Bank Municipal Portfolio Management

Challenges and Solutions for Banks’ Municipal Bond Portfolios

Community Banks continue to have many challenges concerning their municipal bond portfolios. In today’s market when municipal yields are outperforming treasuries and many other investments, it is a time when a Bank would be well served to have, or increase, its municipal portfolio, despite the challenges that they face.

Fortunately there is a solution to those challenges which is offered by MBPA. The benefits to a Bank retaining the services of MBPA include:

  1. An independent advisor to manage a Bank’s municipal portfolio;
  2. An Investment Advisor with substantial expertise and experience;
  3. An actively managed portfolio of investment grade municipal bonds; and
  4. Cost savings concerning the management of a municipal bond portfolio such as:
    1. Lower personnel and associated costs
    2. Economies of scale
    3. Selected bonds reduce compliance costs

In summary, we believe that MBPA’s approach and services:

  1. Provides independent expert advice and assistance;
  2. Emphasizes rated investment grade issuers;
  3. Earns a consistent and reliable stream of tax-exempt income;
  4. Includes low cost, quality investments;
  5. Maximizes yield; and
  6. Includes diversification.

Call us to discuss our approach and services.

A Bank’s Best Friend

In light of the burden that complicated regulations, such as Dodd-Frank, put on banks’ officers, CFO’s should welcome the support and assistance of their bank’s outside team of experts in managing highly specialized investments such as municipal bonds. We are not looking to replace your investment staff, but rather to be a specialized extension delegated to work within the complex area of municipal investment and compliance along with your bank’s investment staff. Working with outsourced professionals in specialized areas such as municipal investments leads to investment opportunities otherwise overlooked due to most banks’ unfamiliarity with such investments. Understanding the regulations and researching the municipal markets can be time consuming. Outsourcing (Partnering) allows your key officer’s to focus on other investment issues, especially those areas in which their expertise is required, without missing complementary investment opportunities. Outsourced investment advisors work with in-house financial officers in choosing the best municipal investments for the bank’s overall performance. Having outside experts monitoring changes in regulations, markets, and a bank’s short and long term investment goals is an added protection in a bank’s wealth building objectives. Annual compliance reports minimize long term risks in the municipal market and allow reevaluation of portfolios. Ongoing reports alleviate a bank’s fear of losing accountability once a contract is signed. Having been in the municipal business for many years, there is no need to train your outsourced partner as to your primary investment concerns as their experience provides them with the knowledge to understand how the municipal market will affect a bank’s returns. The ability to foresee solutions to a bank’s investment concerns invokes ease of mind when customizing specific portfolios for its individual goals. Also, the added benefit of fiduciary protection inherent in working alongside a financial advisor extinguishes any fears associated with misguided investments.

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Discerning Market Reality

" many instances subsequent to the issuance and the rating of a bond that when issued was Florida Turnpikerated on its own credit, (i.e. a water and sewer bond) as an A, something has happened such as a substantial increase in the cost of power necessary to operate the utility or the loss of a large number of customers due to economic factors (for example a large factory closes, or a hospital shuts down, etc.). In this situation, a bondholder’s risk of a greater chance of a default would be unknown unless he or she happened to be monitoring the water and sewer issuer on their own...."- H. Gilmer Nix

"...a bond might be rated AAA by virtue of having been issued with bond insurance; however today there is no bond insurer that has a AAA rating, and therefore the bond is no longer a AAA bond. Often times those with significant bond holdings have not factored this into their analysis, have adjusted for, or are even aware of such changes...."- Worth T. Blackwell

Over the past 5 years a number of factors have negatively impacted the municipal bond industry:

•     The demise of the bond insurers themselves;
•     The downturn in the economy;
•     The collapse of the housing market;
•     The increase in the pension liabilities for its       employees of almost all municipalities;

Each of the foregoing factors acting alone would not have had any substantial impact on the municipal bond market; however, with all of them acting in concert we have a recipe for disaster.

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