Amid the ongoing turmoil that plagued the financial and credit markets in the first half of 2008, the nation's commercial and savings banks experienced slight negative growth in their municipal bond portfolios. The holdings declined by 1.0% to $142.7 billion on a cost basis and by 2.7% to $141.1 billion on fair-value basis through June 30, according to data from Sheshunoff Information Services Inc.

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Analysts said a combination of events - including the ongoing credit crisis, the collapse of the auction-rate securities market, and overall poor financial performance of banks - contributed to those institutions owning less municipal debt versus last year's modest growth.

In all of 2007, by comparison, banks' muni portfolios increased by 5.3% on a cost basis to $144.1 billion and by 4.4% on a fair-value basis to $145.0 billion, which was preceded by double-digit percentage growth the prior two years. Analysts have linked the significant growth of bank holdings in recent years to the wide use of leveraged tender-option bond strategies. However, that strategy unraveled when banks could no longer seek leverage in the ARS market after auctions failed and the market collapsed in February.

"It seems that banks may have unwound tender-option bond positions, reduced their willingness to carry short-term tax-exempt securities, and reduced inventories of bonds for resale to institutional customers," said Chris Mier, managing director and municipal strategist at Loop Capital Markets LLC in Chicago.

A New York investment banker said he believed the poor financial performance of some national and regional banks through June 30 helped curtail ownership.

"If they were under some earnings pressure and had a lesser need for the tax shelter provided by municipal bonds, they could have bought less paper," he said.

To a lesser extent, the banker said the 0.2% drop in bank-qualified paper in the first half, to $8.18 billion from $8.20 billion over the same period in 2007, could have had a minimal effect on ownership.

As a result of these circumstances, some of the nation's largest banks saw the steepest declines in their portfolios, but still managed to rank high among the 500 commercial and savings banks included in the data.

Chicago-based LaSalle Bank had the largest decrease in holdings, declining by $2.9 billion - or 41.3% - as it was acquired by Bank of America in the fall of 2007, a merger that will be completed by the end of this month. The banks ranked fourth and fifth among the largest portfolios.

Bank of America ranked fourth with $5.15 billion. However, that was down by $1.8 billion, or 25.9%, after growing by 10.1% to $6.95 billion in 2007 and by 35% in 2006 to $6.32 billion from $4.68 billion.

LaSalle, meanwhile, ranked fifth with $4.26 billion compared with a 6.4% increase to $7.25 billion in 2007, and a 9.1% increase to $6.82 billion in 2006.

Although Las Vegas-based Citibank posted the third largest decline of its portfolio - dropping by 3% or $351 million from the end of 2007 - its $11.28 billion municipal portfolio took top billing as the largest by a bank in the first half. Last year, Citibank's portfolio declined 22.4% to $11.63 billion after increasing by 16.4% to $14.99 billion in all of 2006.

Fifth Third Bank in Grand Rapids, Mich., also had a noticeable decrease of $99.9 million, or 21.6%, to $363 million and ranked in fifth place among the top 30 banks with the largest declines. That was on the heels of an 18% drop in 2007 from $462.9 million, and 14.9% in 2006 from $564.7 million.

Meanwhile, US Bank NA in Cincinnati saw its portfolio decline the least, dropping $38.9 million - just 0.5% - to $7.14 billion, and was ranked 12th among those with the largest declines, though it also had the second largest portfolio behind Citibank.

The bank's slight decrease in the first half follows a whopping 58.7% rise to $7.18 billion in 2007, up from $4.53 billion in 2006.

Other banks that saw noticeable increases included Branch Banking & Trust Co., headquartered in Winston-Salem, N.C., which grew by $633.2 million, or 44.5%, and garnered seventh place among the largest portfolios with $2.05 billion in muni holdings compared with $1.42 billion last year.

State Street Bank & Trust Co., based in Boston, grew by $523.7 million, or 8.8%, and ranked third among largest portfolios with $6.46 billion, which is up from $5.93 billion in 2007.

Meanwhile, Cambridge, Mass.-based Cambridge Trust Co. held the least amount of municipal debt among the top 500 banks, growing its portfolio by only 3.2% to a total of $37.7 million, compared with an 11.6% increase to $36.5 million in 2007.

Banks experienced the most growth of their muni holdings a decade ago, increasing by 13.1% on a cost basis to $86.5 billion and 13.3% on a fair-value basis to $89.4 billion from the year before. Banks' municipal portfolios have not decreased year over year since 1995, when they dropped by 5.5% on a cost basis to $73.8 billion, and by 1.8% to $76.2 billion on a fair-value basis compared with 1994, according to the data.

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