Refresh: 1) SECU has been highly successful for the last 85 years - without RBL, 2) SECU has been financially successful - last 5 years "most profitable ever" per CEO Brady - without RBL,
3) SECU members - per SECU Loan Administration estimates - will pay
literally hundreds of millions of dollars in excess interest on loans - with RBL, 4) the same rate, "A-paper for all" lending approach is a superior "marketing" strategy - without RBL, 5) " everybody else is doing it" (aka "industry standard") is not sound reasoning, and 6) there are no financial nor operational reasons for the SECU Board not to pause future RBL implementation in order to review its RBL decision with the SECU membership.
But, let's return to yesterday's post [RBL #7] and prove why the "same rate for all" lending strategy is a superior business and marketing strategy for SECU, - especially given the 5 points above. As an added benefit, SECU will not have to deal with the fairness and discrimination issues which arise with risk-based lending - that priceless reputational value of SECU being viewed as a fair, principled lender, right?
Put on your business cap; this one is easy! SECU Loan Administration (LA) has proclaimed that it can offer SECU members a market competitive A-paper loan rate under RBL. I looked around yesterday based on SECU' s posted new/used car rates and SECU A-rates do look competitive! SECU LA has also proclaimed that the newly competitive rates will bring "A-rate" borrowers flocking back to SECU - let's hope so!
✅ Here's the first "no-brainer", ready? Offering that "A paper", competitive rate under either the RBL or "same rate for all" model will bring those A-rate folks flocking back - either model brings that group back! LA has fixed its loan mis-pricing problem of the past, by moving back to the "best rate around" reputaion SECU had. So, having made that pricing correction, by again offering competitive rates - now let every member win again!
✅ The second "no-brainer" is from a marketing perspective. If LA offers that same competitive A-rate under "the same rate for all" model, SECU should make more qualified member loans in the B, C, D, E, F, G. H, I, J, K "tiers", too - everybody will come flocking back! Why? Because obviously SECU will be offering the best loan rate in the market to all those members too! And, members like to talk...! "Same rate for all" = best rate for all members! Told you this was easy!
✅ But let's throw in the "no-brainer" financial aspect for the naysayers. SECU has @ $10 billion sitting in T-bill investments earning on average less than 1%! - earning less than $100 million annually. Under the "same rate for all" model, if those investments are converted into "flocking back" used car loans of any tier, SECU earnings will soar by over $500 million each year.
How can SECU lose by being fair to all members?
... some factual data from LA at this point would be most helpful, instead of more LA-LA-LA...
Can SECU dump those T-Bills without taking a major loss? Wasn't that part of the SVB downfall? Understand they had a liquidity concern and had to sell, but wouldn't want to see SECU make that mistake. Maybe they are waiting for those to mature before raising deposit rates? And with current treasury rates hovering around 4.5%-5.5% the used car rate would need to be at that or more to account for risk(which i'm all for, that will certianly bring in A paper). Lower rates for all brings in more "good" loans. Sounds like a good investment to me. I think the timing of those treasury maturities may play a bigger role here though.
ReplyDeleteyes
DeleteWould SECU incur any losses if they were to dump the low interest rate investments since rates have gone up?
ReplyDeleteNo
DeleteCan you expand? Seems like basic finance that selling bonds that were bought at ~1% but are now yielding ~4-5% would result in a realized loss.
DeleteYes, but will you google "sunk costs" first and give it some thought?
DeleteNot a realized loss until you sell. First rule of investing is don’t lose money.
DeleteYes, I think we all agree that there's no changing purchases that occurred in the past. SECU is in the red on that portfolio, regardless of the how the accounting is done (read: the loss has already been incurred). Seems like management doesn't want to further the decline in assets by realizing a loss on $9B in bonds. One has to wonder if there is no good alternative investment for these funds if they are marked as part of the capital reserves.
DeleteIsn’t it loan administrations job to make money?
ReplyDelete"Okay, Houston, I believe we have a problem here."
DeleteNo, you're working for the wrong organization. SECU is a non-profit; its goal nor LA's is to "make money". You obviously didn't take your "modules"!
DeleteOne rate for all can be OK if you can make enough large mortgage loans to a-paper to offset losses elsewhere. Not the fairest strategy though.
ReplyDeleteDon't get the connection. Fair rate for all doesn't affect A-paper mortgage lending volume?
DeleteIt does of mortgage loan profitability is what is/was keeping loan losses low.
DeleteSimply not true. The quality of your mortgage portfolio has nothing to do with the quality of the personal/auto loan portfolio.
DeleteLast time I checked, if loan rates are an indicator, mortgage rates are usually the lowest of all your lending products and therefore are your "least profitable" loan category. An auto loan earning 7.5% should be "more profitable" than a 5.25% mortgage, right? Right.
Auto loan would be more profitable if losses resulted in a higher net rate of return than a mortgage loan. Generally hasn’t been the case.
DeleteHope you've noticed that persistent blog readers have grown tired of "generalists"...as in the above "Generally hasn't been the case". Show the actual #s over the last 5 years or so...LA has them. Did the Board not get complete data from LA before it made the RBL decision?
DeleteIf you don't really know that's ok...most folks don't - we all tend to "generalize", which is fine as idle chatter on matters that don't adversely impact over 2.5 million North Carolinians. This discussion does matter to those members.
That's why a pause to produce the real #s and share them for discussion with the members would be wise for the Board. If you're right, what do you fear?
BTW, agree with the "General"...if you had no chargeoffs/losses on loans, the loans would be more profitable.
