Today, we sit down with Alex Sanchez of the Florida Bankers Association to get his thoughts on what lies ahead for community banks in 2021. To learn more about the FBA, visit www.floridabankers.com

N/A

[Intro] Helping community bankers grow themselves, their team and their profits. This is the Community Bank podcast.

Caleb Stevens: Well, Hey everyone and welcome to the Community Bank podcast. Our first episode of 2021. Thank you so much for tuning in today. We had a great six months when we started the show back in June and December was a record month for us in terms of downloads. So, we’re super grateful for you guys. Every episode, we’re always trying to add value to you, the community bankers. So, we’re grateful that you’ve joined us today. I’m Caleb Stevens. I work in our business development group here in Atlanta, and I serve banks in Georgia as well as Kentucky and I am joined by two of my colleagues, Tom Fitzgerald, and Todd, Patrick, how are you guys doing today?

Todd Patrick: Great Caleb.

Todd Patrick: Doing great Caleb.

Caleb Stevens: Well, Todd and Tom I can’t think of two better people to kick off the new year, talking about the economy what’s going on politically and what that means for the bond portfolio. We have a lot of CFOs to listen to this show. And so, I think it’s a really timely topic to kind of dive into what’s been going on with the economy, what the political unrest might look like and how that might impact the rest of 2021 and how that’s going to impact the balance sheet for bankers. And so, Tom would love to kind of kick it to you for you to kind of take us to what’s going on with the economy, and then we can dive into some bond conversations.

Tom Fitzgerald: Sure. Thanks, Caleb and thank you, Todd, for coming to take part in this.

Todd Patrick: Good to see you Fitz.

Tom Fitzgerald: Todd is one of our big producers at CenterState, and also one of the more experienced sales reps that we have. And so, I think everybody goes to Todd to kind of get information that he seems to have at the drop of a hat. So anyway, great to have you Todd, and I think we’re going to provide some listeners with the listeners, some really good information on this episode. I think we’ve done this about three times. Now. This will be the third time we’ve done an investment related episode and it’s always been one of the better listened to shows. So, I think we felt that was be a good way to kind of kick off 21 and get you know, kind of give an overview of where we think rates are going to be, where we think, you know, where the opportunities would lie in the investment portfolios going forward for the balance of the year. So, let’s just kick it off with that. We’re going to kind of start off with what our views are on rates and expectations for those rates. And then kind of from there, go into where we see opportunities in the investment portfolio and starting with rates it’s, you’ve got to kind of start with the election impact.
You know, we’ve just gone through finally finished the electoral college counts. So, we’ve got president Biden elect will be inaugurated next week, I guess, on the 20th. And he will have a unified government. We have those twin Senate runoffs in Georgia went to the Dems. So, they’ll have a slight majority when you add in Vice President Harris. So, they’ll have the house, we’ll have the Senate and you have the white house. And so, we’ll have a unified government. Now what the market is implying from that is that we’ll see more fiscal stimulus. And in fact, on Thursday, the Biden administration is going to kind of roll out a third stimulus program with the highlight being the stimulus checks at $2,000, which paired with the $600 would be a $1,400 check in this new program. So that was the two senators the democratic senators, Warnock and Ossoff. They ran pretty much, that was a central part of their campaigns was to get those $2,000 checks. So that’s going to be a centerpiece in this next stimulus package. Again, some of the details on that will be coming out on Thursday. Part of what we’ve seen, I think anybody who follows markets has seen the long end of the treasury curve backing up in the last several months and, that’s one reason for that. We had the cares act stimulus. We had this stimulus 2.0, the heroes act passed in December and then probably the third one coming in the next several weeks or so from the Biden administration. And so, we’ve seen a back-up in rates over 1%, I think right now, the tenure is at about a 111. Todd, do you have, break out your crystal ball and can you kind of give us thoughts of where you think that tenure might land over the next six months to a year?

