Small Banks Use Muni Debt to Bond with Communities

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First Financial Northwest in Renton, Wash., jumped at a chance to have a stronger bond with its hometown.

When officials in Renton recently floated a bond issue to fund improvements to city schools, the $939 million-asset First Financial was an eager participant, buying $500,000 of notes. The company wanted to buy even more, said President and Chief Executive Joseph Kiley 3rd.

"We hunted them down," Kiley said. "We bought all we could. They were pretty well received on the market."

First Financial isn't the only bank that is keen on buying municipal bonds. The banking industry, as a whole, held nearly $500 billion in municipal notes at the end of last year, seizing on the tax advantages that typically come with such investments. Municipal bonds also tend to have strong credit ratings.

For community banks, the investments also represent a tailor-made opportunity to generate local goodwill – a fact that turns them into especially aggressive buyers when hometown opportunities arise.

"Most community banks that buy municipal bonds have a preference for investments in the area they operate," said Mark Evans, director of trading at Vining Sparks. "They're all over them."

Mechanics Bank in San Pablo, Calif., last fall bought an entire $3 million issue of social impact bonds designed to rehabilitate and sell abandoned houses in Richmond, Calif. In a press release, Ken Russell, the $3.6 billion-asset bank's president and chief executive, said Mechanics "jumped at the chance" to buy the bonds.

Glacier Bancorp in Kalispell, Mont., bought $9 million of school bonds issued in December by the city of Bigfork, Mont., to upgrade a local high school.

"School bonds are very, very attractive to the small banks and they try to buy up all they can," said Glenn Floyd, a Norman, Okla., lawyer who has specialized in municipal bonds since 1968.

Community bank interest in local bond issues has rarely, if ever, wavered during his career, Floyd said. As many as five banks will bid for some school bond issues, with local banks typically coming out on top.

"Interest in local capital needs is very high," Floyd said. "Bankers know those credits; they know the city managers; they know the county commissioners and they trust them."

"There is more desire among community banks to make those types of investments than opportunities to do so," Evans said.

First Financial, meanwhile, is doing more than just investing in school bonds; the company is also active in promoting financial literacy among students. Bank employees, for instance, lectured players on Renton High School's football team on personal finance prior to home games during the 2015 season.

The bank, which also sprang for the pre-game meal, is set to provide a second season of classes and meals for Renton's team.

Community banks can make "much more impactful" investments by participating in bond issues from smaller municipalities, Evans said. For instance, First Financial's $500,000 purchase might have gone unnoticed had involved Seattle, given the scale of that city's finance activities, he said.

The school bond purchase was "a little on the unique side" for First Financial Northwest, Kiley said, though it seemed to turn out well for both the bank and for Renton.

"Once we heard it was going forward, we kept our eyes peeled for it," Kiley said. "We like to put our money where our mouth is. The bond issue was very successful and we feel good about it."

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