Sunday, November 12, 2023

SECU Risk-Based "Savings" - The Sunk Cost Trap: SECU's Other Expensive Misteak! 

What Is a Sunk Cost Trap? How Does It Work?

The sunk cost trap refers to a tendency for people to irrationally follow through on an activity that is not meeting their expectations. This is because of the time or money they have already invested. The sunk cost trap explains why people finish movies they are not enjoying, finish meals that taste bad, keep clothes in their closet that they’ve never worn and hold on to investments that are under-performing.  

Investors [SECU in this case] fall into the sunk cost trap when they base their decisions on past behaviors and a desire to not lose the money they have already invested, instead of cutting their losses and making the decision that would give them the best outcome going forward. Many investors [SECU]  are reluctant to admit, even to themselves [SECU Board and management], that they have made a bad investment. Changing strategies is viewed as admitting failure.

As we discussed in the first "Risk-based "Savings": Now What?" post [link here to 11/9], SECU is caught in a sunk cost trap with its @ $10 billion treasury securities investment portfolio, which has incurred an @ $1 billion unrealized value loss. Now, don't get angry and start ranting and raving - yet! All other financial institutions have equally "been caught" by the rapid increase in market interest rates.

The SECU Board and CEO are compounding this market rate dilemma by not selling the investment portfolio now and reinvesting the money at current rates. Why? 1) To benefit  SECU member savers (currently earning 1.1% on @ $18 billion in MMSA deposits) and 2) to cover the safety and soundness risk that more members will begin withdrawing those low-earning MMSA deposits (so far @ $4 billion has already exited). 

😎 Here's how you do that, using those approximate #'s - the estimates are pretty close. [As a side note, "incurred" means, from a finance perspective the $1 billion loss has already occurred; "unrealized" means, from an accounting perspective the loss hasn't been "booked" - yet!

Pieces of the Puzzle: 1) @ $10 bill. investment portfolio earning @ 1%, 2) incurred investment portfolio loss @ $1 bill., 3) SECU member MMSA balances @ $ 18 bill. earning @ 1.1%, 4) SECU 2023 "record profits" @ $587 mill. 5) current short term treasury security rates @ 5% [here's where you find them-link]. Okay, ready to go?

1) Q: How much is SECU earning annually on its $10 bill. portfolio? A: @ $100 mill ($10 bill x 1% = $100 mill.).

2) Q: If SECU sold the $10 bill. portfolio and booked the $1 bill loss, how much would be left to reinvest? A: $ 9 bill. ($10 bill. - $ 1bill. loss = $9 bill. left to reinvest). 

3) Q: If SECU simply reinvested in an identical portfolio, how much would the $ 9 bill. earn annually for SECU? A: $450 mill. ($ 9 bill. x 5% [current market rate] = $ 450 mill.).

4) Q: How much would SECU's "net profits" increase annually by executing this transaction? A: up $350 mill. ($450 mill. [earnings at new 5% rate ] - $100 mill. [less portfolio earnings at current 1% rate] = a gain of $350 mill. in "net profits").

5) Q: What would it cost annually to raise the rate paid on SECU members' MMSA deposits by 1%? A: $180 mill. ($18 bill. in balances x each 1% rate increase = $180 mill.).

6) Q: If the SECU Board used that $350 mill. gain in portfolio earnings (#4) to increase the MMSA rate, what would the MMSA rate rise to? A: @ a 3% MMSA rate ( $350 mill = @ ⬆2% + current 1.1% rate = @3%).

7) Q: What would SECU's "net profits" be next year if the SECU Board also used an additional $360 million more to increase the MMSA rate further? A: still over $200+ mill. "net profits" ($587 mill. "record profits in 2023" - $360 mill. to increase MMSA rate more = still $227 mill. "net profits").

8) Q: What would the MMSA rate be if the SECU Board did that (#7) also? A: @ a 5% MMSA rate (1.1% current rate + 2% from portfolio gain + 2 % increase from return of $360 mill. of "record profits" to member-owners = @ 5%).

9) Q: How long would it take to handle all these transactions by SECU? A: about 1 hour.

10) Q: Would SECU remain well capitalized, safe and sound after this transaction? A: Yes. Actually much safer and sounder since SECU has eliminated the likelihood of further major outflows of member deposits.

11) Q: Why wouldn't the SECU Board do this? A: The SECU Board next meets in November, before Thanksgiving.


  Would be a wonderful Thanksgiving surprise for SECU members!  A win-win ... now that sounds more like a credit union again!  