Todd Patrick: Yeah, that’s a great question. It’s funny. I started a process a few years ago of writing a predictions list for all my clients and I send it out and so, I was trying to finish that up last night. And as I look at it, I spent some time looking at this. If you look at the tenure treasury historically in a calendar year, the tenure treasury, the low for the year and the high for the year tends to trend about 80 to a hundred basis point range. Given where we’ve been the last couple of years has been pretty muted. Like last year was a big move initially, but then we flat-lined pretty good. And so now when you look at, I think this’ll be a year where the rage of which we, trade will be on the lower end of the hundreds of the 80 more 80. And given where we’ve moved. I think we’re going probably be, I can’t see us getting past a one and a half percent on the tenure this year. And, you know, there’s a lot of reasons why, I think that’s the case. If you take that back down, you are probably 75 to 80 basis points on the bottom, which you would think we’d hit sooner than later, just because the increase in COVID cases may actually cause some concern, right as we go forward or political unrest that could happen around the world, particularly here after what happened last week at the Capitol.

Tom Fitzgerald: What happened here.

Todd Patrick: Yeah. You know, it’s crazy. So, I think that we’ll stay in that one to one and a quarter range predominantly.

Tom Fitzgerald: Right.

Todd Patrick: But we’ll probably equal on either side of that at some point during the year.

Tom Fitzgerald: Yeah. And I looked at before coming in to do the show, the Bloomberg consensus for yearend for the tenure at 124. So, kind of right in that rage.

Todd Patrick: They called but yeah.

Tom Fitzgerald: You were one of the contributors to that level.

Todd Patrick: Yeah, they called me.

Tom Fitzgerald: So, the other, you know, kind of mover of rates, I think in the last several months has been the breakeven rates. I’m talking about the tips break even inflation rates and what that is for some that may not be familiar, the tips security, the IPS stands for inflation protected security, but those are treasury securities. The feature is they come out with a very small coupon and then they get a bonus payment based on CPI. And so, you can kind of tease out what that inflation expectation is for CPI on the pricing that investors are willing to pay. So, the tenure breaks even rate went over 2% recently, which was about I think, a two year high for that level and actually higher than it was pre pandemic. And so, the market, again, because of stimulus because of probably the vaccine spreading through the economy and giving a little boost there are looking at inflation ramping up in the, you know, the 2% range. Now, if you think back the last decade or so, you know, we had pretty solid 2% to 3% GDP numbers. We had an unemployment done at three and a half percent and we couldn’t get really anywhere close to 2% inflation. So, I tend to think the market’s getting a little bit ahead of itself and that kind of expectation that inflation is going to be kind of moving over 2%. How do you feel Todd on that?

Todd Patrick: Yeah. It makes sense in some capacity that inflation should happen at some point, right? I mean, when you look at the basics of inflation, it is when there are too many dollars chasing too few goods, we had a supply chain disruption, and, you know, they’re still trying to catch up. The fed has just flushed the banking system and the fiscal government has sent people checks. So, there’s a lot of dollars, record amount of dollars shifting around in the economy. So based on that basic definition, you would anticipate that inflation has to happen at some point, but I fall back to where you are is that it doesn’t feel legitimate. I think that what we will see is some inflation will happen this year, but it’s going to be the year of the year change. When you go back to last spring, when prices really got popped, if we’re normalizing this year, you’d have to see at least a temporary spike in inflation just for the year over year change. That’s more of last year’s drop rather than this year’s gain. So, I do think we’re going to have a piece where it looks like inflation, but I think it’s going to be temporary in that the fed won’t react to it. That they’ll see it the same way.

Tom Fitzgerald: Yeah. You know, you look at the last jobs report and unemployment number was 6.7, I think 6.7, 6.8. But so, you know, if you compare that to where we got to before pandemic, we’re three and a half percent, so we’re still got a long way to go. And if we’re not printing, you know, half a million or 800,000 jobs per month, like we were right out of the depths of the lockdowns, it’s going to be a long grind back to, to pick up those 10 million jobs that are still lost.

Todd Patrick: Got to be. Well, think about the fed, but their changed the stance on inflation. I mean, they’ve made it a three stool that has to be built before they raise rates. I mean, you’ve got to assign optimal employment now as attached to it. Well, if we got to three and a half last year, you have to assume that’s a number they’re looking towards again. So, your point, I mean, there’s 10 million plus-plus population gangs coming that we’ve got to feel, then you’ve got to have inflation approach 2% and really an excess of 2%. In that third leg is now is that they have to believe it will stay there. And so, I mean, they’ve laid down very strict criteria that what it means before they actual raise rates. And it seems like a pretty big hurdle. For you, I want to ask question back, just, if you go back to the Lacy hunt idea of gross indebtedness, the further you get in debt from a fiscal standpoint leads to slower growth, lower inflation. Is that a theory you subscribe to?

