Independent Banker - July 2018 - 37

" How does that work? "
" By using a very simple, very generic
interest-rate swap. Like most community
banks, you're chronically short of
short assets and long liabilities, and
this tool can quickly fix that problem.
I should also mention that you could
save as much as a quarter point [0.25
percent] on your cost compared to
standard fixed-rate advances. "
" Jim, can you explain this strategy
to my ALCO team and my board?
This is going to sound mighty sophisticated
to them. And the examiners
will be here later this year and will be
asking some questions, too. "
" Charlie, it should give you some
comfort to know there are more than
1,000 community banks that already
are using some form of rate swaps to
hedge their risk. We're very used to
explaining this process, to the point
that it's almost a turnkey approach. "
" What can I do on the asset side to
create some cash flow? "
" Two things come to mind. First,
buy some mortgage-backed securities
[MBSs] that are short enough and
have high enough coupons so you're
assured of having some reliable cash
flow. A prime example is a seasoned,
15-year MBS with a stated rate of 3.0
percent or higher. In my view, 'seasoned'
means two or more years old. "
" What's my other option? "
" You could buy a seasoned, adjustable-rate
mortgage [ARM] pool that is
about a year away from its first reset
date. Some call this a 'short roll date'
pool. Typically, the borrowers will
really pick up their prepayment activity
as that roll date gets closer, so you'll
Education on Tap
Road trip
ICBA Securities and its
exclusive broker, Vining
Sparks, will be on the road this
summer and fall, speaking at
a number of ICBA state and
regional partner events. For a
full calendar of engagements,
visit icbasecurities.com/
seminarswebinars
2018 Bond Academy
announced
ICBA Securities will host
the 2018 edition of the ICBA
Bond Academy, Oct. 22-23
in Memphis, Tenn. This event
will equip attendees with the
basic tools to plan, build and
maintain a high-performing
investment portfolio. Twelve
hours of CPE credit are
available. To register, visit the
ICBA Securities website.
      ǫ
get a wave of principal paydowns,
which is exactly what you want. You'll
need to have an exit strategy with
these pools, as they can get pretty
small pretty quickly. "
" OK, Jim, here's my last question.
I'm happy to be paying fewer taxes,
but do I really need as many municipal
bonds as I've had in the past? "
" Charlie, we think yes. Munis still
accomplish their objectives, which is
to give you high-quality, still relatively
high-yield liquid investments. And the
market has adjusted so that you're getting
nearly the same spreads as before
on maturities 10 years and out. So
my suggestion is to keep your muni
weightings near where they've been in
the past, and enjoy the business cycle. "
" Thanks much, Jim. I'll call again,
as soon as something else confuses me
about my balance sheet. "
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Independent Banker - July 2018

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