first search for alternatives is now digital. Community banks must reach customers earlier and with more precision.

Deposits will require new thinking. Rates must be competitive. Treasury services must be faster and easier to onboard. Data should be used to identify flight risks before they turn into outflows. And community banks should offer savings and cash management tools robust enough to keep funds from flowing to national platforms.

Partnerships will be essential. Community banks should partner for AI based fraud detection, payments, lending infrastructure, and compliance automation. If you cannot build it you can rent it. If you cannot afford it you can partner for it. Precision does not require size. It requires discipline and clarity.

And finally precision M and A should return as a strategic tool. Community banks should not merge for size. They should merge to fill gaps. They should seek cost synergies that lower their operating ratio. They should look for micro market consolidation that increases share without diluting culture.

The world described in the Bloomberg document and the McKinsey report is not a distant future. It is happening now. The Fed is divided. Rates are uncertain. AI is advancing at a pace unmatched by any previous technology cycle. Customer behavior is already changing. The old model of relationship banking is not dead. It just needs to evolve.

Community banks that embrace precision will thrive. Those that do not will see margins tighten, deposits migrate, and relevance diminish. The window for action is open now.

Portfolio Review

It was a strong week and a strong month for the Community Bank Investor portfolio. On an equal weight basis the group gained about 5.0 percent over the past week and about 9.0 percent over the past month. Breadth was solid with gains in almost every name, and one standout move that reminded us why we own small and overlooked banks in the first place.

Mechanics Bancorp (NASDAQ:MCHB) continues to do exactly what we want from a well-run local institution. The stock gained 4.2 percent for the week and is up 14.8 percent over the past month. Mechanics Bancorp is a traditional community bank that leans on core deposits and a balanced mix of commercial and consumer lending in its local markets. The equity to asset ratio is about 12.0 percent, which gives the bank a solid capital cushion. The shares trade at about 1.98 times tangible book value, so the market already recognizes the quality of the franchise, and we hold it as a core compounder rather than a deep value special situation.

Bank of California (NYSE:BANC) remains a higher profile regional story, but for our purposes it is still a credit and spread business that we expect to grind out higher earnings over time. The shares gained 5.3 percent over the past week and 14.8 percent over the past month as investors have become more comfortable with the combined franchise and its earnings power. Banc of California runs with an equity to asset ratio around 10.0 percent, which is reasonable for a regional bank with its business mix. The stock trades at about 1.17 times tangible book value and yields about 2.0 percent, which is not a distressed valuation by any stretch but still leaves room for upside if management delivers on cost saves and loan growth.

Kearny Financial (NASDAQ:KRNY) had an excellent month as the market continues to revalue thrift conversions and rate sensitive balance sheets. The stock was up 5.3 percent for the week and 21.6 percent over the past month. Kearny is a classic former mutual thrift with a heavy focus on real estate lending and a deposit base that is still evolving toward more core relationships. The equity to asset ratio is about 10.0 percent, and the shares change hands at roughly 0.77 times tangible book value. With a dividend yield of about 5.6 percent and a solid capital position, we still view Kearny as an attractive value play on a normalizing rate and credit environment.

Blue Ridge Bankshares (AMEX:BRBS) was quiet this week in price terms, but the story is still about cleanup and eventual normalization. The stock gained 0.7 percent for the week and 1.8 percent for the month. Blue Ridge is a community bank that has been working through credit and regulatory issues and refocusing on core community banking and small business lending. The equity to asset ratio is about 14.0 percent, which gives the company room to execute its plan. The shares trade around 1.15 times tangible book value, so this is less of a deep discount situation and more of an execution story that we continue to monitor closely.

John Marshall Bancorp (NASDAQ:JMSB) remains a classic commercially focused community bank that concentrates on business owners and professionals in its footprint. The shares gained 3.0 percent this week and 5.9 percent over the past month. John Marshall runs with an equity to asset ratio of about 11.0 percent, which is healthy for a bank with its business mix and risk profile. The stock trades at roughly 1.12 times tangible book value and yields about 1.5 percent. That is a fair but not demanding valuation for a conservative lender that has historically managed credit and growth with discipline.

Princeton Bancorp (NASDAQ:BPRN) continues to act like the steady, slightly sleepy, value name that it is, which is exactly what we want. The stock was up 4.0 percent for the week and 5.4 percent for the month. Princeton is a traditional community bank with a strong core deposit base and a loan book anchored in commercial and residential real estate in its home markets. The equity to asset ratio is about 12.0 percent, and the stock trades at about 0.96 times tangible book value. With a dividend yield of roughly 3.5 percent and a valuation just under book, we still see a favorable risk reward profile here.

