Independent Banker - December 2021 - 30

PORTFOLIO PORTFOLIO MANAGEMENT
Shop talk 2021
Here's another conversation with our consummate community banker.
By Jim Reber, ICBA Securities
" T
his is Jim Reber. "
" Hi Jim, this is Charlie
Brown with Community Trust Bank.
Do you have a minute? "
" I sure do, Charlie. I don't think
I've heard from you since the summer
of 2020. How are things at the
community bank? "
" I think things are going pretty
well. But you know what, as we're
getting pretty close to year-end, I
believe we need to take a good look
at our investment portfolio, and
that's why I'm calling. As you may
have guessed, we need a refresher
about the dos and don'ts for yearend
strategies. "
" Charlie, this conversation is taking
place right now between hundreds
of community bankers and their
brokers, so your timing is pretty good,
but we should get on this project
immediately. Liquidity, in the sense
of how efficiently your bonds can
be sold, starts to dwindle as we get
to mid-December, even for generic
bonds like mortgage-backed securities
(MBS). And municipal bonds are a
wholly different story. "
" Well Jim, let me start by asking
about taking gains versus taking
losses. I know most tax accountants
preach that we should sell bonds at
a loss instead of gains, because that
speeds up the income tax liability. Am I
saying that right? "
" Yes, and I hasten to add that if you
sell bonds you own at a gain, you're
almost certainly going to see your
overall portfolio yield go down again.
And if there's a theme that I've heard
this year from your peers, it's that the
returns on their bonds are dreadful. So,
you'll be aggravating that situation. "
" Most community bankers I know
don't like to admit defeat. Are you
suggesting I'm supposed to like selling
my dogs and taking losses?
" Charlie, since you brought up the
metaphor, let me remind you that the
bond portfolio is just a complement to
the rest of the balance sheet. It is the
proverbial tail of the dog. And I'd guess
that your annual earnings number is
looking pretty good, right? "
" Yes, but that's because of some
events that aren't likely to repeat
themselves next year. I mean, we
booked a lot of fee income from the
Paycheck Protection Program (PPP),
and our mortgage department has
been ahead of budget all year too. I
don't see how we're going to do better
next year than we've done in 2021. "
" Which is all the more reason to push
your earnings out to future periods.
And that means taking losses in 2021,
buying some replacement bonds that
have higher yields and liking your newand-improved
bond portfolio. "
" But Jim, why would I do that if
interest rates are going to be going up
next year? Doesn't that mean my bonds
will lose more value by extending their
maturities than if I stay put? "
" Let me answer your question by
asking one: Is Community Trust Bank
asset sensitive from an interest rate
risk standpoint? "
" The answer is, 'I think so.' That
26 Q ICBA Independent Banker Q December 2021
Independent Banker - December 2021

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