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Bank investment portfolios: What community banks should know about changing allocations in the current crisis

The pandemic financial “comma,” or shock, has changed the financial climate of the U.S.—and those around the world. Below are considerations for community bank presidents as they navigate through the pandemic and into recovery.

Avoid zero as much as possible

Portfolios are still around 2.5% in terms of tax equivalent yields, but if you have a cash reserve of half your portfolio at zero, those numbers fall sharply in that calculation. The goal is to mitigate this as much as possible.

The trio of bank investment portfolio options

For community banks’ investment portfolios, primary categories for consideration remain mortgage-backed securities (MBS), municipals bonds (munis) and agency bullets/callables. Following is recent guidance we have offered community banks about this trio of options:

  • MBS: Mind the weighted average coupons (WAC). With current mortgage rates averaging right around 3% for both 15- and 30-year mortgages, look for collateral with WACs under 3.50%.
    • Reducing the call risk with low WAC collateral tempers the risk inherent in higher premiums that are common in MBS today.
    • Despite risks, MBS remains a viable option and continued overweight in this environment with spreads of 50-125bps to T-notes available.
  • Municipals: Yields have dropped dramatically since early March as the Fed support of the market ushered in heavy buying. With exempt yields still well over 100% of comparable maturity treasuries, there is further room to the downside until munis find a bottom, which historically has been with ratios of 70-80 percent of T-notes.
  • Agency bullets/callables: With bullet spreads under 15bps out to five years, it’s very tough to avoid callable paper with at least double the spread. Focus on one-time calls when possible and ladder calls and finals.

Our general perspective at present is keep it simple for your bank investment portfolio, work the trio and stay out of zero for long periods of time.

As a large financial institution, UMB Bank’s Investment Banking Division can provide access to a comprehensive suite of solutions. From market data and robust technology platforms, to fixed income sales and insightful modeling, your full-service UMB Bank experience provides support that’s relevant to you, with relationships that last for the long-term.


This communication is provided for informational purposes only. UMB Bank, n.a. and UMB Financial Corporation are not liable for any errors, omissions, or misstatements. This is not an offer or solicitation for the purchase or sale of any financial instrument, nor a solicitation to participate in any trading strategy, nor an official confirmation of any transaction. The information is believed to be reliable, but we do not warrant its completeness or accuracy. There are risks associated with all transactions involving investment securities. As with any investment, please read all offering information, prospectus, or any other required disclosures before initiating any transaction. Past performance is no indication of future results. The numbers cited are for illustrative purposes only. The opinions expressed herein are those of the author and do not necessarily represent the opinions of UMB Bank, n.a. or UMB Financial Corporation. Future results may vary.

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