Independent Banker - January 2022 - 26

PORTFOLIO PORTFOLIO MANAGEMENT
market analysts refer to as " quality
earnings. " These, in a nutshell, are
net margins from traditional means,
namely core lending and borrowing.
The most prevalent portfolio manager
wish is that interest rates tick higher,
and it's well documented that
community banks are poised for a rate
rally. Another hope is that traditional
loan demand picks up, possibly fueled
by all the unspent stimulus money and
the dislodging of supply chain logjams.
Supply and demand dynamics are in
play in the financial markets as well.
2022 supply
chain histrionics
To start the year, here are my thoughts on the municipal bond market.
By Jim Reber, ICBA Securities
he most prominent, by far,
comment I heard from ICBA
members in the second half of 2021
was that they weren't sure where their
income is going to come from in 2022.
This was mainly the result of
two variables acting independently
but in concert. The first is that
community banks benefited greatly
from both rounds of the Small
Business Administration's (SBA)
Paycheck Protection Program (PPP),
T
and no successor is on the horizon.
The second was the continued
margin pressure resulting from
the Federal Reserve's aggressive
" accommodation " in its monetary
policy, which for most of the past
two years has left little room for net
interest margins that community
bank managers would be proud of.
Several factors may be in play
in 2022 that could provide some
opportunity to create what capital
Munis matter
You may recall seeing in this column
over the years that municipal bonds are
a driver of performance in community
bank bond portfolios. There may be
temporary episodes of " dislocation " -
bond-analyst speak for yield spikes-
but, overall, the muni market has
been remarkably stable in the past 30
years. If it had ever been put to the
test, it was in 2020. Both Moody's and
Standard & Poor's placed the state
and local municipal bond sectors on
" outlook negative " in March 2020, only
to restore them to " outlook stable " a
year later. Ratings upgrades in 2021 far
outnumbered 2020's downgrades.
Even better, in spite of what appears
to be improving credit metrics,
yield spreads for most high-quality
municipal bonds remain attractive on
an historical basis. For the past couple
of months, a bank could purchase a
10-year AAA-rated muni at a raw yield
(i.e., before the tax effect is factored
in) of around 90% of a like maturity
treasury. That is well above the old
benchmark of around 75% that was in
place for much of the past decade. It's
also in spite of supply issues, which
we'll learn about soon.
Demand on the rise
The term " crossover buyer " has
evolved in the past 10 years or so.
26 Q ICBA Independent Banker Q January 2022
Photo by MirageC/Getty Images

Independent Banker - January 2022

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

Table of Contents
Independent Banker - January 2022 - Cover1
Independent Banker - January 2022 - Cover2
Independent Banker - January 2022 - Table of Contents
Independent Banker - January 2022 - 2
Independent Banker - January 2022 - 3
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