Independent Banker - October 2022 - 37

Next: Bankers reflect on their advocacy experiences 
The state of bond portfolios, October 2022
Top
Quartile
`Tax-equivalent yield
`Effective duration (years)
`Price volatility +300 basis points
`Net unrealized loss %
`Percentage of portfolio in treasury securities
2.70% 1.53%
5.31
4.22
Bottom
Quartile Difference
1.17%
1.09
-15.44% -12.03% -3.41%
-8.08% -9.15% 1.07%
3.98% 15.09% -11.11%
`Percentage of portfolio in municipal securities 41.78% 18.57% 23.21%
`Percentage of portfolio classified as HTM
15.16% 18.56% -3.40%
Source: Stifel Financial
buying treasuries may be capital
preservation, since unrealized losses
for bonds classifi ed as available for
sale (AFS) impact capital ratios for
fi nancial reporting purposes, and
treasuries are 0% risk-weighted.
This chain reaction has caused
many banks to reclassify AFS
investments as held to maturity
(HTM). (The " AFS/HTM " standard
went into eff ect in 1993 as FAS 115,
and it's believed bond portfolios have
not had that large of a loss since.)
Historically, around 5% of bonds have
been classifi ed as HTM; in mid-2022,
the number is more like 15%. This is
still another example that community
bankers are keeping their eyes on
their balance sheets, which most
assuredly includes their equity ratios.
Gulf is still wide
So, given all the stimuli and
responses, what do bond portfolios
look like today? Starting with taxequivalent
yields, the average is barely
over 2% but rising. More telling is
the gap between the top quartile and
the bottom (see table). It currently is
low on an historical basis, around 120
basis points, or 1.2%; in other rate
environments, the diff erence is closer
to 200 basis points, or 2%. But before
we declare the lowest quartile has
made up signifi cant ground, we must
also point out that bond portfolios
are much larger than in 2019, so in
absolute dollars, the income give-up is
still substantial.
Another item of interest is that
the bottom quartile has a larger
unrealized loss than the top quartile
in spite of having a shorter duration,
which presumably should produce
less price risk. This anomaly can
be explained by the higher-yielding
portfolios being more highly
weighted in municipal bonds, and
likely premium munis at that.
Tax-free securities, especially
those priced above par, react more
favorably to rising rates than
virtually any other sector, and the
top quartile has over 40% of its
bonds in that category.
The next set of unscheduled,
unprecedented, unbudgeted and
unwelcome trials to face community
banks? No way to tell. But my
money's on the ICBA members, and
their bond portfolio managers. 
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
Education on Tap
2022 webinar series continues
ICBA Securities and its exclusive broker, Stifel Financial, conclude their
2022 Community Banking Matters webinar series on Oct. 4 at 10 a.m.
Central. The topic is " Planning for the Year End, and the New Year. " To
register, visit icbasecurities.com
Bank strategies webinar this month
Stifel will host its 4th quarter Quarterly Strategy Webcast at a date in
late October at 12 p.m. Central. There will be multiple presenters, and
up to 1.5 hours of CPE are off ered. Contact your Stifel rep for more
information and to register, or visit icbasecurities.com for updates.
independentbanker.org Q 35
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Independent Banker - October 2022

Table of Contents for the Digital Edition of Independent Banker - October 2022