And perhaps, would help restore some credibility!


  1. "The sunk cost trap explains why people finish movies they are not enjoying, finish meals that taste bad, keep clothes in their closet that they’ve never worn and hold on to investments that are under-performing."

    Yep done everyone ...

    "All other financial institutions have equally "been caught" by the rapid increase in market interest rates."

    This one surprises me since they were printing money as fast as they could (spending 'trillions!!!'), I would think the "experts" would know inflation HAD to be on the horizon and that would be at the back of their mind when performing any duties.

    as for the "rest of the story", I'm hoping this will be begining on 11/13/2023 ..... starting at 9:00 am.

  2. Sounds pretty good. Any risk in doing this?

    1. Could help four current SECU Board members get reelected next year... but its never been about "bad" people, its been about bad policies..

    2. Guess you risk making SECU members holding over a third ($18 bill.) of your deposits ($45 bill.) wildly happy! Might be a "risk" worth taking given the last 2 years!

  3. Why would they do this right when they have done every last thing wrong for 2 years?

    1. if first they would humble themselves then anything can be accomplished.

  4. Doesn't this analysis exclude the $1B loss that must be realized on the income statement if SECU were to sell and repurchase an identical portfolio? If SECU doesn't sell, there's no entry for the loss on the income statement, and the reverse is also true... thus making SECU's net profits -$650M in Year 1 up to bullet point 4.

    You can be generous and assume that SECU would amortize the loss entries over the term structure of the current portfolio, somewhere around 3 years ($650M/3) = $217M. So $350M-$217M = $133M net profits for Year 1... Getting pretty close to that $100M of yield from the current portfolio. I'm fairly confident the numbers don't line up because we don't know the exact term structure and pricing of the current portfolio.

    All this to say, you can't boost yield by selling and rebuying at the same price. The loss has already happened, no changing it.

  5. No, the $1 billlion loss is booked under rest of analysis doesn't hold up.

    1. Yes, but the income figures in #3 and #4 don't reflect the $1B loss entry on the income statement.

    2. Yes, you're technically correct on that! But it doesn't matter in the overall scenario! Here's why.

      When you're trying to measure the changes in the prior year "earnings" (how these transactions would affect the up/down in that $587 million "net profits " number), booking the $1 billion loss is not relevant, it's a "one-off" (it didn't happen last year and won't happen again). In other words, "booking" the $1 billion loss is a one time event .

      The $1 billion loss is handled separately under #10 which lets you know that SECU will still be well-capitalized even after actually selling and "booking" the already "incurred" $1 billion loss.

      Credit unions are required to maintain a capital ratio of 7+% to be considered "well-capitalized". SECU's capital ratio will be 8+% after the already incurred loss is booked. The 8+% ratio is within SECU Board approved capital guidelines!

      Sounds confusing, but if you want to verify that the $1 billion loss has already been "incurred", just take a look at SECU's latest financial statement. In the capital /equity section, you'll see the $1 billion has already been deducted by the CPAs from SECU's total capital.

      If SECU doesn't sell the portfolio, it will book that $1.1 billion loss a bit at a time each month over the next 3 or 4 years, while underpaying member savers and risking a further run-off in deposits.
      If SECU does sell and go ahead recognize the loss all at once, it can begin to pay members up to 5% immediately and avoid the potential of losing further member deposits and support.


      Except one way (waiting!) hurts the members, one way (acting decisively!) helps the members.

    3. These folks should be used to 'losing' a billion ...
      I wish they would give up this habit once and for all!

    4. Here are the actual #'s at 9/30/23:
      Members' Equity
      All Reserves and Accumulated Earnings:
      Less Unrealized Gains/Losses on Securities:
      Total Members' Equity:

    5. We are both in agreement that the loss is a loss and there's no changing that. I think we're in agreement that the final earnings after all relevant losses on holding the Treasury securities portfolio to maturity is exactly the same as selling at market prices and rebuying an identical portfolio (that should be common sense). The difference is a matter of accounting. I am personally skeptical that such a large change in dividend expense can be justified solely on the grounds of accounting changes, rather than material changes to SECU's financial position.

      BTW, I think your proposal is a viable strategy, it just needs to be coupled with increased interest income. If biting the bullet and taking the loss all at once makes it easier to explain the financials then I'm all for it. The low loan/deposit ratio makes it hard to pay member's dividends on their deposits when the loan income isn't there to support it.

