Independent Banker - April 2018 - Cover3

Nuts & Bolts
price) of an investment, the more
out-of-the-money any embedded
options are.
Exempli gratia
One simple example is to look at
a callable agency bond that was
printed in 2017. Fannie Mae issued a
fi ve-year bond in October 2017 with
a 2.25 percent rate that has a fi rst call
date in April 2018. Original owners
of that bond, who paid $100 at the
launch, now have an unrealized
loss in that position. Recently, its
market value was about $97.75, so a
new investor would earn about 2.77
percent to maturity. Its " modifi ed
duration, " which takes into account
the call features, is now 4.2 years,
which means all pricing models are
projecting that it will be around
until 2022. If it were to be called
2.46%
Average tax-equivalent
investment portfolio yield
for the 400-plus community
banks that utilize Vining
Sparks' bond accounting
services, as of Dec. 31, 2017
Community bank investment portfolios
December 31
2012
2013
2014
2015
2016
2017
moment, so there will likely be very
little principal cash fl ow in the early
going. Hence the longer duration.
Again, if prepayments were to pick
up, the bond's yield would improve,
thanks to the discount price.
early, and this is Fannie Mae's decision,
the new owner would have a
windfall, as the yield to the call date
would be enhanced.
Mortgage securities are similar
but not identical. A 15-year pool
with a 2.5 percent rate, issued by
Fannie Mae or Freddie Mac, also
has a current price of around $97.75.
What that tells an investor is that the
loans behind the pool are not subject
to much refi nance activity at the
Tax-free discount alert
Here's one reminder of caution to
be exercised when buying bonds at
a discount. In the land of tax-free
securities, there are several different
rules that come into play. In
particular, if a given municipal bond
is purchased at a price below par,
and it was not originally issued at a
discount, capital gains tax liability
can accrue to the new investor. To
be sure, the amount of the tax can
be minor if the discount is small, but
make sure to have your broker quantify
for you the extent of any capital
gains hit.
Finally, I wouldn't despair if your
portfolio is several percentage points
underwater. This just means that
you're in good company with the
other 5,700 community banks in the
country. You can also inform your
investment committee, board and
examiners that portfolio earnings are
now on the way up, thanks to higher
market yields. Buying popularly
priced investments does not make
one a bottom feeder.
Education
on tap
Webinar series continues
ICBA Securities and its exclusive
broker, Vining Sparks, will continue
their 2018 webinar series
on April 10. Greg Roll and Dan
Stimpson will discuss " Portfolio
Strategies for an Evolving Market. "
One hour of CPE is available,
and you can register by visiting
viningsparks.com.
Learn balance sheet
management
ICBA Securities and Vining
Sparks will present the 2018 Balance
Sheet Academy from April
23-24 in Memphis, Tenn. This
intermediate-level class off ers
a range of topics to improve community
bank performance, and
up to 18 hours of CPE. To register,
visit icbasecurities.com.
independentbanker.org ICBA Independent Banker 83
Unrealized gain (loss), % of portfolio
2.40
(1.87)
0.73
0.30
(0.72)
(0.50)
Source: Vining Sparks Bond Accounting Population
http://www.viningsparks.com http://www.icbasecurities.com http://www.independentbanker.org
Independent Banker - April 2018

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