Despite the scare over derivatives, some community banks say they have turned out to be big money-makers.
The Crescent Bank and Trust Co. in Jasper, Ga., for example, had $21 million worth of derivatives on its books as of Sept. 30.
That's a large position for a bank with only $55 million of assets, but J. Donald Boggus Jr., the bank's senior vice president, says he doesn't know what he'd do without them.
"Are they a valuable tool? Oh, very much so," he said. "There would be more interest rate risk than what we would want if we didn't have them."
Crescent uses the instruments for its wholesale mortgage operations. In order to minimize interest rate exposure during the closing period of a loan, which lasts 30 to 45 days on average, the bank uses a forward commitment to lock in the interest rate.
The bank securitizes the loans in blocks of $1 million and usually closes $35 million to $50 million a month. That sort of volume requires the hedging services provided by derivatives, he said.
"When interest rates began to creep up last year, you heard about institutions suffering," Mr. Boggus added. "But we were able to avoid those problems by being fixed in to our rates."
An American Banker study showed that at least nine community banks around the country had more than $10 million of derivatives on their books as of last fall. Four of those - Commercial Bank of New York, Greene County Bank of Strafford, Mo., Fort Wayne National Bank of Ind., and Imperial Bank of Inglewood, Calif. - each controlled at least $100 million of the instruments.
A handful of small banks derived a substantial part of their income - in the 9% to 12% range - from the instruments. But the reactions of several of those reached revealed just how much of a suspect word 'derivative' has become.
"It scares the fool out of me," said Barry L. Crow, chief financial officer of Simmons First National Bank in Pine Bluff, Ark. "We don't want anyone here associated with the 'D-word.' We'd be unemployed if we were."
Simmons First appeared in the study as having 24% of its year-to-date income in the third quarter coming from derivatives trading. However, Mr. Crow said the income, $1.5 million, came not from the bank's investment portfolio but from its securities dealer department.
The bank's cut from lining up buyers and sellers of securities generated the income, he said. That number was listed in the interest rate exposure line item on its call report, the spot where banks place their derivatives trading numbers.
"We're just a little nervous about derivatives and Simmons First National being in the same sentence," he said. "That's just not who we are."
But several of those interviewed said the instruments, if used as they were initially intended, are efficient ways of limiting risk, not increasing it.
"We were fortunate in that we had a couple of board members who used these in their own business and were able to educate some of our people," said Stephen R. Gillig, chief financial officer of Fort Wayne National Bank, a $2.2 billion-asset Indiana company. "I think those that are afraid of them probably don't understand how they work."
Unlike Crescent, which uses the instrument to hedge assets, Fort Wayne uses them to hedge liability positions.
The instruments allow the bank to artificially extend the maturity of short-term liabilities, such as certificates of deposits and deposit accounts, he said.
"You can get pretty far out with these things, but that's not our game," he added.