As profits from fixed-income investments continue to shrink in the current interest rate environment, some community and regional banks are selling off chunks of their portfolios at a loss, taking a hit on their earnings, and redeploying the proceeds in better-yielding investments.
Though statistics on the number of banks restructuring investment portfolios are difficult to obtain, anecdotal evidence shows that the trend has picked up as interest rates have risen in recent months.
According to Alison England, vice president of the financial services group at First Tennessee Capital Markets, now is a good time to make such a move.
"Bank stocks have already been beaten down, so you can take your losses now and improve your position for the future," said Ms. England, speaking before the Illinois Bankers Association's annual convention in Nashville this week.
Sun Bancorp in Selinsgrove, Pa., came to a similar conclusion. In June, the banking company said it was restructuring its portfolio and taking a $2.1 million loss. Its plan was to take advantage of higher interest rates by selling Ginnie Maes yielding 6.5% and buying the same mortgage-backed securities with a 7.5% return.
"Dollar for dollar, we went back into the same pool of investments," said Robert J. McCormack, president of the $715 million-asset Sun Bancorp. In fact, the company has already seen some security gains from the exchange, Mr. McCormack said.
Interwest Bancorp in Oak Harbor, Wash., and Hudson United Bancorp in Mahwah, N.J., are taking much the same approach.
Interwest, with $2.8 billion of assets, said last month that it would sell about $130 million of Treasuries and other fixed-income instruments and reinvest the proceeds in shorter-term, higher-yielding securities. It estimates that expenses relating to the sale would be $4.4 million, but chief financial officer Bette J. Floray said the company expects to recoup its loss in less than a year.
Hudson United, meanwhile, announced last week that it would sell some $2 billion worth of mortgage-related securities - almost 20% of its assets - so that it could pay down short-term debt and buy back some of its stock. Hudson United, with $9.3 billion of assets, will take a charge of $42 million for the second quarter, but its chairman says the long-term benefits outweigh the short-term losses.
"If additional rate increases occurred, they would have a negative impact on earnings going forward," said Kenneth T. Neilson, Hudson United's chairman, president, and chief executive officer.
Heather L. Dilbeck, an analyst at Ryan, Beck & Co. in Arlington, Va., considers Hudson United's restructuring a positive development. Banks were able to capitalize on the spread between rates on borrowed funds and those collected on assets a couple of years ago, but the six rate increases since June 1999 have narrowed spreads dramatically.
"This isn't the best interest rate environment for a leveraging strategy," Ms. Dilbeck said.
Even the stock market reacted positively to the news that Hudson United was taking a $42 million loss. The day of the announcement, the stock closed at $24.25, up from $23.375 the day before.
Jay Brew, a senior managing partner at BNK Advisory Group in Northampton, Pa., said that when interest rates are relatively high and rising he encourages community bank clients to consider selling fixed-income securities at a loss to reduce tax liability and increase earnings in the future.
He also agreed that now is a particularly good time to restructure because investors are less interested in bank stocks than they were a couple of years ago. In this environment, he said, banks could announce large losses relating to investment portfolios and many investors would not even notice.
"While the current stock market is turning a blind eye to banks' managerial efforts, don't be surprised to see the markets reward those banks that have done a solid job of repositioning themselves," he said.
Craig Woker contributed to this story/P>