HOMETOWN BANKER | HOMETOWNBANKER.ORG | 13 JIM REBER ( JREBER@ICBASECURITIES.COM ) IS PRESIDENT AND CEO OF ICBA SECURITIES, ICBA’S INSTITUTIONAL, FIXED-INCOME BROKER-DEALER FOR COMMUNITY BANKS. Another subtle but significant feature in that legislation was to no longer allow muni issuers to “pre-refinance” their outstanding debt into other, new tax-free issues. In the 2020 calendar year, fully 30% of municipal bond issues were of the taxable variety. This is a decade-plus high-water mark. Less than ten years ago, taxable munis were but a blip on the new issue screen. They’d constitute somewhere between 3% and 7% of total new issuances. In fact, the only year that taxable munis exceeded 2020’s volume was 2010, and that was purely a function of the narrow window for issuing Build America Bonds (BABs), a type of taxable munis only available for issue in 2009–2010. CROWD PLEASERS Now to the afore-promised good news. If your community bank isn’t much invested in munis, taxables could bring some welcome relief to the issues mentioned in the first paragraph. As supply has grown and the interest rate curve has steepened throughout 2021, taxable munis can serve a number of purposes, not the least of which is respectable return. An investor can also now realistically hope for an issue that’s reasonably proximate to its footprint. Speaking of returns, a high-grade general obligation taxable muni will out-yield a bank-qualified (BQ) issue at any point on the yield curve. As of this writing, a 10-year AA-rated BQ bond will have a tax-equivalent yield of about 1.85%, whereas a similar-duration taxable will be about 2.10%. There are a number of reasons for this, including the relative lack of supply of BQ paper. Also, it bears mentioning that S Corp banks, if they’re able to have tax-free income, will recognize higher tax-equivalent yields than their C Corp brethren. What’s the downside? Just like any other taxable security, municipal bonds will have a higher degree of price volatility than tax-frees. However, the additional price risk is less than it used to be back in the era of 36% marginal rates for C Corps. It’s anyone’s guess what the impact of higher marginal tax rates will be to the tax-free muni market, but on the face of it, higher rates should be supportive of tax-effected assets. In the meantime, the growing supply of taxable munis should continue to produce attractive yields. The supply, both in absolute dollars and for a given issue (which isn’t limited to $10 million per issuer per year that BQs are), should produce more than adequate liquidity. The benefits and availability of taxable munis should appeal to the many community banks looking for the right combination of risk and reward. LOAN PORTFOLIO MANAGEMENT WEBINAR ICBA Securities and its exclusive broker Vining Sparks will host its next segment of the 2021 Community Banking Matters webinar series on May 11 at 10 a.m. Central. We will present Balance Sheet Management and Your Loan Portfolio. Visit icbasecurities.com to register.