Biggest Banks Slashed Municipal Bond Holdings in 1990

The nation's 500 largest banks reduced their holdings of municipal bonds by 18.6%, or $10.29 billion, in 1990, leaving a book-value total of $44.98 billion.

At the end of 1985, the banks held $95.41 billion of municipals -- the high-water mark -- having built their portfolios in anticipation of the Tax Reform Act of 1986.

Ever since, money-center banks have steadily and steeply reduced their holdings of municipals.

Last year, for example, three of the four largest banks in the United States each reduced holdings by more than $400 million. (See table.)

The exception, No. 2-ranked BankAmerica Corp., still reduced holding of tax-exempts by $32 million, despite being hugely profitable. (In this year's first quarter, the San Francisco-based holding company has the highest net income in domestic banking, at $282 million.)

Regionals Partly Compensate

As money-centers were dropping tax-exempt bonds, regional banks were buying them -- but on a far smaller scale. The largest purchaser was Boston-based State Street Bank and Trust Co., the only institution to break the $100 million mark in additions to holdings of municipals. Other heavy buyers are in such unexpected places as Puerto Rico; Wilkes-Barre, Pa.; Hempstead, N.Y.; Dallas; and Anchorage, Alaska.

On a percentage basis, the biggest increase in holdings among banks with a significant portfolio was at Dallas-based Team Bank.

Rising from the ashes of failed Texas American Bancshares and 22 other Texas banks, Team Bank ranked 110th nationally, with $5 billion in assets and an overall investment portfolio of $1.8 billion. And last year it built a new portfolio of municipals, buying $51.59 million worth to raise its holding 1,112.4%.

Spreads |Way Too Narrow'

But Suzie Chapman, senior vice president and chief investment officer at Team Bank, said current spreads make municipals forgettable, and after-tax income suffers as a result.

"I now have about $60 million of bank-qualifieds, but I haven't bought very many, because the spreads for banks are way too narrow," Ms. Chapman said. "We thought we would have had up to $150 million by now.

"Maybe it's not so in other states with state and local taxes, but here in Texas, with neither, on a risk-weighted basis they are not competitive with CMOs and asset-backed securities," she continued. "We are a highly profitable bank, and we'd like to diversify. We'd like to have many more munis than we have, but the spreads aren't there."

Ms. Chapman said a recent pricing scale for bank-qualified Washington State paper had no spread with respect to Treasuries. "Either they are selling it to retail or they're losing money," she said.

An Entire Portfolio Sold

Southeast Bank, a Miami-based regional, is the mirror image of Team Bank. Southeast, which is losing money and paying no dividends, last year sold its entire portfolio of municipal bonds.

"We are not in a taxable bracket," said Robert Robinson, vice president of municipal trading and underwriting at Southeast. "We had losses of about $116 million last quarter, $150 million in the fourth quarter of 1990, and then $60 million the quarter before that. We don't need tax-exempt income."

The sale of the portfolio brought a $28 million profit; without that income, the third-quarter loss would have been almost $90 million, Mr. Robinson said.

And because the bank's earnings are "nonexistent," the profit is not taxable, Mr. Robinson said.

"We went out and put it into 8% securities. It just didn't make sense holding onto 5% bonds."

Although Southeast Bank maintains a municipals sales force of 25 and is still active in municipal underwriting, trading, and swapping, buying is done for now, Mr. Robinson said.

"Because of the losses, we won't look at any municipal buying in the near future."

Market Value Sinks

The market value of the 500 banks' holdings declined 18.6% in 1990, to $46.24 billion from $56.84 billion.

Bank portfolio figures cited here are based on filings with the federal regulatory Report of Condition, which is listed with federal banking regulators every six months. The figures were compiled by Automatic Data Processing Inc. Data for previous years have been revised to reflect mergers and acquisitions.

The 500 banks are ranked by assets as of Dec. 31 and include credit card and other specialty banks.

Commercial banks were the largest group of investors in municipal bonds in every year but one from 1965 through 1986, according to the Federal Reserve Board's Flow of Funds Accounts.

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

Banks were overtaken by households as the largest sector holding tax-exempts in 1987, and then dropped to third -- behind casualty and property insurance companies -- in 1989. According to preliminary Flow of Funds data, commercial banks held just $117.5 billion of bonds on Dec. 31, or only 14% of the $840.6 billion of municipals outstanding. Now tax-exempt bond funds, which hold only $8.4 billion less than banks, are closing in.

Savings and loan associations and mutual savings banks, which are not included in the banking totals, held a relatively paltry $3.1 billion of tax-exempts on Dec. 31, according to Flow of Funds. The group has never held more than $3.6 billion.

New York Banks

Top banks that are based in New York State held more municipal bonds than those in any other state. Forty-three New York banks held $9.38 billion of municipals, or 21% of the 500 banks' combined portfolios. Thirty-seven Pennsylvania banks followed, with $2.91 billion. Fifteen banks in Michigan had $2.57 billion, 26 in Ohio held $2.56 billion, and 29 in Florida $2.53 billion.

The New York banks sold reduced their holdings the most, by $3.48 billion, or 27%. Florida was second, with a reduction of $1.21 billion, or 32%; Southeast Bank accounted for nearly two-thirds of the decline. Next were New Jersey, down $829 million; Connecticut, down $571 million; and Massachusetts, down $539 million. [Tabular Data Omitted]

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