Independent Banker - August 2021 - 28

PORTFOLIO PORTFOLIO MANAGEMENT
Extension indulgence?
Community bank portfolio durations reach historic lengths.
By Jim Reber, ICBA Securities
ere's something you haven't
heard yet from the pandemic,
economic shutdown, record
stimulus, heroic Paycheck Protection
Program efforts and flight-to-quality
dynamics of the past 18 months: Your
community bank is probably sitting
on a record-high length of average
maturities in its bond portfolio. And
it's gotten there in a hurry.
But I hasten to add that it's not
arrived there by mistake, at least
I don't think so. After accounting
for all the other variables buzzing
around the financial management
of a community bank in 2021, it's
H
likely that portfolio managers have
very intentionally changed the risk
dynamics of their collection of bonds.
At the same time, the adjustment is so
dramatic, it deserves some attention,
which is the subject of this column.
You may learn from reading that your
own bank's portfolio is right in line
with its peers.
Price risk barometer
When ICBA Securities and its
exclusive broker, Vining Sparks,
teach bond basics at the annual
Bond Academy, one of the first
topics covered is price risk. This
is really the only risk in portfolio
management that cannot be avoided
or neutralized. It is baked in the cake
that the market value of your bonds
will move inversely with interest
rates. Therefore, it's a high priority
of management to define what's an
acceptable level of price risk, and to
monitor the investment collection to
ensure compliance. Enter the concept
of duration.
Over the past quarter century, the
average portfolio's duration has
been in the three-year range. The
most popular, and probably the
most accurate, type of duration
28 Q ICBA Independent Banker Q August 2021
Photo by Klaus Vedfelt/Getty

Independent Banker - August 2021

Table of Contents for the Digital Edition of Independent Banker - August 2021

Table of Contents
Independent Banker - August 2021 - Intro
Independent Banker - August 2021 - Cover1
Independent Banker - August 2021 - Cover2
Independent Banker - August 2021 - Table of Contents
Independent Banker - August 2021 - 2
Independent Banker - August 2021 - 3
Independent Banker - August 2021 - 4
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Independent Banker - August 2021 - Cover3
Independent Banker - August 2021 - Cover4
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