WHERE COMMUNITY BANKS BANK Member FDIC Scan to call now Traci Oliver Eric Hallman Tara Koester As a bankers’ bank we strive to help with every level of service and expertise, covering anything from loan participations, merchant services, ATM/debit and much more. We aim to answer your questions with, “…yes, we can do that too!” www.bbwest.com Bankers’ Bank of the West soon-to-be empty nesters, or possibly expect to move for employment reasons. If the borrowers do prepay before the first reset date arrives, they’ve saved some interest costs and didn’t expose themselves to higher reset rates. Current Examples Given the profiles and behaviors of the borrowers, the cash flows that hybrids produce are substantial. The loans have fully amortizing 30-year terms, so not a lot of principal is scheduled to amortize initially, but an investor can expect some early activity. Then, as the first reset date approaches, the prepayments speed up even more, sometimes dramatically. Some models predict paydowns of 25% or more annually during the fixed rate window, and even faster in the last few years before the initial reset. For many community banks, fast prepayments are exactly what they want in 2023. Clearly, this was not the case in 2020 and 2021 when banks were drowning in liquidity and interest rates were at record lows. Another piece of good news is that current market prices for these newly-issued hybrids are near par, usually between 100 and 101. This means that significant paydowns won’t have much impact on your yields. Perhaps even better: the inverted yield curve makes the hybrids with the shortest first reset date (weighted average roll, or WAR) the highest yielding, at least until the WAR. For example, a GNMA hybrid with a 36-month roll date, that starts with a full 5% coupon, is currently available at just a slight premium. This significantly out-yields some longer MBS, at least for the next three years. There’s more to the ARMs story than we have time and space for here (e.g., rate caps), but it’s fair to say hybrids are worth a portfolio manager’s look in early 2023. You may decide they’re virtual bargains, and that your security inventory should pivot and take down a supply. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income brokerdealer for community banks. NICBONLINE.COM 13
RkJQdWJsaXNoZXIy MTg3NDExNQ==