Independent Banker - December 2017 - 74

Nuts & Bolts
PORTFOLIO MANAGEMENT
Shopping list 2017
A guide to year-end portfolio management
By Jim Reber
I
ICBA
VOICE
___
n the spirit of the holidays, I
thought it would be appropriate
to convey to you some suggestions
about how to effi ciently
close out the calendar year and
perhaps spend some quality time with
the family. These ideas hopefully will
allow you to take advantage of some
temporary market conditions. As I
write, 2017 did not turn out to be a year
that saw signifi cant declines in value
for community bank investment portfolios,
thanks to infl ation that remained
confusingly subdued.
We know that literally thousands
of community banks have steeled
their balance sheets against rising
rates, and we're not suggesting anything
different, but the payoff hasn't
occurred, at least not yet. Nonetheless,
portfolio managers have some
options at their disposal. This has to
do with the current term structure
of interest rates and the ability for
most community banks to capture
gains or losses through sales. The
upshot is that strategic repositioning
of your holdings can be accomplished
through a review of what you own
and what is available.
Jim Reber (jreber@icbasecurities.
com) is president and CEO of ICBA
Securities, ICBA's institutional,
fi xed-income broker-dealer for
community banks.
_____________
Tidy up
Investment managers
often look to
year end to make
adjustments to the
bond portfolio. We
have learned that
there are a number
of reasons for this
70 ICBA Independent Banker December 2017
seasonality, although one that seems
to recur is that the bank's annual
earnings fi gure comes into focus
when we're in the fourth quarter.
A common year-end cleanup activity
is to consolidate the mortgage
securities that have amortized down
to a certain principal balance by selling
them and reinvesting the dollars
into a larger, single block. Each bank
has its own idea about the best dollar
limit to use when executing, but for a
general guide, a remaining balance of
about $250,000 of a pool has reasonable
liquidity when seeking a bid.
Another popular fourth-quarter
action is to review the portfolio's
cash fl ows. Your favorite broker or an
interest-rate risk consultant should
be able to provide shocked cash fl ows
in quick order, at no incremental
cost. The standard rate shocks would
range from +400 basis points (up 4.00
percent) to -300 basis points.
What the market's giving
If you've looked at the market values
of your holdings lately, you've noticed
something odd. The longest maturity
investments that you own, which
normally mean your municipal bonds,
have the biggest gains, while your
shorter investments are on balance
under water. What has happened?
Well, we can point to the hawkish
stance of the Fed. The Fed has
tightened rates twice this year and
continues to suggest in word and
action that it will hike them again in
December. In response, short rates
have risen, and anything with an
expected life of less than four years
has lost value this year. Longer rates
are slightly lower, as infl ation has
actually declined, so higher-duration
bond values have improved.
If you are so inclined to sell some
Independent Banker - December 2017

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