Independent Banker - August 2022 - 29

Next: Put the A in your audit process 
There is once again the notion that
floating rate assets can actually be a
salvation from a yield and price stability
point of view.
are full faith and credit instruments,
and 0% risk-weighted. It's possible
to buy these to eff ectively yield
the prime rate minus 2.4%, which
is the same as saying fed funds
plus 0.6%. That may not sound
exciting until one considers that
it's conceivable the net yield could
be approaching 3% a few quarters
from now. Another enticement
is the market values of 7(a)s are
remarkably stable. Most pricing
models project that they would be
down only about 2% even in a highrate
shock environment.
It must be said that many of
these pools can come to market
with high premium prices of 10
points or more, which absolutely
creates prepayment risk to the
investor. There are ways to manage
this exposure that are beyond the
scope of this column, which your
brokers can explain. Still, it's safe
to say 2022 is built for a bond like
an SBA 7(a).
Also in the discussion
Mortgage-backed securities
(MBS) come in several different
adjustable-rate models. Among the
more popular are collateralized
mortgage obligation (CMO)
floaters. These have some of the
characteristics of an SBA, in that
there are no periodic caps, and
they float based on money-market
indices, such as the secured
overnight financing rate (SOFR).
One comment is that they have very
low priority to cash flows, so their
prepayments and average lives can
fluctuate wildly. Most investors
don't mind, as CMO floaters'
appeal is their quick reaction to
rate changes. Be careful of those
lifetime caps, however: They could
be in the 4.0% range, which means
their market values will lose some
ground in higher rate scenarios.
Commercial MBS, such as
Freddie Mac " Ks, " also come in
floating rate structures. Their
indices are often SOFR, and they
also have no periodic caps. Because
Freddie Ks are collateralized by
multifamily projects, they, too,
can see very inconsistent cash fl ow
if some of the larger properties
experience prepayments. Again,
like CMOs, these usually will
come to market with little or no
premium, so the early payoff s may
not hurt the yields. You'll want to
pay attention to the lifetime caps
on these as well.
All told, the expected path of
monetary policy in 2022 should
bode well for money-market
alternatives, both for price
stability and yield. Bonds that
are submerged could be nicely
complemented by short-duration
instruments. Floaters may just be
the answer to restore some levity to
your investment portfolio. 
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
Education on Tap
2022 webinar series takes a summer break
ICBA Securities and its exclusive broker Stifel Financial will go on
hiatus from its Community Banking Matters series for several months
but will resume our schedule in the fall. Look for announcements in
this space beginning in September.
Fall balance sheet conference
The 2022 Balance Sheet Academy will be held in Memphis, Tenn., from
Oct. 17-18. This is an intermediate-level program that addresses topics
such as interest rate products, bond swaps and private-label securities.
Up to 12 hours of CPE credit are off ered. For more information, contact
your Stifel representative or visit icbasecurities.com
independentbanker.org Q 29
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Independent Banker - August 2022

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