Executives at America’s legion of small lenders could learn a couple of things from two merging New York rivals. Provident New York Bancorp and Sterling Bancorp agreed to a $344 million merger with a $7 billion balance sheet on Thursday. So far, so unremarkable. But the deal also leaves the two even better positioned to handle one of the biggest problems looming for community banks: rising interest rates.
Usually, higher rates mean higher payments on loans and securities. After years of low rates eating away at margins, that ought to be welcome to the nation’s 7,000 community banks, which generally have less than $10 billion in assets and provide almost half of all small-business loans. But many have stocked up on longer-dated loans and securities to get a bit of extra yield.
Assets maturing in five years or more make up at least 30 percent of the portfolios of nearly half of community institutions, according to the Federal Deposit Insurance Corp – almost double their exposure in 2008.
That leaves them vulnerable when rates rise. Provident already looks better placed than many. It has added more short-term loans to its books as it has grown its business with companies to offset an earlier reliance on commercial real estate – and will pile on even more with Sterling’s corporate-heavy lending book.
As of the end of last year a rapid 3 percentage point rise in rates could whack $30 million off the value of Provident’s portfolio, according to filings with the Securities and Exchange Commission. An $11 million increase in interest income would help offset that. But even without that, the loss would at worst wipe out a year’s net income.
That’s not, however, the case elsewhere. Bank of Green County, for example, would also take a $30 million hit on its portfolio, yet only earns $5 million a year. So the red ink could drown almost half its equity. Extrapolate that scenario across the sector and the average 15.5 percent Tier 1 risk-based capital the FDIC reports at banks with less than $5 billion in assets looks inadequate. If community lenders want to avoid a mad dash to raise capital when rates rise, they need to start acting now.