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US banks still executing bond loss trades to boost net interest margins, income

Realized losses on US banks' available-for-sale securities remained elevated during the fourth quarter of 2023 but did not quite reach the peak seen in the linked quarter.

US banks recognized $4.17 billion in realized losses on available-for-sale (AFS) securities in the fourth quarter of 2023, down slightly from $4.29 billion in the linked quarter but still up compared to any other quarter in the last three years, according to S&P Global Market Intelligence data. During the same period, the industry's realized losses on held-to-maturity (HTM) securities increased to $12.2 million from $1.6 million in the linked quarter.

Most banks are only restructuring smaller portions of their portfolio — between 10% and 25% — but the sales still come with big gains such as enhancing net interest margins and core earnings, accelerating asset yield normalization, extending the duration of near-term bond maturities and retaining optionality compared to a larger restructuring, Andy Gibbs, the leader of Mercer Capital's Financial Institutions Group, said during an industry conference in January.

"You're preserving your capital in case something happens now versus a larger restructuring," Gibbs said. "You're bringing the losses forward and that will enable some recovery and earning asset yields that would otherwise take longer to occur."

The bond rally during the 2023 fourth quarter also allowed banks to restructure their securities portfolios without realizing the level of losses they would have previously, he said.

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Largest recognized losses

All 20 banks with the most realized securities losses for the 2023 fourth quarter realized upward of $30 million, compared to just six of the top 20 during the linked quarter.

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Cadence Bank recorded the second-largest realized loss at $384.5 million after the company restructured more than 25% of its AFS portfolio in December 2023. The company's sale of its insurance unit for $904 million last year allowed it to restructure its balance sheet through paying down wholesale borrowings and selling securities.

The restructure is expected to boost Cadence's 2024 earnings per share by 11% and its net interest margin by 21 basis points, and lower its efficiency ratio by 530 basis points, according to an investor presentation after the insurance deal was announced.

"The securities repositioning obviously accelerates our margin improvement efforts," Chairman and CEO Dan Rollins said during the company's 2023 fourth-quarter earnings call. "We anticipate additional positive impact from this repositioning in the first quarter margin."

Pacific Premier Bancorp Inc. reported the third-highest realized loss on securities at $254.1 million, despite its goal of building capital and de-emphasizing balance sheet growth, Chairman, President and CEO Steven Gardner said during a January earnings presentation. The sale boosted the company's liquidity and its net interest margin by 16 basis points.

"We continue to retain higher levels of capital given the environment, but where we see opportunities such as the securities repositioning transaction ... that's going to continue to be our approach here for the foreseeable future," Gardner said.

Northern Trust Corp. also repositioned its balance sheet during the 2023 fourth quarter, realizing losses of $176.4 million. The company completed another repositioning in January, realizing additional losses of $200 million, CFO Jason Tyler said during the company's 2023 fourth-quarter earnings presentation. The company expects the fourth-quarter 2023 and first-quarter sales to boost its net interest income by $30 million a quarter in 2024.

The sales also benefited the company's capital base as it reinvested proceeds into higher quality liquid assets, which is helpful as it waits for clarity on the Basel III endgame final rule, Tyler said.

"We also got to have in mind that Basel Endgame ... it's still unclear. We did do a comment letter ... but it's unclear what the impacts are going to be. We think we're in good position relative to peers but I want to keep an eye on that," Tyler said. "The repositionings we did this year were all helpful to capital."