Banks took advantage of rising yields to grow their bond holdings in the 2021 fourth quarter, a trend that has continued into 2022 as long-term rates have moved higher still.

Deployment of excess cash, a byproduct of explosive deposit growth, into securities is a key component behind projections for rebounds in net interest income. However, some banks said in earnings reports in January that they are focused on loan growth, and keeping an eye on potential shifts in deposits as they manage their investment portfolios.

Securities portfolios increased a median 3.3% sequentially during the fourth quarter across banks with more than $50 billion of assets, according to data from S&P Global Market Intelligence. In the aggregate, securities holdings increased $43.39 billion for the group, compared with a drop in cash and equivalents of $93.67 billion.

So far this year, seasonally adjusted securities holdings for the entire industry increased $84.43 billion, while cash assets fell $258.89 billion from Dec. 29, 2021, to Jan. 26, 2022, according to the most recent weekly data from the Federal Reserve. The yield on 10-year Treasurys jumped 30 basis points over the same time to 1.85% as the central bank continued its pivot toward fighting inflation.

In the 2021 fourth quarter, total securities at Cullen/Frost Bankers Inc. increased 16.1% sequentially to $15.70 billion, including purchases of about $1.7 billion of mortgage-backed bonds yielding about 2.05%, CFO Jerry Salinas said on the bank's earnings call. The bank still has about $14 billion in cash at the Federal Reserve, he said, and might increase its securities portfolio another $5 billion this year.

"If these deposits continue to stick, we could be more opportunistic, but that's kind of where I'm thinking right now," Salinas said.

Fifth Third Bancorp, which had pegged the threshold at which yields would start to become attractive at about 2%, increased its securities by 0.3%, or $114.0 million, in the 2021 fourth quarter. For 2022, CFO James Leonard said Fifth Third's forecast for net interest income growth of 4% to 5% assumes increases in its securities holdings of about $1 billion each quarter.

"We've always said we wanted to get to the 2% entry points," Leonard said. "We put some money to work in December, and then we've continued to do that here in January and expect to do it as the year progresses."

Growth in U.S. Bancorp's securities holdings was one of the sharpest among the group, with a 17.0% sequential increase to $174.82 billion. "We did step up the investment portfolio a lot," CFO Terrance Dolan said, adding that the bank entered into swaps to keep duration short. "We want maximum flexibility. As long-term rates start to rise, we would expect to kind of unwind that [with] the benefit coming through in 2022," he said.

Going forward, Dolan said he expects the size of the investment portfolio to stay "relatively flat to fourth quarter levels," with earning asset growth coming from lending.