Independent Banker - September 2020 - 41

Next: Safe deposit boxes can drive customer loyalty
had lost track of how low yields had
gotten on the things we typically buy.
And we've had more uninvested cash
than we like and that's yielding us not
much above zero. What are you telling
the Vining Sparks customers? "
" I believe we've come to the realization
that interest rates aren't going up
much anytime soon. The Fed told us
in its latest projections it expects overnight
rates to be unchanged through
2022. So, the waiting game isn't on
your side. "
" Last time we talked, you suggested
banks' asset/liability positions were
built for rising rates. That seems to be
the case with us. And since local loan
demand is going to be hard to grow
anytime soon, how are we going to
maintain our net interest margins? "
" To be succinct, you're not. 2020
will not be a year of record earnings
for the banking industry. And if you
think about it, there are several other
headwinds that are probably going to
keep a cap on interest rates. Namely,
the Fed doesn't look like it's going to
be taking its foot off the gas pedal with
its open market operations. And we
haven't even mentioned the inflation
outlook yet. "
" I came to you for advice, but I haven't
heard any yet. "
" Here's what we're suggesting. First,
stay invested. A very simple, boring
bond that yields 60 basis points
(0.60%) is going to beat Fed Funds
by half a percentage point. When you
drill down to what's really available,
a bond that yields even 1% is going to
have some kind of uncertainty-either
call risk, price risk or even credit risk.
That's how it's going to be for a while. "
" Am I supposed to like this? "
" Let me try to spin it this way: If you
buy these crummy yields, and interest
rates start to rise, sure you'll have some
unrealized losses. But the big picture
will get better, since that'll mean your
overall margins will improve. And
Education on Tap
2020 webinar series resumes
ICBA Securities and Vining Sparks will present the next segment of
their 2020 webinar series Community Banking Matters on Sept. 15
at 10 a.m. CDT. Justin Sparks and Dennis Porcaro will present
Municipal Market Update: Investment Strategies and Credit. Free
CPE is available. Visit viningsparks.com to register.
Virtual speaking schedule
Most of the 2020 ICBA state affiliate live events have been cancelled
or postponed, but a number of them have been converted to virtual
events and include ICBA Securities speakers. To view a current
calendar, visit icbasecurities.com/events
2020 will not be
a year of record
earnings for the
banking industry.
to be sure, banks at the moment can
stand to work on their bond portfolios'
durations, which are much shorter
than they were intended to be. "
" OK, give me some thoughts on
what you bond people refer to as 'relative
value'. What has a decent risk/
reward profile in this environment? "
" Many indicators point to the
municipal bond market. For six
straight weeks back in March and
April, retail investors, who own twothirds
of the overall market, were
big net sellers. That pushed all muni
yields higher, even on high-quality
issues that banks usually own. That
sector's yield has dropped throughout
the summer, but the spreads are still
far wider than earlier in the year. "
" I realize that's a sector where I
can build back my duration to where
I want it to be. But I keep hearing
that the other shoe is going to drop
on state and local governments. How
is a community bank supposed to get
comfortable with that? "
" There are several ways to do that,
Charlie. First and foremost, keep doing
your pre- and post-purchase due diligence.
We can certainly help you with
that. Strategically, the local issuers,
like school districts, townships and
local utilities, generally have a more
consistent revenue stream than state
governments, which usually rely more
on sales taxes. And, of course, pay
close attention to any credit enhancement
features that may be present. "
" Never would have thought I'd be
talking to you in a rate environment
like this. Thanks for your time. "
" Charlie, your brokers never run
out of things to suggest. Glad to help.
And keep your eyes on your portfolio's
duration. "
○You can read previous years' Shop
Talks at independentbanker.org
independentbanker.org Q 31
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Independent Banker - September 2020

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