    6. At 10:07PM - You've got the 2 major keys: 1) the $1 billion loss is a fact and 2) the choice is whether you pay it now or over the next 3 or 4 years.

      Paying for "a large change in dividend expense", I assume refers to increasing the MMSA rate from 1.1% to 5% which would cost @ $720 million ($18 bill in MMSA balances x 4% = $720 mill).

      That $720 mill. is funded with little risk from the @ $350 mill. increase in portfolio earnings (see #3 & #4) plus by reducing 2024 "net profits" to @ $200 mill. from 2023"s $550+ mill. "record profits" ( see #7). Very simple to achieve

      As to the "low loan to deposit ratio", three things. First, it's not all that low @ 70+% (and remember Loan Administration has promised to have new loans "flocking into the CU" this year!), 2) the loan to deposit ratio is not the challenge, it's the "sunk cost", low yield dilemma of the investment portfolio, and 3) haven't you noticed that SECU isn't exactly "struggling" with earnings - least they keep boasting about those $587 million in record profits"! Remember?

      Not exactly "hard times" at SECU - except for the under-rewarded savers and overcharged RBL borrowers.

  6. Honestly, this is a "mic-drop" moment for all concerned.

    CEO Brady and Board members - FIX IT for crying out loud! The members are depending on you. What is your answer? What excuse do you have now?

    CEO Brady, you have been overheard saying you don't know how to fix it. Well, here is your treasure map, just follow the directions.

    The members are counting on you. We're all waiting for you to do your job. Don't let us down....again.

  7. They're not interested in helping the members, they're the kinda folks that when they see you broke down on the side of the road they just drive past never thinking it could be them someday. Society has become harden in their heart... They always assume the worst of people instead of expecting the best... you usually get what you think.
    SECU - There was a Difference

  8. Anyone notice the travel amounts of managers aren't included in the financial reports anymore? Wonder why that is? More wasted money.

    1. Flying back and forth from wherever they live for 'meetings' is hard to justify?

    2. Once the dummy posted the yacht party photos, the 'memo' was sent, ' No more posting or reporting of blowing the members money on 'travel' ... '

  9. We could also eliminate the marketing department and give raises to employees.

  10. we're 4 months into Leigh's rein ... 3 board members were tossed out ... .1% increase in MM rates ... RBC was just ramped up ... fudged the balance sheet numbers ... no raises for the work force (I'm hearing) ... I'm looking for a bright spot ...

    1. I guess I should clarify ... a bright spot for the members...
      (This doesn't include the "record profits in 2023") ... which should be passed on to the member/owners!

  11. Was asked: "Isn't it better "to wait" because the loss will "just go away". That is the kind of unrealistic, "hope for the best" strategic planning that is simply unsound - and currently being used..

    Want an example? The SECU investment portfolio loss as you have seen, was $1.198 billion at 9/30/2023, (see above comment). At the end of December last year (2022), the SECU investment portfolio loss was $1.224 billion, down a whopping $26,000 during 2023...not exactly "just going away" is it.

    1. Do we know when the t bills mature?

    2. SECU can easily provide this info...but the "average maturity" appears to be @ 3-4 years. Doesn't make any significant difference in the analysis really.
      Doubt there would be many longer term investments given the well-announced "increasing interest rates strategy" of the Fed over the last two years. If SECU invested longer term over the last couple of years that would probably be called negligence.

      Which reminds us of that $5 billion of investments in out-of-state commercial loans made during the last two years, but that one can wait for another day...

  12. With US debt yields moving lower over the past month, would expect continued decrease in unrealized loss on Novembers financials.

  13. Don’t believe all 10 billion is due at the same time. Wouldn’t that impact your analysis?

    1. Not significantly, the $1 billion loss includes all maturities... on average the portfolio length is @ 3-4 years.

  14. Why should there be much concern about more funds leaving the MMSA paying 1.1%? Well, common sense is the best answer, but...
    1) MMSA balances: Dec/2021: $23.497 billion
    Dec/2022: $22.776 billion
    Oct/2023: @ $18 billion $5+ billion and counting...
    2) Not too difficult to find a better rate. Even our friends at Local Government FCU are paying twice the SECU MMSA rate.

    1. I find your thoughts on this matter very intriguing. What if SECU’s 10B in securities at par value is 9B and we are already expecting a 1B loss? Could it be if we sold those treasures today the loss could be even greater?

  15. Get rid of marketing and the pmo. Both of these groups are trying to spend us into the ground and have no idea what SECU is about.