Independent Banker - December 2024 - 27

Next: The outlook on the farm bill's renewal 
primarily treasury securities and
mortgage-backed securities (MBS),
pushing down yields to near-record
lows across the maturity spectrum.
As we know, borrowers will refi nance
their debt when it makes economic
sense to do so; in short order, the call
notices started rolling in virtually each
business day for several years.
For an example of the ferocity of
the prepayment push, let's look at
one MBS cohort. In 2019, there was
around $328 billion of 30-year FNMA
3.0% pools issued. The average
borrowers' rate (gross WAC) was
3.87%, which is a bargain in 2024.
However, within a year of the 2019
issuance, mortgage rates had fallen
enough for even these seemingly
low-rate loans to start converting.
By the time they were two years old,
more than half of the entire cohort
was gone.
Extrapolating that over an entire
community bank bond portfolio,
including its callable agency,
corporate and municipal bonds, we
can see why the entire collection
Portfolio managers should have
some sandbags ready in the form of
call protection to guard against any
incoming waves of cash flow.
possibly turned over several
times in 2020 and 2021.
Here we go
And now we begin the muchanticipated
easing phase of the
interest rate cycle. While the speed
and extent of the rate cuts will
ultimately determine how much
cash fl ow is unleashed from your
community bank's collection of
investments, there are some factors
that will make 2025 and beyond
diff erent than 2020-not the least of
Education on Tap
Thanks to ICBA aff iliates for your 2024 support
ICBA Securities and its exclusive broker-dealer Stifel participated in
education events for 28 ICBA state aff iliates this year, which is the
most in our history. We are grateful for the relationships and look
forward to more collaboration in 2025.
ICBA LIVE 2025
ICBA Securities and Stifel will again be active at ICBA LIVE in
Nashville, Tenn., March 11-14. We will host several Learning Labs
and be visible in the Expo. A number of Stifel strategists will be on
hand to meet with management teams and discuss balance sheet
and income opportunities. To register, visit icba.org/live
which is that banks had more liquidity
on hand fi ve years ago, so an initial
dose of calls and prepayments will be
welcome to most community bank
balance sheets.
Also, while today's portfolios yield a
bit more than they did fi ve years ago,
their durations are much higher (4.3
years versus 2.9). This means that
the fl ood of cash may take longer to
materialize than it did in 2020. On
the plus side, since today's portfolios
are still, on balance, underwater by
about 8%, there's room for them to
appreciate in value if they have any
staying power.
One fi nal thought: Through
September 2024, the year-to-date
volume of calls being exercised on
agency bonds totaled $300 billion,
compared with $330 billion through
the fi rst nine months of 2020. This
speaks to the " higher-for-longer " rate
cycle just concluded. It also suggests
that portfolio managers should have
some sandbags ready in the form of
call protection to guard against any
incoming waves of cash fl ow.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks.
independentbanker.org // 27
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Independent Banker - December 2024

Table of Contents for the Digital Edition of Independent Banker - December 2024
