Pub. 10 2021 Issue 1

The Commun i tyBanker 8 Do’s, Don’ts, and Maybes A Set of Simple Rules to Streamline Portfolio Management in 2021 I f my recent aggregate conversations with investment managers are an indication, there is still a lot of seat-of-the- pants decision-making going on out there when it comes to portfolio strategies. And I hasten to add this is not a criticism; it’s merely an observation. Why should we expect anything else? Banks are still sitting on a lot of cash. The bond market is giving mixed signals, with short rates being anchored at near-zero levels while the Treasury yield curve is its steepest in three years. Bond portfolios still have substantial unharvested gains, and net interest margins are at record lows. PPP 2.0 has been launched as a new fiscal stimulus wave about to be unleashed on consumers and governments. Given this bewildering set of variables, perhaps we can create a (relatively) simple set of ground rules that portfolio managers can refer to while trying to make sense of it all. I want to emphasize that “maybe” is the unspoken theme to these guidelines, as every community bank has its own risk/ size/earnings/ownership profiles. But here goes: Do: Stay invested. Cash yields zero and will remain there for the remainder of the year, at least. A simple bond that yields even 50 basis points (.50%) will probably produce a spread to your cost of funds and provide collateral for pledg- ing purposes. An example of a bond that yields 0.50% is a callable agency with a five-year maturity and one year of call protection (“5/1 callable”). Don’t: Keep buying the same old bonds just because. In just the last three years, community bank portfolios have changed tenor significantly. You know that banks own fewer tax-free securities since tax rates were cut in 2017, but did you know that both general market munis, and taxable munis, have picked up the slack? The other big “new” bond sector is multifamily mortgage-backed securities (MBS), which follows. By Jim Reber F E A T U R E