Increasing interest rates are affecting banks’ investment portfolios and are slowing – in some cases, postponing – their sale, according to bank consultants.
The Federal Deposit Insurance Corp. noted in the release late last month of its Quarterly Banking Profile that banks and savings institutions nationally saw an 89.1 percent decline – or a loss of $51.1 billion – in the market values of their securities portfolios between the first quarter of 2013 and second quarter of 2013.
“This decline was due primarily to rising medium- and long-term interest rates, which eroded market values of fixed-rate securities,” the FDIC said in the quarterly profile.
An FDIC spokesman said the data isn’t broken out on a state level.
A Tennessee-based bank consultant said in his mid-September newsletter to clients that the decline in the market value of the investment portfolio of a bank that was pursuing a sale and which he was helping, negatively affected its purchase price.
Kenneth Friedel, manager and consultant for the financial institutions group at Kennedy and Coe, said he knows of at least one client of his firm that was similarly affected, and consequently postponed its sale.
“Oh, yeah. It’s real,” Friedel said.
He said the market value of a bank’s investment portfolio is considered in the valuation of a bank when it sells. Bank regulations limit the types of securities a bank can invest in, and most often they are government bonds.
Banks are relying more heavily on earnings from government bonds, he said, because earnings from loans are tighter.
In this instance, he said if the rate of a government bond of a selling bank is below what the current market expectations are for its rate of return, it has to discount the value of the bond because of accounting rules.
“A paper loss becomes real in an acquisition,” Friedel said.
Equity Bank chairman and CEO Brad Elliott said the market value of a bank’s investment portfolio is a consideration in every bank sale.
“It’s always the case,” Elliott said. “Anytime there is a transaction, that’s always the case.”
Elliott said that was a consideration when his bank developed its bid in an auction last week for Quincy, Ill.-based Mercantile Bank. Equity did not win the auction.
But Elliott and Friedel don’t think the situation with investment portfolios will stop banks from selling.
“Because the reasons for owners selling or buying banks is still stronger than temporary market situations,” Friedel said.