Pub. 2 2021 Issue 4

7 ISSUE 4 | 2021 Jim Reber, CPA, CFA is the president and CEO of ICBA Securities, ICBA’s institutional, fixed- income broker-dealer for community banks. Connect with Jim jreber@ life insurance. Since that time, banks have shed about one-fifth of their tax-frees. 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. Refinancing older bonds into taxable matters would significantly impact the types of munis issued in the current environment. In the 2020 calendar year, fully 30% of municipal bond issues were of the taxable variety, a decade-plus high-water mark. Less than ten years ago, taxable munis were but a blip on the new issue screen. They would constitute somewhere between 3% and 7% of total new issuances. The only year 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 is not 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 several purposes, not the least of which is a respectable return. An investor can also now realistically hope for an issue that is reasonably proximate to its footprint. 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 many reasons, including the relative lack of supply of BQ paper. Also, it bears mentioning that if S Corp banks have tax-free income, they may recognize higher tax-equivalent yields than their C Corp brethren. What is the downside? As with 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 is unknown what the impact of higher marginal tax rates will be on the tax-free muni market, but 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 amount, both in absolute dollars and for a given issue (which is not 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.  FMSI 913.955.3355 FMSI is a small business founded and located in Kansas, specializing in assisting community banks to succeed, a mission consistent with core CBA values. We have partnered with community banks for nearly 25-years providing core advisory services including asset/ liability, investment, and liquidity management. FMSI advisors actively assess market conditions and bank balance sheets of different size, mix, and capital levels. Market conditions are constantly changing presenting opportunities and challenges for CBA member banks. Interest rates are increasing for the first time in nearly a decade and now is a perfect time to partner with a trusted, industry leader. Establishing an FMSI relationship provides confidence your bank is optimizing the balance sheet, deploying necessary strategies, maximizing profitability, and managing balance sheet risks. FMSI is a Kansas CBA Endorsed Provider