19 ISSUE 1 | 2022 “Which is all the more reason to push your earnings out to future periods. And that means taking losses in 2021, buying some replacement bonds that have higher yields, and liking your newand-improved bond portfolio.” “But Jim, why would I do that if interest rates are going to be going up next year? Doesn’t that mean my bonds will lose more value by extending their maturities than if I stay put?” “Let me answer your question by asking one: is Community Trust Bank asset sensitive from an interest rate risk standpoint?” “The answer is, ‘I think so.’ That big wave of deposits that showed up last year just won’t go away. And even though we’re paying next to nothing for them, it’s had the effect of making our balance sheet positioned for rising rates.” “If that’s the case, then I wouldn’t worry about some selective extensions of your investments. Your overall earnings will be better if rates rise, which isn’t a given. And that brings up another point I’ve been making to community bankers this fall: Don’t be so proud of your unrealized gains. What that means by definition is that interest rates have fallen since you bought your collection of bonds. And since you’ve told me you’re asset sensitive, that means margin compression, so I would embrace a modest loss in my bond portfolio.” “Jim, at the moment, our portfolio is a little underwater since rates have risen in the past few months. What do I do next?” “Your brokers can identify those which are the best candidates for sale. Economically the most efficient are often those that are shorter, or maybe you have some MBS pools that have smaller block sizes. And circling back to municipals, those with maturities of less than 10 years often have market prices propped Webinar series for 2022 ICBA Securities and its exclusive broker Vining Sparks have concluded a successful Community Banking Matters webinar series. These events have proven very popular among community bankers, and we are planning the 2022 series. If you have topics that you would like to see covered, please contact Jim or your Vining Sparks sales rep. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. up by retail investors. But be careful: Tax-free munis are the last ones you want to sell at gains.” “Jim, this helps a lot. I’m getting on this project right now. And you’ve made me feel better about taking losses and extension swaps. It turns out that 2021 has been a better year than anyone would have thought at the start.” “Charlie, it’s always a pleasure. And don’t think for a minute that taking losses is ‘admitting defeat.’ I think it’s responsible, proactive portfolio management. And congratulations for piecing together another successful year at Community Trust Bank.” Your brokers can identify those which are the best candidates for sale. Economically the most efficient are often those that are shorter, or maybe you have some MBS pools that have smaller block sizes.
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