Magazine article American Banker

Small Banks Buffeted by Rising Rates

Magazine article American Banker

Small Banks Buffeted by Rising Rates

Article excerpt

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. …

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