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Leaders of small banks do not want the Fed to purchase more bonds or keep interest rates low. Instead, they want the Fed stand down and let the economy heal on its own.
September 12 -
The selloff in Treasuries that extended through much of this month underscores the dangers of adding exposure to long-dated bonds, but both large and small banks have been doing just that in recent quarters. Use this interactive graphic to examine the maturity profiles holding companies with at least $1 billion in assets.
August 24
Community banks are steadily stockpiling securities and cash on their balance sheets as their loan balances continue to decline.
Banks with less than $20 billion in assets have almost $1 trillion in securities and cash, marking a new high for those institutions.
Securities holdings at those banks jumped by 10% at Sept. 30 compared to two years earlier, with a preference for mortgage-backed securities and municipal bonds, according to data supplied by Bill Moreland, a partner at BankRegData.com in Dallas.
Cash for those banks has grown by 3% since the third quarter of 2010; loans have decreased by roughly 2%.
The shift is more pronounced at banks with less than $5 billion in assets: securities holdings have jumped 17% since the third quarter of 2010, while outstanding loans shrank by 6%.
Most small banks have no choice but to invest in securities that typically yield less than loans, says Louis Rosenthal, a principal at Chicago consulting firm GRG Group. "There is no other choice" if loans are scarce, he says.
Banks, for the most part, have been drowning in liquidity as customers show a preference for building up deposits rather than applying for loans. And there are few places to put that money to work.
Intense pricing pressure on the loans that are being made has also driven smaller banks to securities, says Stewart Thigpen of bank consulting firm Steve H. Powell & Co. in Statesboro, Ga.
"Community banks can't compete with the big boys on price," Thigpen says. "Super-regionals are throwing out 10- and 15-year fixed products in the 3% range, and it's really hard for community banks to compete with that."
The problem has been particularly acute for community banks in the Southeast that compete with regional banks such as Regions Financial (RF) in Birmingham, Ala., and Synovus Financial (SNV) in Columbus, Ga., Thigpen says.
The smallest banks have developed the biggest appetite for securities. At banks with less than $500 million in assets, balances of munis jumped 49% since mid-2010, according to BankRegData.com. Mortgage-backed securities rose by 33% over that period.
At Sept. 30, munis and mortgage-backed securities made up nearly 70% of the $197 billion in securities held by banks with less than $500 million in assets. Securities made up 23% of total assets at those banks at the end of the third quarter, compared to about 20% in mid-2010.
Securities holdings have also remained elevated at larger community banks, comprising 22.7% of overall assets at banks with less than $20 billion in assets, totaling $740 billion at Sept. 30. Loans made up 61.8% of total assets at those banks; cash comprised another 7.7%.
The
"There is a risk of some banks relaxing their underwriting standards to chase loan growth and yield," Holley says. CapitalMark has increased its dependence on securities, which made up 35% of total assets at Sept. 30, compared to 15% in mid-2010.
The Federal Reserve Board's plans to keep interest rates low until at least mid-2015, combined with an aggressive shift by banks into securities, could cause many institutions to lose money on those investments.
CapitalMark is aware of the risk, particularly on investments
To be sure, some community banks have moved in the opposite direction. The $130 million-asset NOA Bank in Duluth, Ga., has reduced the size of its securities portfolio. Securities made up 11% of the bank's total assets at Sept. 30, compared to 21% in mid-2010.
NOA is not worried about holding onto a certain amount of securities, even when interest rates climb, says Jay Kim, the bank's president and chief executive.
"I think we're well-balanced," Kim says. "I don't see any immediate sign that rates will go up sharply. I don't worry about it much at this juncture."
If loan demand returns, banks that maintain sizable stockpiles in securities could end up seeing a pay-off, Rosenthal says. "If rates rise to a point where there is opportunity to grow the loan book, the losses incurred upon the sale of the securities might be well worth taking," he says.
