Banks Loans Up, Securities Down In Reversal of A 3-Year Trend

In an about-face caused by rate hikes and a spurt of loan demand, most banks reduced reliance on portfolio securities last year, an American Bankers Association survey confirms.

Half of the 117 bank investment managers surveyed reduced their portfolios as a percentage of total assets. Only 23% increased the securities percentage.

The survey offers a stark illustration of the recent change in the banking environment. In 1993, 42% of managers said they were increasing portfolios as a percentage of bank assets and only 32% said they decreased their reliance on securities.

"Throughout the '90s, there has been excess liquidity and low loan demand," said John W. Logan, the survey's creator and executive vice president at First American National Bank in Nashville.

"Within one year, we had a total reversal of these two trends," said Mr. Logan. "This is the first year in the last five that liquidity has been one of the top five issues."

Five years of a growing economy had built up expectations that there would be some loan growth.

"It took a while for that growth to start," said John W. Mitchell, the chief economist at the U.S. Bancorp in Portland, Ore. "It finally came on, and now we're starting to see it through."

The survey bears out the Federal Deposit Insurance Corp.'s quarterly banking profile.

Commercial and industrial loans grew 9.4% from 1993, while loans to individuals increased 16.3%, according to the FDIC.

Nonetheless, some observers expressed surprise at the extent of the loan and investment connection.

"One thing that surprised me was the way all the groups were reducing their investment portfolios to fund loan growth," said John S. Bartles, chief financial officer at First National Bank in Dennison, Ohio. "That was the standard, no matter what the size of the bank."

Mr. Bartles said that his $95.5 million-asset bank followed the general trend.

First National's investment portfolio was down 40% in the last 18 months, while loan growth was up dramatically. The bank took a loss by selling its securities before their maturity.

Like many of the banks surveyed, First National reduced the percentage of securities in the available-for-sale category.

The survey showed that available-for-sale securities fell to 51% of portfolios from the previous year's 55%, reflecting the need to generate liquidity.

Given the securities losses, bankers expressed surprise at the reported 1.7% total return for 1994.

But some observers said the difficulty in getting accurate pricing for municipal bonds created artificially inflated returns, particularly for smaller banks.

"The total returns were skewed on the high side, because many local issues aren't really able to be priced," said Daniel S. Van Timmeren, a portfolio manager at $3 billion-asset FMB Financial Group in Holland, Mich.

FMB was among the banks bucking this trend, Mr. Van Timmeran said. "We've been steadily increasing our available-for-sale holdings. Any investments we're making right now are going into available-for-sale."

FMB currently holds between 20% and 30% of its securities in the available-for-sale category.

Additionally, some banks already held much more than the 51% average.

F&M Bank and Trust Co. in Tulsa, Okla., holds all of its portfolio in available-for-sale. "Given our capital adequacy, we give up too much by not having our securities available for sale," said Dean Day, a senior vice president in investment and trust services at F&M.

The $600 million-asset bank is now down to $110 million in its securities portfolio.

The survey also showed that large banks use derivatives more often than small ones.

"Primarily the reason we decided not to invest in derivatives is because we've been cautious historically on interest sensitivity," said Mr. Day. With shorter-term investments the bank doesn't have much interest rate sensitivity.

"In many instances, the cost versus the potential protection seemed askew," Mr. Day said.

The few community banks that do use derivatives have done so cautiously.

"There was some concern about risk from management at first," said Mr. Bartles of First National Bank.

In general the survey merely corroborated what many bankers have already observed.

"There were not a heck of a lot of surprises," said Mr. Logan.

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