Rising interest rates have torn into the investment portfolios of some community banks,
Nine banks -- all of them smaller institutions -- have racked up unrealized losses on securities equaling more than 50% of their equity, according to a study by Veribanc Inc., Wakefield, Mass. (See table on page 6.)
The woes of this group underscore how rate rises since February have buffered securities portfolios throughout the banking industry.
Among all banks, unbooked losses on securities held for the long term totaled $8.4 billion as of June 30, up a whopping 764% from the previous quarter, Veribanc found.
And 67 banks held unbooked securities losses that exceed onequarter of their equity.
Community banks have been hit especially hard because they lack the expertise in managing interest rate risk that larger institutions have, experts said.
"Small institutions are particularly relying on third-party advice," said Edward Furash, chairman of Furash & Co., a Washington-based bank consulting firm.
"They tend to be more trusting."
Holdings of mortgage-backed securities have proved especially troublesome to community banks.
These often complex instruments can plunge in value when interest rates rise.
Warren Heller, Veribanc's director of research, said he doesn't expect the problems in investment portfolios to cause community bank failures.
But he said he does see regulators cracking down with more memorandums of understanding and cease and desist orders.
The problems have come to light as a result of recently instituted accounting rules requiring banks to report unbooked losses on securities they plan to hold until maturity.
The nine hardest-hit banks -- scattered from Louisiana to New Jersey -- say they are already starting to revamp their investment strategies.
"No more long-term bonds," said' Walter Coffman, president of First National Bank, Hamilton, Tex.
That institution had $750,000 in unhooked losses as of June 30, Veribanc found.
In other words, if the bank had sold the securities then, the losses would have amounted to 52.2% of equity.
Lew Harmon, president of Bank of Altenburg, Mo., which has $940,000 in unbooked securities losses, said it plans to restrict future investments to jumbo certificates of deposit, Treasuries, and municipal bonds.
"We will not buy a lot of that stuff that fluctuates that much," he said.
According to the survey, Vernon Bank of Leesville, La., would be hardest hit if it sold its portfolio. The bank had $2.67 million in unbooked securities losses as of June 30, representing 74.2% of its equity. Vernon officials could not be reached for comment.
Three banks operated by Commerce Bancorp, a $2.3 billion-asset Cherry Hill, N.J., holding company, also would be hard hit if it took losses.
The company's lead bank, Commerce Bank, had unbooked securities losses of $67.44 million, or 73% of equity.
Its sister banks, Commerce Bank/Devon, Pa., and Commerce Bank Shore, Forked River, N.J., had unbooked losses of $6.91 million and $6.75 million, respectively.
If the losses were realized, Commerce Bank in Cherry Hill would become critically undercapitalized, Commerce/Devon would become significantly undercapitalized, and Commerce/Forked River would become undercapitalized, the report says.
Officials with the company declined to comment, other than to say that the three banks are all well capitalized.
Meanwhile, some banks said they plan to hold on to their battered securities rather than sell them and take losses.
"We will just ride this thing out unless the regulators make us sell some of them," Mr. Harmon said. "If you hold them long enough they will pay."