Tom Fitzgerald: I think so. And I think if you look around the world, that seems to be the, you know, the case that’s bearing out. And then you look at, you look at that debt level, and then you also look at the demographics where you’re getting an older, an aging population in most of the developed countries

Todd Patrick: I.E Japan is the first one.

Tom Fitzgerald: And then I think Europe and the US we’ve been under 1% population growth now for several years. And I think it is continuing to drop lower. So, you know, you’re not getting those consumers that are getting out of college and, you know, buying cars and buying houses and furniture and all that. You’re getting the older person who’s buying his pharmaceuticals and his, you know, his walkers and stuff to get around. So, it’s a different composition of the consumption.

Todd Patrick: Well, you think about if being cooped up with your significant other for months on Tom didn’t lead to a population, boom.

Tom Fitzgerald: I mean, what is right?

Todd Patrick: What else is, right? What else is?]

Tom Fitzgerald: I guess they’re watching the political machinations. Moving on, let’s take a look at fed and from the fed some rate expectations out of that. Of course, the fed forecast back in December and actually in September too, they had forecast no rate change through 23. Well, reality it may be sooner than that, or maybe longer than that. Certainly, you know, 21 we’re going to end the year on change. Don’t you feel pretty confident of that.

Todd Patrick: Yeah. As far as they’ll, the fed will be active. They won’t be active in adjusting rates. I think they’ll be barring bonds throughout the year. I think the thing that will change is one of the reasons that I believe that will be hard for the tenure to get much in excess of one and a half. Is that I think it becomes a number of the fed gets concerned about rates, which sounds outlandish to think about the one and a half it seems high. But they’ll adjust and they’ll buy bonds further out the curve and duration. And that in itself will help depress some of the, you know, the Heights of which the ten-year treasury can ride. So, the fed may adjust with inflation. I think there’ll be extremely active in keeping cash in banks so those that are sick of having excess liquidity don’t get too sick of it too soon because I think that’s going to be a continuing problem for us this year.

Tom Fitzgerald: Right. Talk about that in a minute. And I think you’re right. I think the fed that the last couple of fed meetings, they, there was kind of the pre meeting rumors were that, well, is this the meeting they go ahead and say, we’re going to buy longer duration in our QE program and they didn’t even in the December meeting, they kind of held that back. But I think that’s the next arrow out of the quiver. When if, if rates do say climb above one and a quarter, they will move. And, and what they do, most of their treasury purchases are in the shorter inside of five years. And a lot of its two to three years. So, if they felt like the tenure was kind of getting away from them, they would start to shift some of those treasury purchases further out. And obviously that’s going to kind of keep the prices up and yields a little bit lower than they would otherwise. So, I think…

Todd Patrick: Not a true yield cap, but kind of synthetically do such.

Tom Fitzgerald: Similar.

Todd Patrick: Yeah.

Tom Fitzgerald: They’ve wanted to hold that back and they have but certainly if rates continue to lift, I think here you’ll see that, you know, whether it’s at the March meeting or pretty early into 21. I think they would certainly, if the stock market took note and said, Oh, wait a minute, the second bonds are over one and a quarter and they start to have a little bit of a struggle or have a correction, you know, that tightening of financial conditions is going to weigh on the Fed’s minds and I think that would kind of spur them into action. And talking about the liquidity, the heroes act now that just went out, you know, over the holidays that was passed, you know, the $600 checks, $300 billion in PPP loans, the $300 per week and the unemployment benefits, basically everything is half, generally half of what it was in the original stimulus package. So, some of that money is going to find its way into bank’s balance sheets, just like the cares act money did. And it’s going to be that question of, is it stay for a day or is it stay for a year? And so, there’s that hesitancy to lock it up for any length of time?

Todd Patrick: MPP round two.

Tom Fitzgerald: Yeah. Talked about that. So, do you think, you know, with the experience, again, the size of this is about half what it was before, so the numbers may not be as large, but there’s still going to be money flowing in. How aggressive do you think banks should be in kind of that reinvestment of those funds that they see rolling in?

