Independent Banker - April 2020 - 31

Next: Stop your data from being held hostage
several community banks had to write off their investments
in certain bonds-bonds!-and that was no fun. Lehman
Brothers and agency-preferred stock comes to mind. Of
course, a lot of community banks had loan issues back
in that era, too. I believe I'm correct in saying the entire
industry lost money, net, in 2008 and 2009. Glad that era
is in our rearview mirror.
And I know part of the reason I had been fairly idle
recently is that our deposit-gathering has been a challenge.
That's a universal condition. And I'll mostly let the liabilities
section of our balance sheet speak for itself, but have
you considered layering in some wholesale funds? I realize
there can be a stigma attached to that activity, but, at the
same time, we've got plenty of capital. I understand our
asset/liability posture is pretty balanced, so it's just possible
that you can grab some fixed-rate deposits, lock in
your costs and leverage out on the yield curve with loans or
bonds. I would be pleased to be of service.
I'm excited about contributing to the community bank's
success this year. It's something of a bittersweet period
for us bond portfolios when we get back to being in the
spotlight, because it probably means that the overall economy
has peaked and is at least beginning to show signs of
I thoroughly enjoy being part
of a successful enterprise like
our community bank.
a slowdown. I realize a free-market system has expansions
and recessions, so it's part of life, and we've been lucky to
have such a great run of economic growth recently. Still,
I'm ready for what the near future holds.
You mentioned that bond fashion has changed in the
past five years. That's great! I've never been very proud of
some of my components anyway. It seems like the bonds
that can get called away at any time never perform like
you want them to. I hear the term " negative convexity "
and some profanity in close quarters quite often. I'd much
rather be made up of bonds that can actually rise in value
if rates fall. And it doesn't bother me that a new wave of
mortgage-backed securities secured by apartments and
healthcare facilities is available. If they have the same
Ginnie Mae, Fannie Mae or Freddie Mac wrappers, they
should be as liquid as the ones backed by single family residences,
right? And, just maybe, their cash flows will be
more predictable.
Education on Tap
Webinar series continues
ICBA Securities and its exclusive broker Vining
Sparks continue their 2020 Community Banking
Matters webinar series on April 14 at 10 a.m. CDT.
Greg Roll will present Balance Sheet Management
and Your Loan Portfolio. Up to one hour of CPE
is offered, and there is no cost to attend. Visit
viningsparks.com to register.
I suppose I should address your point about my being
nearly 3% underwater in the recent past. Of course I'm
going to lose value when rates rise! That's why you've
got qualified risk managers to assist you-so that you can
make value judgments about the price volatilities in each
bond you buy and about me in aggregate. And since you've
purposely set my duration at
about three years, you know
what happens when rates rise
1%-my price is going to drop
about 3%. That should have
come as no surprise.
Graduate
While I'm at it, you contended
in your letter that when
I lost value, my yield didn't
improve. That's what's going
to happen if you're not sending
me any new bonds when
rates are rising! I'm asking
politely for bonds with positive
convexity, thank you very
much. With rates across the
board being on the low side,
it doesn't cost much to buy
call protection.
I'm ready when you are to
build me back up to my peak
size. I thoroughly enjoy being
part of a successful enterprise
Banking School
in Memphis
Barret School of
Banking, endorsed
by ICBA Community
Banker University,
is hosting its 48th
annual session
from May 17-22.
Attendees learn
cutting-edge banking
skills and leadership
techniques at a costeffective
price point.
Visit barret.ws for
more information.
like our community bank. I am also very happy to be the
alternative-and complement-to our bank's loan portfolio.
It's what I'm here for.
Very truly yours,
The Bond Portfolio
independentbanker.org Q 31
http://www.viningsparks.com http://www.barret.ws http://www.independentbanker.org
Independent Banker - April 2020

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