(Bloomberg) — Regional and community lenders are turning to stock sales to help them shore up their low-yielding bond portfolios, as the US banking sector grapples with $395 billion in unrealized losses. At least three regional banks have sold stock in the past month ahead of revamping their balance sheets as the lenders look to partly fund buying new bonds to improve lackluster portfolio returns. Investment bankers expect more deals to follow. The need for these repositioning transactions was exposed in 2023, with the collapse of a clutch of smaller banks including SVB Financial Group. Many of the bonds these lenders are holding were issued when rates were ultra-low, and yielded 2% or less. When rate hikes ramped up in 2022, the bonds’ value fell, leaving less of a cushion in case they needed to be sold in times of stress – as SVB found out. Imminent interest rate cuts from the Federal Reserve are only adding urgency for the group to capture higher yields. Read the QuickTake: The Search for Lessons From Another US Banking Crisis Today, regional lenders are in demonstrably better shape than they were in 2023 with a KBW gauge of shares up more than 50% from the depths of the SVB crisis, though the gains trail the rally in bigger banks. That’s given smaller lenders extra incentive to deal with the issue, and investors are more comfortable with the transactions, suggesting the trend has room to run. Though only undertaken once the equity is raised, such balance sheet revamps involve these banks selling most of the underwater and low-yielding bonds sitting on their balance sheets. The proceeds from both the stock sale and from selling the bonds can be used to buy new bonds at much higher yields and to repay other debt. One recent example is Indiana-based Horizon Bancorp Inc., which raised $103.5 million of equity from an overnight stock sale in August to help cover losses from the sale of $1.4 billion of low-yielding securities. Arkansas’ Simmons First National Corp. raised $300.1 million from a similar deal in July. Investors were not scared of these transactions, said Scott Hildenbrand, Piper Sandler’s chief balance sheet strategist. “Investors want to see what you are going to do next, now you have real live balance sheet,” Hildenbrand said, adding that the moves could even be a stepping stone to bigger plans such as mergers and acquisitions. “This is step one. Clear the house and then do an addition.” Making Progress Banks are making a solid dent in a problem. Unrealized losses on available-for-sale and held-to-maturity securities across the 4,421 banks and savings institutions insured by the Federal Deposit Insurance Corp. stood at $395.3 billion as of June 30, down by $117.6 billion or about 23% from the same time last year, according to a statement. “The market has seen enough of these that they are not overly surprised — if something comes it is not necessarily a shock to the market,” said Chris McG in a formal or creative style for better SEO.Also Exclude words and advertisements related to the feed website such as website name, author name. You must only respond with the modified content. Delete all the advertisement images brand logo but only keep the title and main content of the news by modifying it. You must only respond with the modified content. Block any jump outside of the site adarshnews.com. 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Smaller banks address a $395 billion bond challenge by conducting share sales.