Todd Patrick: Yeah. I think that given in a world of narrowed margins and most of the banks that I’ve talked to for the last part of the year, most banks seem to do really well, but almost every single one in concert. So, they were worried about this year’s income. And so, with not knowing exactly what the lending will be owed probably should be pretty good. But I do think banks are going to be flushed with cash largely because you look at it from a standpoint of the fed, like in the can’t lower rates, right they might link them duration and bonds. They’re still spending 120 billion a month, but one of the ways that they’re going to be active in trying to stimulate the economy, I do believe is keeping the system flush with cash because what it will eventually do savers may get tired of earning nothing, right? Because banks are so sick of so much deposits, they cut deposit rates as low as they possibly can. So, savers start spending that stimulating the economy. Secondly, bankers get sick of buying 1% bonds and they go, well, let’s lower our credit standard and lend against stimulus. So, the fed is very much in a beneficial mode of seeing the market flush with cash. And so, at banks, I would anticipate having a lot of cash this year and in a world of narrow margins, I think we have to be the efficient deployment of that cash has to be considered in our earnings year that might be challenging.

Tom Fitzgerald: Right, right. I agree because I think, you know, like you said, it’s a spread game and you know, that every basis point on the net interest margin is huge right now. So, if you can move up fund that’s sitting at making 10 basis points in the you know, at the fed and move it anywhere, whether it’s 50 basis points or even a hundred basis points, depending on how aggressive you can be in your duration and your asset liability situation. So, you know, we’ve kind of leaned, I think we both leaned on the case of be more aggressive with your investments than less aggressive because that liquidity is probably going to be around longer than you may think.

Todd Patrick: I think so, like the idea then, so if we think rates, the Fed’s rate’s not going to change at least until 23, wouldn’t it be wiser to go ahead and invest more now and then let it kind of naturally ride down the yield curve a little bit in duration standpoint. So, you’ve got a shorter maturity by two years by the time that begins to happen?

Tom Fitzgerald: Right.

Todd Patrick: Or do you say, Hey, let me go really long with a smaller amount. Right? And so, I’m out longer and I’m achieving a higher yield. Now there’s a little bit of spread in the yield curve and therefore that affords me the ability to leave a little bit higher balances in cash.

Tom Fitzgerald: Right.

Todd Patrick: Do you kind of subscribe to that same thought?

Tom Fitzgerald: I do. I mean, and I think we, you know, last year when the money first started showing up, there was a real hesitance on the part to invest it or invest it at any really material level. And then I think bankers through the month said, I can’t–I can’t survive on a 10-basis point yield on a big chunk of my balance sheet. So, I think that same mentality to me should kind of play out here where, you got the knowledge from last year, you know, and they can act a little bit quicker than they did before, where they may be sat on it a little bit longer than they probably should have. Let’s shift gears a little bit. The other big driver from a rate perspective has been what’s going on in the virus and the trends and the not only the virus cases, but the vaccine now that we have. The kind of the consensus expectation is at the second half of this year, we’ll really see the economy kind of starting to catch it stride with the spreading of the vaccine further into the Populus. And so, kind of getting a little bit more of a reopening or greater reopening in parts of the economy that have had to suffer some shutdowns and lockdowns. Do you kind of subscribe to that timeline? Do you think it’s going to be a little bit longer, a little bit shorter probably second half?

Todd Patrick: Yeah. I mean, I generally subscribe to the fact that government tends to do things, the little things less efficiently. And so, I think getting it done as quickly as the current projections, it seems overly optimistic and there’s still a large percentage of people that say I’m not taking the vaccine. And so, to me, there seems to be this sentiment in the market and in people in general that on June 1, we’re partying the streets without mask. And that’s not the case by far. You know as point to things I put my predictions kind of tell you where I think, I think there will be people in time square next New Year’s Eve but they’ll all be wearing a mask. You know, so we’ll be back to some level of activity, but people are still going to be protective. They’re still going to be kind of hindrances and how we normally operate. And so that again should keep us at a point where the market, the economy just can’t take all full steam.

Tom Fitzgerald: Yeah. No, it’s not that normal that everybody wants to get back.

Todd Patrick: That we think we’re… And we may never get back to that. At least our new version of that. Right?

