Jim Reber is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. He can be reached at jreber@icbasecurities.com. New ICBA Securities Directors ICBA Securities has added these four leadership bankers to its Board of Directors: Tommy Bates, ICBA Chairman, Legends Bank, Clarksville, Tenn.; Aza Bittinger, Community Bankers Association of Ohio, Columbus, Ohio; Blake Heid, First Option Bank, Paola, Kan.; and Craig Wanichek, Summit Bank, Eugene, Ore. bond now has an expected average life of almost six years, while the 2.5% is around four years. This is part of the reason that the higher coupon’s price has declined less than the cut coupon pool. But to be clear, neither of these are expected to have much prepayment activity in the near future, as the collateral for both is plainly out of the money to be refinanced. Discount munis: Buyers be alert Let’s shift investment sectors, but stay on message. The taxfree municipal segment of a bank’s collection of bonds is an important determinant of overall performance. Certain rules apply to tax-frees purchased at prices below par that you may have forgotten since “discount munis” was an oxymoron for most of the last four years. The Internal Revenue Code states that a tax-free bond that came to market either at a par or premium price, which is subsequently purchased in the secondary market at a discount, is subject to capital gains tax to the extent the yield is attributable to the discount. For example, a bond with a 3.0% coupon that came to market at par, and is now priced at a discount to yield 4.0%, will be taxed at the capital gains rate on the 1.0% incremental market yield. The upshot is a muni priced to yield 4.0% may not yield 4.0%, given its coupon and original price. Your brokers can and should walk you through the ramifications of these matters, which have some subplots that space does not allow to discuss here. The easiest workaround? You guessed it: up-in-coupon bonds. Munis that have higher stated rates, which today mean fours and fives, have built-in cushions against falling prices and avoid capital gains tax liabilities. Ultimately, multiple applications of this strategy suggested here can make life better for your community bank. Limited price volatility? Probably. More predictable cash flow? Likely. Up with income? Most expectedly. BRUCE GOETSCH National Sales Manager bgoetsch@myservion.com 651-497-4734 myservion.com We provide financial institutions and borrowers the support they need to reach their financial goals. Re-envisionyour mortgage strategy. Correspondent Retail Wholesale Delegated Conventional FHA, VA, USDA Jumbo/Non-Conforming Quality control Contract processing Contract closing Servicing Appraisal review Servion Mortgage is a DBA of Servion, Inc. NMLS #1037 Equal Housing Lender partnership channels mortgage products additional services 9 ISSUE 3 | 2022
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