BV Financial (NASDAQ:BVFL) is one of the more overcapitalized names in the portfolio and we own it for that reason. The stock gained 3.2 percent this week and 12.8 percent over the past month. BV Financial is a small thrift style community bank that has accumulated a significant capital cushion as it gradually works its way toward a more levered and more profitable balance sheet. The equity to asset ratio is a very robust 21.0 percent. Even with that excess capital the stock trades at about 1.04 times tangible book value. That combination of high capital and only modest premium keeps this name firmly in the potential corporate action and slow burn value bucket.

SR Bancorp (NASDAQ:SRBK) is another relatively young thrift conversion with a lot of capital and a lot of flexibility. The shares gained 4.4 percent during the week and 8.3 percent over the past month. SR Bancorp is building out a traditional community banking franchise from a strong capital base and has the ability to grow loans, repurchase stock, or pursue acquisitions as opportunities arise. The equity to asset ratio is about 17.0 percent and the stock trades around 0.77 times tangible book value, with a modest yield of just under 1.0 percent. That deep discount to tangible book combined with surplus capital leaves us very comfortable owning SR Bancorp as a patient value idea.

Riverview Bancorp (NASDAQ:RVSB) had a softer stretch in a strong tape and reminds us that even in a good market individual names will move to their own rhythms. The shares were up 1.0 percent for the week but are down about 3.6 percent over the past month. Riverview is a Pacific Northwest community bank with a traditional mix of commercial and real estate lending and a meaningful focus on local small businesses and households. The equity to asset ratio is about 11.0 percent and the stock trades near 0.81 times tangible book value with a dividend yield of roughly 1.5 percent. We continue to view Riverview as a solid franchise selling at a discount that does not reflect its long term earnings power.

Central Plains Bancshares (NASDAQ:CPBI) continues to move forward as a small but very well capitalized community bank. The stock gained 1.2 percent this week and 2.6 percent over the past month. Central Plains is a classic heartland bank focused on core funding and relationship lending in its home markets. The equity to asset ratio sits around 17.0 percent and the shares trade near 0.81 times tangible book value. The bank does not currently pay a dividend, so this is a pure capital appreciation story built on excess capital and time.

Broadway Financial (NASDAQ:BYFC) remains one of the more complex and specialized stories in the portfolio. The shares gained 2.6 percent during the week and 2.2 percent over the month. Broadway is focused on serving historically underserved communities and has a business mix that leans heavily on multifamily and affordable housing related lending. The equity to asset ratio is about 23.0 percent, one of the highest in the portfolio, and the stock trades at roughly 0.55 times tangible book value. There is no dividend, but the combination of mission, capital and discount gives this name long term optionality.

Home Federal Bancorp of Louisiana (NASDAQ:HFBL) was the clear star of the week. The shares jumped 23.0 percent over the past week and are up 20.2 percent over the past month as the market begins to recognize the value embedded in this small but profitable franchise. Home Federal is a traditional community bank with a strong presence in its local markets and a conservative credit culture. The equity to asset ratio is about 9.0 percent, which is perfectly reasonable given its balance sheet and earnings profile. The stock trades at about 1.12 times tangible book value and yields about 2.8 percent. After the recent move it is less of a secret, but we still see room for patient investors.

NSTS Bancorp (NASDAQ:NSTS) is another deeply overcapitalized conversion that we own for what it can become rather than what it is today. The shares gained 3.9 percent for the week and 6.3 percent over the month. NSTS is a small community bank that is still very early in the post conversion playbook and has a large amount of unused capital relative to its current size. The equity to asset ratio is approximately 29.0 percent, the highest figure in the portfolio. Despite that, the stock trades at only about 0.72 times tangible book value and does not yet pay a dividend. That combination of surplus capital and a steep discount remains very attractive from a long term value perspective.

PFS Bancorp (OTC:PFSB) rounds out the list and also sits firmly in the overcapitalized deep value camp. The stock gained 7.6 percent for the week and 13.0 percent over the month. PFS Bancorp is a small thrift style bank that has converted and now carries an equity to asset ratio of about 19.0 percent, leaving it with many of the same options we look for in these situations, including organic growth, repurchases, special dividends or eventual sale. The shares trade at roughly 0.61 times tangible book value. There is no dividend today, so investors are paid in the form of discount and option value while we wait for management to unlock the balance sheet.

Taken together the portfolio continues to reflect the core themes we have been talking about all year. Capital is plentiful across most of the names. Valuations for many of the smaller thrift conversions and community banks remain below tangible book value. Returns over the past month have been strong, led by Home Federal and Kearny, but even after this move we still have a collection of well capitalized franchises selling at very reasonable multiples of tangible book. In a world where the big banks dominate the headlines and AI and private credit grab all the attention; this little basket of community banks keeps quietly compounding value for patient owners.