Banks Keep Shedding Municipals

Tax-exempt bonds continue to hold no allure for the nation's 500 largest banks. Declining profitability led the institutions to reduce their municipal portfolios by $6.11 billion, or 14%, in the first half of 1991.

Even among the few banks that appeared to step up purchases of municipal securities in the first six months, some dumped them in the second half of the year.

"In order to use tax-exempt income, you need income first," said an executive with a major New York bank.

2,246% Rise Evaporates

Marine Midland Bank increased its municipal holdings by $80 million, or 2,246%, in the first half, but then liquidated the entire portfolio by mid-December. In August, the bank eliminated its municipal securities department, which had been managing the tax-exempt portfolio.

"We don't have a portfolio any more," said Susan Vogel, vice president in financial control at Marine Midland. "The last pieces were just prerefunded. There's nothing left."

The overwhelming majority of top municipal-buying banks are regional institutions with strong market positions. These banks dine on the small "bank-qualified" issues - offerings from municipalities that borrow a maximum of $10 million a year in the tax-exempt market.

LaSalle a Big Buyer

The second-largest purchaser for the period, Chicago-based LaSalle National Bank, is a good example. The regional bank increased its holdings by $50.4 million, or 17.1%, because it turned a profit.

Wally Lazuka, senior vice president at LaSalle, said the bank's portfolio "picked up maybe $15 million to $20 million" in the second half of 1991.

"We are becoming dominant" in the Chicago area, Mr. Lazuka said. "Next year, we are probably going to try to increase the portfolio 10% to $15%" beyond its current $360 million.

The rest of the top 20 net buyers represented a very minor buying force in the market, averaging only $13.9 million each during the first six months of 1991.

The market must go to such locations as Anchorage, Harrisburg, Pa., and Schenectady, N.Y., to find these bond buyers.

Sellers Keeping Busy

The most active sellers of tax-exempts, on the other hand, handily outweigh the buyers. Citibank shrank its holdings by $445 million, or 88.3%, in the first half to top the list of sellers.

Sources at the bank said almost the entire portfolio had been liquidated during the first half. One official noted that $500 million "is not that much of a portfolio" compared with the $2.4 billion at Morgan Guaranty Trust Co. and the old days of Citibank's globally dominant position.

"We just don't need the tax-exempt income," he said. "It's that simple."

As recently as 1989, Citibank had a $1.43 billion tax-exempt portfolio, making it the second-largest holder of municipals among banks. By last June, it ranked 168th.

The 500 commercial banks' holdings, in terms of book value, have dropped steadily over the past five years, declining from $86.09 billion in 1986, to $39.19 billion as of June 30, 1991.

The bank portfolio figures are based on the entries the banks make in their Federal Regulatory Report of Condition under the category "securities issued by states and political subdivisions of the United States."

The report is filed with federal banking regulators every six months. Figures were compiled by ADP Data Services Division in New York. Data for previous years have been revised to reflect mergers and acquisitions.

Historically, the market entered a new era in 1987. From 1965 through 1986, commercial banks were the largest group of investors in municipal bonds in every year except one, according to the Federal Reserve Board's Flow of Funds Accounts.

In 1980, for example, commercial banks held $149.2 billion of municipal bonds, or 44% of the $341.6 billion of bonds outstanding.

Holdings Reached Peak in '85

But since the $231.7 billion peak in 1985, the story has been grim. The Federal Reserve calculates that the total holdings of all commercial banks were only $108.7 billion on June 30, 1991, or 12.8% of the $847.5 billion of municipals outstanding.

The 42 New York State banks in the top 500 held more municipal bonds than banks in any other state, with $7.41 billion of municipals, or 19% of the total.

Pennsylvania's 35 banks followed, with $2.65 billion; then Michigan's 14 banks, with $2.45 billion; Ohio's 28 banks, with $2.44 billion; and Florida's 30 banks, with $2.39 billion.

North Carolina banks boasted the largest average holdings, with $198 million per bank, followed by Alabama with $193 million, New York with $177 million, Michigan with $175 million, and Virginia with $151 million.

The Biggest Sellers

The New York banks sold off by far the most bonds in the first half of 1991, with a $1.89 billion, or 20%, reduction. New Jersey was second with a $650 million decline, or 26%.

Next came Arizona, down $398 million; California, down $352 million; and Pennsylvania, down $263 million.

Banks in five states increased their combined municipal holdings in the first half of the year. Illinois's 23 banks in the top 500 increased their portfolios by $47 million, or 2.4%; Alaska's three banks added $22 million, or 16%; Idaho's four banks added $7 million, or 3%; Louisiana's eight banks added $4 million, or 2%; and Wisconsin's six banks added $4.6 million, or 1%.

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