Independent Banker - July 2020 - 29

Next: Branch design is pushing the needle. So is bank security
among them on most of the issuers they are rating, some
qualitative factors could have an influence on one or more
of the NRSROs. There are also variables that could influence
the liquidity of corporates or munis.
For example, a muni issue could be a small block
size. (Actually, if it's a bank-qualified issue, it's limited to
$10 million.) It could also be in a location that's exposed
to one or two major employers. Or, if it's a corporate issue,
it could be an industry that's cyclical or mature. Given the
lack of uniformity in these sectors, one can understand why
the Fed's foray into these new credit-risk markets is getting
some attention.
Haves ...
In this column this past month, we discussed the types of
securities the Fed is buying. To recap, they include " TBAeligible "
mortgage-backed securities (MBS) and certain
commercial MBS. And its buying them in large quantities.
As of the end of May, the Fed's balance sheet was a new high
of $7.1 trillion.
TBA-eligible pools include conventional Fannie Mae and
Freddie Mac fixed rate pools with maturities ranging from
10 to 30 years and Ginnie Mae 30-year fixed rate pools.
The Fed has purchased coupons ranging from 2% to 4%.
Commercial MBS purchases include several types we've
discussed in this column recently, including " DUS " bonds,
Freddie Mac " K's " and Ginnie Mae Project Loans.
As expected, and as the Fed hoped, prices have risen on
these chosen pools. For example, between March 15 and
May 15, Fannie Mae 3% MBS increased by more than 4%
to the point that many investors actually have begun to sell
their holdings and realizing their gains.
Municipal purchases through the Municipal Liquidity
Facility (MLF) are just beginning, as the Fed has redefined
what bonds and issuers are eligible. The investments will be
shorter in duration than the MBS with maximum terms of
three years.
... and have nots
What is of greater importance to community banks is what
the Fed is not buying. This " losers " list includes MBS backed
by jumbo loans, adjustable rate MBS and collateralized
mortgage obligations (CMOs). Prices on these bonds have
also risen this year, but by a fraction of TBA-eligible pools.
The municipal bond market has essentially been
bifurcated. Short maturities, which have long been
price-supported by retail investors, have now benefitted
from the MLF. The yields on the short end of the curve (i.e.,
five years and less) are of little interest to community banks.
Longer maturities, however, are another story.
Education on Tap
Quarterly economic update
Vining Sparks economists Craig Dismuke and
Dudley Carter are presenting their next Economic
Outlook webinar on July 14 at 10 a.m. Central. To
register, visit viningsparks.com
New investment research
ICBA Securities' exclusive broker, Vining Sparks,
has recently published a Strategic Insight, Potential
for Selling Held-to-Maturity Securities. This
document suggests that conditions may exist for
banks to find liquidity from an unexpected source.
To access your copy of this report, visit the website
or contact your Vining Sparks sales rep.
There are several options for community banks that come
from this tumult. My first recommendation is to identify
whether any TBA-eligible MBS are already in the bond portfolio.
Your brokers can assist you in this regard. You may be
pleasantly surprised what they're worth.
Secondly, if you're so inclined to sell them, consider longer
municipal bonds or non-TBA pools for reinvestment
What is of greater importance
to community banks is what
the Fed is not buying.
options. There are a lot more bonds that the Fed isn't buying
than ones that they are, so finding replacement securities
shouldn't be too difficult. And, of course, perform your due
diligence on the creditworthiness of any muni offering.
Finally, be sure to sufficiently model the effects of the
bond swap across the entirety of your financial statements.
You'll want to be clear about the impact on capital, earnings,
liquidity and interest rate risk. It's proper to have this documented
sufficiently before pulling any triggers.
Community bank portfolio managers have long been adept
at recognizing value. In today's bond market, that could
mean selling " winners " and buying " losers. " It's further indication
that 2020 is a year for banking unlike any other.
independentbanker.org Q 29
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Independent Banker - July 2020

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