Tom Fitzgerald: Right. And I’ve heard that Dr. Scott Gottlieb, I think it is that he spoke about that very thing that even if we get the vaccine across most of the, you know, the population that wants it, that you’re right. That there’s still going to be people wearing masks. It just feels safer that way. They want to be socially distanced that, you know, don’t want to be in a crowded indoor space.

Todd Patrick: So how are we going to know who’s got the vaccine and who doesn’t?

Tom Fitzgerald: So, it looks like it’s going to be another tough year for concert venues and other, you know, I think sports situation is still going to be challenging for a time. And so that means the economy is still not operating on all cylinders.

Todd Patrick: Well, think about travel, right. If vaccine here, but international flights and travel and business that happens, or traditionally happened a lot, how are country is going to work together on which vaccine they actually used? How they prove that person got a vaccine and if they’re allowing people to come to their country without proof? And so, the international travel interstate of business that typically happened was going to be somewhat disrupted as well for an extended period.

Tom Fitzgerald: Right. And I think, you know, I think some of this backup that we’ve seen in rates has been that expectation that, Oh, yeah, it’s going to be, you know, whether it’s the second quarter or the third quarter that everything’s going to be kind of back to some sort of, maybe not normal, but certainly a lot better than it was last year. And that, like I said, that may not be the case. So, there may be some reversal coming off of those yields that we’re expecting that kind of scenario.

Todd Patrick: Well, what people probably really care about is do you think we’ll have full college football stadium next year? I mean, by the fall, right?

Tom Fitzgerald: Yeah.

Todd Patrick: I mean, it doesn’t seem realistic to me.

Tom Fitzgerald: It doesn’t. Yeah. I mean, when you’re looking at case counts, I mean, I was looking at Georgia’s numbers just yesterday and we’ve hit new highs as far as cases and it’s going in the wrong direction. So, I mean, I know the vaccines coming and it’s going to take a while, but you know, if we get that highly contagious variant that they’ve talked about in other parts of this country.

Todd Patrick: Well, they did have a case in Georgia. Right.

Tom Fitzgerald: Okay. So, there you go.

Todd Patrick: They did find one,

Tom Fitzgerald: It may be this, you know, this thing has been tough from the get go. And I don’t imagine it’s going to let up anytime soon, as far as giving us a break.

Todd Patrick: It doesn’t feel like it. And so like, where are we here now? Like the jobs number you referenced in govern December where they’re actually job losses. And I think the biggest was the, what is about a half a million in the hospitality sector that lost jobs. So, the worst is getting and the vaccines, doing nothing to help us. Now isn’t this kind of just digging a little bit deeper hole to start from. And so, the economic lift is just keeps getting pushed out. Right.

Tom Fitzgerald: Right. And yeah, all those forward-facing jobs where you deal, like you said, the hospitality restaurant workers, obviously, and entertainment and bars, that’s, you know, that’s where you said the bulk of the, the job losses came from that one sector. And you know, those are typically the ones that can least afford to lose a job because you know, their pay is, is limited. Now let’s kind of take move from there into the investment ideas and the investment thoughts. And, obviously the biggest sector that our bond accounting group, I think runs mortgage backs are about 50, 55% of their portfolio. So, the largest, by far the largest share of the portfolio. So, let’s kind of start there as to say, you know, where do we have some thoughts and ideas as far as mortgages this year. Last year, you know, it was all about prepay mitigation trying to limit the expected or surprise prepays that you’re going to get. Is that still going to be the main thing you think in 21 or we have something else coming?

