The prospect of the Federal Reserve tapering off its $85 billion a month in bond purchases caused interest rates to jump at the start of summer - bringing losses to bond investors and higher mortgage rates to home buyers.
An analysis by an asset manager in White Plains, N.Y., suggests New Jersey community banks might be at risk, as well, when interest rates are no longer held near zero by the Fed.
Paradigm Asset Management, which manages
$1 billion in assets, says half of the 101 New Jersey community banks it reviewed have "extensive exposure to potential investment portfolio losses now that interest rates have begun to rise to 'normalized' levels."
The analysis by its Strategies and Solutions division found that among these banks with $5 billion or less in assets, half typically had 38 percent of their investment portfolios in mortgage-backed securities. For a 10th of the community banks, a 90-percent level of investment in mortgage-backed securities was typical.
Edmund Gish, senior strategist with Paradigm, said attention has focused on the rate-increase effects on major banks, with $37 billion wiped from industry balance sheets through June. The effects going forward on community banks also will be great.
"These banks tend to have higher concentrations of mortgage-backed securities than the larger institutions and have less opportunity to rebuild eroded capital by accessing investors via the capital markets," Gish said in a statement.
Jarius DeWalt, chief strategist at Paradigm, said the shift from showing unrealized gains on such investments to showing unrealized losses will pose regulatory and financial challenges.
"Interest rates returning to normal levels will blow holes in a number of firms' capital accounts over the next year or so, similar to the experience in 1994-95," DeWalt said in a statement.
So far, most community banks in the region seem to be weathering the prolonged downturn that has followed the financial crisis of 2007-08. Bankrate.com's most recent analysis at the end of the first quarter found many in good-to-better shape.
Those rated sound, meriting four of five stars, included: Capital Bank of New Jersey, based in Vineland; Century Savings Bank, of Vineland; First National Bank of Absecon; Millville Savings & Loan Association; Newfield National Bank; and Ocean City Home Bank.
Area banks rated as performing, with three of five stars, included: 1st Bank of Sea Isle City; Cape Bank, of Cape May Court House; and Sturdy Savings Bank, of Cape May Court House.
Crown Bank, of Ocean City, received the lowest rating of one star, based mainly on what Bankrate called very questionable asset quality. "Our conclusion with respect to asset quality incorporates our analysis of data depicting regional economic conditions as well as our computations of a highly problematic (as of March 31) nonperforming asset ratio, substantially below normal reserve coverage for nonperforming loans, and much greater than average holdings of commercial real estate and construction loans, two categories that can intensify credit risk," the analysis says.
On the other hand, Bankrate considers Crown Bank to be strongly capitalized and with normal and sustainable profitability.
Two Vineland-based banks, Sun National Bank and Colonial Bank FSB, received two stars, defined as "below peer group." Both were deemed to have lower sustainable profitability and questionable asset quality, while Sun also was considered below standard capitalization and lower than normal liquidity.
For reasons unknown, Crest Savings Bank in Wildwood wasn't analyzed after the second quarter. Its prior-quarter rating from Bankrate was four stars.
Even if Paradigm Asset Management is correct that community banks will come under considerable pressure when interest rates start to rise, there is little reason to expect rates to rise anytime soon.
The Federal Reserve is committed to keeping them low at least until 2015, and U.S. inflation is currently near record lows.
Rates no doubt will normalize some day, when the Fed ends its stimulus programs, but the whole financial world will be affected and probably will look a bit different by then.
Ben Inker, who leads asset allocation at global fund manager GMO, said recently that today's valuations in various markets are predicated on low short-term interest rates.
If everyone expects rates to go up, just about every asset across the board is vulnerable to a drop in price, he said.
AT&T recently expanded its fast 4G LTE mobile phone network to Atlantic City, Vineland and southern New Jersey shore points, part of $250 million in upgrades this year in the state.
From 2010 through 2012, the company invested nearly $2.2 billion in its New Jersey wireless and wired networks.
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