DeleteIf you sell the T-Bill investments now, you would take a huge loss. Your other advice has been to raise deposit rates a lot. We would be taking a huge loss on the investments, increasing deposit expense, and lowering interest income. With the servicing cost, delinquency, and charge offs on the lower credit score loans, we would be losing money hand over fist. Members and NCUA also appreciate knowing that SECU is safe and secure. You called it a no-brainer, sounds about right.
ReplyDeleteSo are the "servicing cost, delinquency, and charge offs on the lower credit score loans" higher now than in the past? Higher enough to justify a near doubling over the lowest rate? Because if not, then it sure sounds like those low credit score borrowers are being used as a source of revenue to paper over the mistakes made on the balance sheet during covid. We know that SECU must have been buying 5-year treasuries (and possibly longer) at a time when that only netted a 0.2% premium over the 1-year. (Because any 3-year or shorter securities bought during covid would be off the books by now.) If this is what has happened, then the leadership should be more open about it, because you're right, we have to take the losses on those treasuries either now by selling them or over time by holding them. Although it sure makes a lot of those executive salaries look pretty bad.
DeleteYes, losses on lower credit tiers are higher than higher credit tiers.
DeleteHow was SECU able to manage that situation so successfully over its first 85 years of existence?
DeleteWhat has changed ?
Ok, @9:45AM, I'm going to assume you misread my question and aren't being intentionally evasive. I asked if the costs, etc on the lower credit score loans are higher than in the past. That's the comparison that matters.
DeleteIt is to be expected that they would be higher than the costs, etc on high credit score loans, but if the ratio hasn't changed from the past, then that isn't relevant to the current "need" for RBL.
How much is that "huge loss" you're talking about?
ReplyDeleteYour financial logic isn't sound! Hope you don't work in LA or Accounting at the CU, that would raise safety and soundness concerns!
But start with the first question, how much is the "huge loss" you bandy about so freely? Cheers!
Take a look at the unrealized loss on the financial statement
Delete$1.1 billion seems to be the number as a commenter below states.
DeleteFrom the publicly available audited financial statement through June 2023, Gross Unrealized Losses was more than $1.1B. If you have an investment paying less than 1%, and there are available investments paying a much higher %, the value of the investment is lower. To sell, you have to have a buyer, and no one will pay face value. To avoid realizing the loss, you have to wait until the investments mature.
ReplyDeleteYour "have to wait" shows you don't understand financial reality - real finance not "I believe" finance. SECU has already incurred the loss, "waiting" doesn't change that fact. If the Board hasn't been told that....well....
DeleteNot receiving complete, accurate information would lead all of us to make bad decisions, wouldn't it?
MarketWatch
ReplyDeleteDelinquencies are up as credit-card debt hits a record $1.08 trillion.
So what should your credit union do? Will SECU's credit card losses be up too? (Y/N) How do you know?
ReplyDeleteWere these $10 billion in low interest T Bill investments purchased under Hayes or did Leigh Brady authorize their purchase?
ReplyDeleteDoes it matter to the members?
ReplyDeleteIt does if you or blog commentators assign them or the board blame.
DeleteDon't know about you, but I'm more interested in what happens next at SECU rather than what has happened in the past - or who did what in the past.
DeleteSuspect that SECU members, who are counting on SECU, feel the same way.
Don't T-Bills have a maturity of one year or less? How could SECU still be holding T-Bills that were sold at less than 1 percent?
ReplyDeleteWe should use the phrase treasury securities instead of just "t-bills". The U.S. Treasury (the Federal government) issues treasury securities with maturities (length of time) of 1 day to over 30 years!
DeleteIt does if the argument is that Hayes and Brady are the only problem.
ReplyDeleteRegardless of the CEO, the SECU Board is accountable for the operation, success or failure of the Credit Union.The "buck stops" with the SECU Board - no debate on that one.
ReplyDeleteI sure miss the good old days when this was never even discussed among the majority of employees. We just knew that we could trust the folks making these investments would be the right things for our members!
ReplyDeleteThese were purchased under Mike Lord while the loan to deposit ratio was lower. They would have not been viewed as a bad investment at the time. Many other banks and credit unions are dealing with the same thing. SVB’s problem was that they had clients and businesses with large sums on deposit that pulled large sums out within a few days which caused SVB to have to sell treasury investments at a loss. We will be fine. This is one of the reasons why it is difficult to raise deposit rates right now.
DeleteCough Cough...bs
Deletehttps://www.secujustasking.com/2023_10_31_archive.html
Over a BILLION dollars in net income the past two years but apparently that's not enough to fairly compensate the "A-Paper" savers, whose money is being used to fund loans.
Agree with @6:56.
DeleteGuess we won't get that holiday bonus this year. Wonder if the higher ups will get something?
Delete"Guess we won't get that holiday bonus this year. Wonder if the higher ups will get something?"
Deletewell they started hiding the salary of the CEO so I'm guessing they will hide that too.
VPs and above already got theirs, and it was a whole lot more than the 1k they give to the peasants
DeleteWhen did VPs and above get theirs? Sad that this is how you find out info these days.
Delete9:03 must be referring to IT
DeleteIT bonuses for what? For hiring vendors????
DeleteDid branch VP’s get one? What about Loan Admin?
DeleteNo, branch vps get stuck trying to explain to members what their rate could or couldn't be. While loan administration gets a meal to celebrate overcharging members. And doesn't have to face the members. Once again branches get screwed over. 85 years of NO issues and look what we've become in just a short period of time.
Delete