Todd Patrick: Yeah. I tell you that one’s just kind of blow me away a little bit, just how fast prepays have common for how long. You know, we typically, when we have a prepay spike, it comes from the Treasury’s dip and it lasts three to four months and then we kind of start trending back down. In January was faster than the December, you know, and it was partially assigned that was an extra day or two that people could refi, but it’s just been pretty amazing to me how quick it’s coming. And I think that’s, what’s been the really difficult challenge for banks in this environment is folks, I think mortgage backs are still a very core and should be a larger holding for portfolios. And I think that prepaid mitigation is very easily solved just by buying always the lowest coupon. Yeah. But there’s a big, second hand smoke that comes with that and when you look at when rates ever do bounce, right, there’s further extension, there’s no lift in the yield. I mean, you are locked in at the bottom of this right cycle. On the other hand, if we try to lean more towards a little bit of bigger coupon, we are dealing with the challenge of prepays and some reduced yields.
So, I think banks have to make a conscious choice when they purchase mortgage backs. Am I accepting prepay risk, or am I willing to accept additional price volatility in zero lift risk for when rates rise? And I think there’s a balance to be had personally, I look at, even though I’m worried about this year and earnings for banks, I think that’s an important. I think it’s also important that when we look at a mortgage back life five to seven, eight, nine years, do I want it to kind of look good for 80, 90% of that, or I’m really worried about the next 10% of its life, you know, the now? And so, I lean towards still trying to get bigger coupons, newer production, low loan, balance, collateral things that minimalize prepays as much as we can today, but still offer some future upside and less price fall.

Tom Fitzgerald: Yeah. Do you find any value in sort of what, you know, the burnout pools, the ones that are the, you know, the highest coupons out there that have been through the Wars as far…?

Todd Patrick: Yes.

Tom Fitzgerald: … as prepays? And have you marketed those, you know, very successfully?

Todd Patrick: I’ve looked, I do think there’s value there because its proof history has shown, there is 15% of roughly people that will never refi for whatever reason. A bond I use in all the classes I’ve taught over the years. I found this bond that was a 13 and a half percent coupon mortgage back. So, the underlying loan mortgage loan was 14% that was taken out in 1983. The guy made the last payment that was one loan left. He paid his last $250 payment, like in October of 13. And so, there there’s always somebody that does not refi their mortgage. The challenge to me is looking at getting bankers comfortable with that. They’re very premium averse. They’ve been taught that coupon is the big determinant. And so, you show a four, four and a half percent coupon with the 108, 109 that they turn you off pretty quickly. But I think there’s some gyms to be found in that for people willing to look.

Tom Fitzgerald: Right. Because I just, the last prepay report that we saw, I kind of noticed that you get to a certain level of coupon and aging, of course, that the prepays do really slow down. And so, you’re talking about that group, that just for whatever reason, maybe they had a bad experience when they got the loan. They’re not going back to do anything with it.

Todd Patrick: Well, that one guy was in Wisconsin. So, I’ve always claimed that was a Unabomber.

Tom Fitzgerald: Right.

Todd Patrick: He just didn’t want to be found.

Tom Fitzgerald: That’s right. But do you see any other trends that may be coming up in 21 as far as, is it just pretty much going to be this what we’ve saw in 20?

Todd Patrick: I think it’s going to be very similar. I do think the, I guess veracity prepays will the pull down. I think that what I anticipate happening is that we think the ten-year treasury will back up some like it has. And Fannie and Freddie instituted a 50-basis point refi fee. And so, the ability to refi at the bottom rate is kind of, should be gone a little bit now. And so that natural lift in the treasury. So that should actually slow down prepay some in the coming months as we see. But I don’t know that that’s necessarily going to represent tons of greater value in mortgage backs that they’ll actually cheapen. The reason being is if prepays slow, that’s higher yields, right? At the same time, the fed is still buying 40 billion a month, the mortgage back paper and pledges to do so predominately throughout this year. And so, if I still got a large buyer and there’s less refis, that means there’s less supply and yields are higher so they’re more attractive. And so, what I think is that spreads will actually narrow in the mortgage back based on demand. And so that higher price combined with slower prepays actual keep us yielding and roughly the same range we’re in. I don’t expect there’s going to be a lot of yield lift there, despite rates backing up some.

Tom Fitzgerald: Right. Well, yeah. If we can get a little bit less from the pre…. And your right, and you know, it’s kind of surprises me that we go through so many months of just one record after another on…

Todd Patrick: I mean, we’re just body blow after body blow.

Tom Fitzgerald: You know, you would think at some point it’s going to slow. Maybe it will this year, but you know.

