Pub. 2 2021 Issue 4 6 In Touch Munis For the Many BY JIM REBER, ICBA SECURITIES, AN ENDORSED CBA PROVIDER I have some good news for community bank portfolio managers who have grown weary of some or all the following conditions that have persisted since 2020: • declining portfolio returns • erratic cash flows • call option exposure • paltry yield spreads Chances are your bank’s portfolio was affected by some of these conditions over the past year. The wild ride in interest rates kept producing surprises for the bond portfolio, and, in truth, the only thing positive to be said is that prices rose — then declined — over that period. So, banks’ positions lost value in 2021, but current investment yields improved, which illustrates the mixed blessing. Over time, one of the enduring determinants of investment performance is sector weighting. More specifically, the more a bond portfolio consists of municipal bonds, the more likely it will have above-peer yields. According to Vining Sparks, as of Dec. 31, 2020, municipal bonds made up 53% of top-quartile community bank portfolios. At the other end of the spectrum, the bottom quartile was only 9% invested in munis. Historically, the number of bank-owned munis primarily determines a bank’s need to avoid tax liability. Some depository balance sheets have not had room for bonds, muni, or otherwise. Others have not been profitable enough to worry about that option. Still others, such as S Corps that pass earnings to shareholders, do not benefit from tax-free earnings. Supply shift Fast forward to the Tax Cuts and Jobs Act of 2017, which reduced corporate tax rates by around 40%. That was good news for bottom lines, but it lowered the effective yields on all tax-effected assets, such as traditional munis and bank-owned Taxable Municipal Bonds Have Appeal For Nearly All Community Banks E n d o r s e d P a r t n e r