Investment Strategies for Banks
Release Date: March 17, 2021
Participants: Aaron Hemphill, Scott Carrithers
Topic: Investment Strategies for Banks
Click here to listen now, or read the transcript below:
Welcome to the latest installment of the Leaderboard Report. I'm Scott Carrithers, Managing Director for Country Club Bank’s Capital Markets Group.
In today's Leaderboard Report, we will hear from Aaron Hemphill of Country Club Bank’s Capital Markets Group Tulsa Office, who will discuss strategies our team is recommending to community banks.
Thank you, Scott.
In our previous Leaderboard Report, Lonnie Harris discussed several of the most common challenges community banks are facing. One challenge is excess liquidity, coupled with decreasing yields on earning assets.
Today, we would like to discuss a few specific strategies banks can use to help preserve investment yields and better position investments for the future.
U.S. Treasury yields have been increasing substantially over the past 30-60 days, primarily on the intermediate to longer end of the curve (from 5-30 year maturities). This increase in yield has been primarily driven by expectations of further economic recovery, vaccine distribution progress, and the Federal Reserve’s commitment to remain accommodative with monetary policy.
Volatility in fixed-income markets has been very high recently, and banks continue to hold large amounts of excess liquidity.
For some, the investment portfolio is managed as an afterthought. Yet, during times of increased market volatility, it‘s important to frequently analyze your security holdings. These movements can expose securities in your portfolio that aren’t performing as expected, or may bring to light holdings that don’t fit your quality and/or risk standards.
We know every bank portfolio is different. There is not a “one-size-fits-all” approach. However, there are a few key recommendations we think banks should consider, especially given the current rate environment and strong likelihood of increased rates into the future.
One key recommendation is to consider 10-15 year mortgage-backed securities (or MBS) that have lower coupons. These pools will have lower premiums and shorter durations with minimal extension risk.
If rates continue to rise, this structure is likely to provide numerous benefits—such as current cash flow of monthly principal and interest payments that can be reinvested at potentially higher rates, or simply used to fund future loan demand at higher interest rates. The flexibility provided down the road if assets are repricing at higher rates, combined with current yield and spread over the Treasury curve, make this a fundamental investment strategy for banks.
A second recommendation to consider is taking advantage of historically low longer-term funding through the brokered CD market. Now, we understand this is a paradox for banks since funding is historically cheaper when we have plenty of liquidity available. But when we actually need it, funding can be much more expensive. At this time, we believe a good portion of bank liquidity is short term, and as the economy continues to regain strength, much of that “shorter-term” liquidity will likely dry up. This will leave banks looking for additional funding as loan demand increases.
Those who take advantage of attractively priced funding now have the option to place those funds in an MBS strategy, as mentioned earlier. If you haven’t already priced longer-term funding options, we highly recommend having this conversation.
Country Club Bank wants to help ensure your portfolio is structured in a way that compliments your banking goals and strategies. Thoughtfully planned and executed strategies can make a significant difference on both your short and long-term profitability. Having a sound investment strategy in place also helps you sleep better at night—and gives you more time to do what you do best: create positive impacts and growth in the communities you serve.
Please reach out to your Country Club Bank representative with questions regarding these recommendations and other ideas, or to discuss your current portfolio strategy. Thank you for your time.