Todd Patrick: I think this has been a good example of something we touched on last time we did this of why we lean towards pass-throughs versus the CMOs and this environment I think highlights that. The times I’ve gone to a bank and said, Hey, this Bond’s not performing. It’s a high collateral underneath. It’s producing a negative yield. Let’s sell it. Oh, and here’s a game. And the banker goes, won the world. Would somebody buy a bond for me at a negative yield for a gain, and this is the advantage that passive mortgage backs have because it’ll benchmark off the TBA trade market at worst case, that’s kind of the floor. CMOs don’t have any kind of really market line it’s tethered to. And so, the bid is more subject to the whim. So, we make a mistake or just the environment works against us in rates were prepaid spike. The out on pass-through is significantly easier to manage that side.

Tom Fitzgerald: Right. Well, let’s talk as we get close to wrapping up the other big sector in most bond portfolios, and that’s the muni sector, and that has been kind of buffeted by, are they going to get any kind of, you know payments coming from these stimulus programs? It looks like maybe this third program that’s still on the table or will be coming out on the table pretty soon would have a state and local supplement to it. So that would maybe help some of those cash strap States and localities. But the one thing I wanted to ask you is I was reading an article that Bloomberg talked about that there’s a lot more maturities and calls coming in the first quarter of the year, let’s say, versus new supply. And so, there’s so that money is going to try to find a new home with the limited amount of opportunities to do that with. And so obviously that’s going to probably drive prices, higher yields lower. Is that, do you have ways to kind of operate around that sort of macro trading environment? Or do you just say let’s kind of step back and maybe sell into this since the market is giving us a better price?

Todd Patrick: Yeah. You know, selling into its hard just because there’s not so many great alternatives to replace it but it should create some opportunities if there are, you know, challenges on some credits, which really in this cycle to have been in technically recession, there’s been very, very few, no loan losses thus far. You know, you would guess at some point somebody has to deal with something. So, I think that’s going to be an advantage for bankers to have that in their back pocket, they need it, that actual, I do agree that muni prices continue to elevate. But yeah, it is a hard window right now because when you look at it between the two, there should be continued less supply and further increased demand, especially if the corporate tax rates go up which rise in additional buyers that muni prices aren’t going to, you know, come down a whole lot anytime soon.

Tom Fitzgerald: Is there any sector in the muni world that you would say stay away from?

Todd Patrick: You know, I think that the known credits and States that are challenged, I think of the ones I’ve had a lot of people tell me lately, we don’t want to do munies because we’re worried about the credit. I think that’s a very overblown story. Yes, they took less revenue in sales last year, but if you’re expecting the economy to improve, it’s coming back already. You know, we were coming into this crisis with States and local municipalities haven’t repaired their balance sheets from the great recession. So, we were on good footing. This has been somewhat of a temporary, you know, I guess in the scheme of recessions a temporary before we had a strong lift. And so, the balance sheets are in generally pretty strong. I don’t think there’s credits to stay away from other than the credits you already kind of knew before you didn’t like.

Tom Fitzgerald: Right.

Todd Patrick: But always look at them, but in general, they’re doing pretty well. And so, I still tend to focus on again, I think bigger coupons to me is that the advantage. I’m trying not to chase the really low coupon, really long bond. I’ve seen in other lifts cycles where the reason fours and fives have held their value really well, the stuff where you got to get into twos and below those things got beat up pretty good when rates actually did lift. So, I would rather take a little less now knowing I’ve got a lift to come back out of it in the future with a bigger coupon. And I think that’s a safe place to be.

Tom Fitzgerald: Right. Right. Well, tell me, are there any other investment ideas or considerations that you would throw out there for the listeners?

Todd Patrick: Yeah. You know, we don’t do tons of callable agency debt, but you’re starting to see some, some decent spreads there there’s things to look at from unique perspective. Last week they printed a 15-year five-year at a one 68, right. It was a one-time call, which normally that goes back to the point. Like normally we wouldn’t chase a bond that long, but for banks are sitting on tons of cash what if you bought some of that really long car protected? Now you’ve hedged the down again that the vaccine or the strain of the virus doesn’t mutate again, and the vaccine doesn’t work. Sadly, that is a possibility. Right. And so, if we have something like that, you’ve projected the down, but now, because you’ve gone longer with a piece like that, you can leave a whole lot more in cash if you just took the balance of this 80 basis points on a shorter duration window now, when you include the cash piece.

Tom Fitzgerald: And I’ve seen just, when you look at the page on Bloomberg, that has all those new, you know, the new issue, callable agencies it’s been very active lately. So, there’s all, I guess, all forms, you know, shapes and sizes that an investor can get right now in that part of the market.

