Pub. 1 2021 Issue 3

June 2021 | 21 The supply, both in absolute dollars and for a given issue (which isn’t limited to $10 million per issuer per year that BQs are), should produce more than adequate liquidity. Jim Reber (jreber@icbasecurities.com ) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Call me at 402.301.3707 Based in Omaha, Neb., covering Nebraska, Kansas and Missouri Mike P te Together, let ’s make it happen. Member FDIC 24870 We do not reparticipate any loans. As your partner, we share your values. You’ll find the community banking service, integrity and trust you’re used to. Why choose Bell as your bank’s lending partner? Commercial & ag participation loans Bank stock & ownership loans Bank building financing Business & personal loans for bankers Crowd pleasers Now to the afore-promised good news. If your community bank isn’t 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 a number of purposes, not the least of which is respectable return. An investor can also now realistically hope for an issue that’s reasonably proximate to its footprint. Speaking of returns, 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 a number of reasons for this, including the relative lack of supply of BQ paper. Also, it bears mentioning that S Corp banks, if they’re able to have tax-free income, will recognize higher tax-equivalent yields than their C Corp brethren. What’s the downside? Just like 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’s anyone’s guess what the impact of higher marginal tax rates will be to the tax-freemuni market, but on the face of it, 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 supply, both in absolute dollars and for a given issue (which isn’t 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. ■