Wednesday, November 30, 2022 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 11/22/22 | 3.97 | 4.40 | 4.68 | 4.79 | 4.47 | 4.27 | 3.93 | 3.86 | 3.76 | 4.05 | 3.83 |
| 11/23/22 | 4.12 | 4.40 | 4.67 | 4.75 | 4.46 | 4.23 | 3.88 | 3.81 | 3.71 | 3.97 | 3.74 |
| 11/25/22 | 4.16 | 4.41 | 4.67 | 4.76 | 4.42 | 4.20 | 3.85 | 3.78 | 3.68 | 3.97 | 3.74 |
| 11/28/22 | 4.11 | 4.41 | 4.72 | 4.76 | 4.46 | 4.22 | 3.88 | 3.80 | 3.69 | 3.97 | 3.74 |
| 11/29/22 | 4.08 | 4.38 | 4.72 | 4.78 | 4.48 | 4.24 | 3.92 | 3.85 | 3.75 | 4.02 | 3.81 |
Source: U.S. Department of the Treasury, as of 11/29/2022
Why would I want to recognize a loss?
“No, I am NOT going to sell those bonds because I don’t want to recognize the loss…and nothing you say can convince me otherwise.”
Sometimes we just need to look at a strategy from a different angle to appreciate the opportunities available to us. All of us have seen losses as they pile up in our bond portfolio this year with a bit of regret, if not downright anger. As a community bank, we find ourselves in the exact place as many of our clients. And with regard to the bond portfolio, all we can say is, “we hear ya!” But there are opportunities (isn’t this always the case?), and we shouldn’t be blind to them even as we lament the missed opportunities elsewhere.
For example, we can all appreciate the difficulty in executing a bond swap strategy (selling bonds and buying back others) when the yield curve is inverted, and as liquidity has run off of the balance sheet, we are looking for creative ways to fund loan demand, while keeping an eye on all of the other metrics that make our businesses successful, i.e., Capital Ratios, ROA and ROE to name a few.
Here is an idea, use your bond portfolio to fund loan growth. This is where the comment at the top of this article comes into play, when we mention this to banks, that is often the response we receive, or put more succinctly, “NO WAY! (virtual door slams) ”
Let’s explore our options when considering adding to the loan portfolio (we will use a 1 year horizon for simplicity):
Sometimes we just need to look at a strategy from a different angle to appreciate the opportunities available to us. All of us have seen losses as they pile up in our bond portfolio this year with a bit of regret, if not downright anger. As a community bank, we find ourselves in the exact place as many of our clients. And with regard to the bond portfolio, all we can say is, “we hear ya!” But there are opportunities (isn’t this always the case?), and we shouldn’t be blind to them even as we lament the missed opportunities elsewhere.
For example, we can all appreciate the difficulty in executing a bond swap strategy (selling bonds and buying back others) when the yield curve is inverted, and as liquidity has run off of the balance sheet, we are looking for creative ways to fund loan demand, while keeping an eye on all of the other metrics that make our businesses successful, i.e., Capital Ratios, ROA and ROE to name a few.
Here is an idea, use your bond portfolio to fund loan growth. This is where the comment at the top of this article comes into play, when we mention this to banks, that is often the response we receive, or put more succinctly, “NO WAY! (virtual door slams) ”
Let’s explore our options when considering adding to the loan portfolio (we will use a 1 year horizon for simplicity):
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Borrow from the FHLB @ 5.16% (cost = $51,600 per year)
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Issue Brokered Deposits @ 4.90% (cost = $49,000 per year)
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Run a Retail Deposit Special @ 3.50% (cost = $35,000 per year, if you can grow without cannibalizing other deposits, otherwise much higher)
The above options increase the size of the balance sheet AND,
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require a capital allocation, lowering the ROE available on the loan.
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are expensive, lowering the spread and thereby reducing the ROA available on the loan.
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reduce the Tangible Capital Ratio by increasing both sides of the balance sheet.
The alternative is to sell bonds, taking a loss that will be a tax write-off, reduce future exposures to larger losses, and fund at a specific and verifiable cost, often much lower than the alternatives above.
For example, here is a swap we ran for a client:
Sell Various Municipal securities with an average maturity of 9.828 years, recognizing a loss of (230,562), with a taxable equivalent Give-Up yield of 3.90%. As a C Corp bank, they will write off 27% of that loss, or 62,252 (21% Federal and 6.00% State).
The after tax loss = $143,128 spread out over 9.828 years = $14,563 per year.
The give-up yield = 3.90%, on the nearly 10Y average life of the securities sold.
The loan in this example is a 5Y loan at 6.50% (well below the 7.65% rate that the Loan Builder tool would indicate is a market rate; https://www.bancpath.com/Tools/loan-builder.aspx
Detail subject to change and availability
In this example, we would obviously take the entire loss at the time of sale, and the higher loan rate would recover this entire loss in just 2.6 years.
By executing the above strategy, this bank accomplishes several goals:
By executing the above strategy, this bank accomplishes several goals:
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funds the loan at the lowest cost
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increases ROA by gaining maximum spread on the loan
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increases ROE by refraining from leveraging the balance sheet further while booking a higher earning asset to drive earnings.
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reduces average maturity on the investment portfolio (limiting future losses if rates increase).
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increases the overall portfolio yield (culling lowest yields leaves higher overall yields in the portfolio).
Now, that wasn’t so bad, was it?
Thank you for your continued confidence in all of us here at Country Club Bank.
Don’t hesitate to call on us if we can help with ANY of the varied products and services we provide to you, our banker friends.
Thank you for your continued confidence in all of us here at Country Club Bank.
Don’t hesitate to call on us if we can help with ANY of the varied products and services we provide to you, our banker friends.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value