Independent Banker - July 2017 - 70

Nuts & Bolts
PORTFOLIO MANAGEMENT
Life and taxes
A drop in tax rates would have an impact on investments.
By Jim Reber
Boon to income...
At the risk of being Master of
the Obvious, the vast majority of
community banks, being profi table
and taxable, will have an
improved after-tax bottom line if
the maximum corporate tax rate
gets cut. Especially so if the cut is
from 35 percent to 15 percent. And
more so if Alternative Minimum Tax
(AMT) is eliminated. And still more
so if the cuts apply to pass-through
businesses.
Given that about a third of all
banks are now S corps, a large portion
of ICBA's membership would
potentially enjoy a windfall of tax
savings. AMT elimination would
also create some permanent benefi ts
for many community banks.
But there will be a new list of
" don'ts " for the management of
these banks' investment portfolios.
For example, the benefi ts that
accrue from tax-advantaged strategies
will fall dramatically.
ICBA
VOICE
Jim Reber (jreber@icbasecurities.
com) is president and CEO of ICBA
Securities, ICBA's institutional,
fi xed-income broker-dealer for
community banks.
______________
___
been welcomed by
the ICBA and the
community banking
industry in general,
as well it should.
There would
be some effect on
the management
of the investment
portfolio, and it
T
he Trump administration
has proposed a
dramatic decrease in the
maximum rate of income
tax at the corporate
level. The proposal would include
" pass-through " businesses such as S
corps. This news, in a vacuum, has
would not all be favorable. While
acknowledging we're very early in the
game of negotiating such a landmark
piece of legislation, this column
will point out some of the results
a substantial tax cut would have
on your community bank's income
statement and balance sheet.
70 ICBA IndependentBanker July 2017
...bust for munis?
Here is one example. A community
bank in the 35 percent tax bracket
has recently been able to buy bankqualifi
ed (BQ) AA-rated municipal
bonds with eight-year maturities
at tax-equivalent yields of around
3.00%. If the marginal rate gets cut
to the 15 percent number being
discussed, the price on that bond
will have to fall more than 4 percent
for the tax-equivalent yield to reach
parity.
There are other variables that
make " before/after " comparisons
diffi cult, including the fact that
TEFRA penalties will decline,
because less tax liability is being
avoided. There also is the reality
that if secondary market prices drop
from premium to discount territory,

Independent Banker - July 2017

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Table of Contents
Independent Banker - July 2017 - Intro
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Independent Banker - July 2017 - Table of Contents
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