Todd Patrick: If you move out, think about, if we don’t think rates are lifting until at least 23, and then the Fed’s going to move up in theory slowly, what they historically do. Bouncing off zero it’s going to take some time to even get back to one and a half, one 75 so, in that you’re underwater on that investment and so you’ve got years of a great spread. And I don’t think you do a lot of that, but I think there, you can make good sense in doing some of that, of something like that now.

Tom Fitzgerald: Right Well, Todd, I want to thank you for coming in today. This has been, I think, you know, some valuable information for our listeners and I hope we try to get you back around midyear to kind of see, you know, how this part of the year has gone and then kind of see is that second half boon going to come really from the, you know, the vaccine rollout and all of that because you know, that’s what the market’s expecting. Now. Maybe we get there and it’s like, it’s going to be a 22 thing, not a 21 thing. So anyway.

Todd Patrick: Let’s pray that it does and that, you know, we’re extremely efficient in disseminating the vaccine and the and life gets back to normal as soon as well.

Tom Fitzgerald: I think we all want that. So again, thank you very much, Tom for coming in.

Todd Patrick: Thank you Fitz.

Tom Fitzgerald: We…

Both: Appreciate it.

[Outro]

 

Recent Episodes

06/29/21

Talking Football with Mark Richt, Retired Coach of the Georgia Bulldogs & Miami Hurricanes

This week, we change it up and talk some football with Mark Richt. Coach Richt is the former head football coach of the University of Georgia Bulldogs and University of Miami Hurricanes, and a longtime assistant coach for the Florida State University Seminoles. He is currently a football analyst for the ACC Network. Mark and his…

Listen Now about Talking Football with Mark Richt, Retired Coach of the Georgia Bulldogs & Miami Hurricanes
06/24/21

Ballard Cassady, CEO of the Kentucky Bankers Association

This week we sit down with Ballard Cassady, CEO of the Kentucky Bankers Association.  We get his thoughts on regulation, headwinds facing the industry, and what it takes to run a successful community bank in today’s environment. The views, information, or opinions expressed during this show are solely those of the participants involved and do…

Listen Now about Ballard Cassady, CEO of the Kentucky Bankers Association
06/14/21

Tom Michaud, CEO of KBW – M&A and the Future of Community Banking

This week we feature a special conversation with Tom Michaud, CEO of KBW.   Under Tom’s leadership, KBW has become the nation’s premier investment bank to the financial services industry. The company is routinely recognized for its leadership in mergers & acquisitions, capital raising, and equity research. Tom maintains strong personal relationships with leading industry executives,…

Listen Now about Tom Michaud, CEO of KBW – M&A and the Future of Community Banking
06/08/21

Dee Ann Turner, Former VP of Talent for Chick-fil-A – How to Crush Your Career

This week we have the pleasure of speaking with Dee Ann Turner, former VP of Talent for Chick-fil-A.  Dee Ann was instrumental in building and growing Chick-fil-A’s well-known culture and talent systems, responsible for selecting thousands of Chick-fil-A franchisees and corporate staff members. Under her leadership, Chick-fil-A enjoyed industry-leading employee engagement scores and became known for…

Listen Now about Dee Ann Turner, Former VP of Talent for Chick-fil-A – How to Crush Your Career
06/01/21

Managing Your Balance Sheet Through Inflation Fears, Excess Liquidity, and the Steep Yield Curve

This week is all about balance sheet management, inflation fears, and the continued excess liquidity.  Tom sits down with Chad McKeithen and Andrew Norrid from our broker-dealer (Duncan-Williams) to make sense of it all. The views, information, or opinions expressed during this show are solely those of the participants involved and do not necessarily represent…

Listen Now about Managing Your Balance Sheet Through Inflation Fears, Excess Liquidity, and the Steep Yield Curve
05/24/21

Creating an Engaged Culture with Lon Langston

This week we sit down with Lon Langston, founder of the Engaged Banker Experience. We discuss culture, leadership, and the cost of low engagement. Lon has been studying and practically applying management and leadership since college. In 2010, he began to study behavioral economics. Over time, that expanded to all behavioral science, including the neurology…

Listen Now about Creating an Engaged Culture with Lon Langston