... Risk-based savings?
Now what...
Lots of comments yesterday [link here to Nov. 8 post] in the continuing discussion of risk-based lending (RBL). A topic of equal importance for SECU members arose concerning the investment portfolio at SECU. The SECU investment portfolio is composed mainly of $10 billion in super-safe U.S. treasury securities - great strategy, no risk there! The concern is not about the high quality of the portfolio; the concern is about the "yield" on the portfolio.
The yield (the interest rate SECU earns) on those treasury investments is currently @1%! Most of these investments were made in prior years when rates were much lower. We all know that market interest rates have soared over the last 2 years - just check out SECU's loan rates compared to 2 years ago! Yep, interest rates are way up everywhere!
So, SECU - like many other financial institutions - is temporarily caught in a blind alley. The $10 billion portfolio is earning just 1%, while market rates are now @ 5%. But here, take a look at how the comments developed (but you may want to read the whole dialogue for entertainment!):
"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 certainly 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."
"Yes, 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."
These 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.
😎 That 6:56 PM comment - "We will be fine" - is bothersome if it reflects the SECU Board and management view of the potential risk SECU may now confront. How so?
The description of what occurred earlier in the year at SVB (Silicon Valley Bank in California, one of the 50 largest U.S. banks) is accurate. SVB had a mega-underwater investment portfolio. For depositors, SVB rates became non-competitive. Folks pulled their funds out to pursue better rates elsewhere and the bank had to close. As deposits left, SVB was forced to sell its underwater portfolio to fund withdrawals. SVB didn't end up having the option "to wait", even though they probably thought "We will be fine"! A "We will be fine", "hope for the best" strategic plan doesn't usually work out all that well in the real world.
SECU has @ $18 billion in member deposits sitting in money market share accounts (MMSA) earning 1.1%. Hope for the best?
If the SECU Board could take that potential risk off the table today, shouldn't they? Wouldn't you as a member-owner?
... can the Board do that? (Yup, easily!)
"Yes butts" have already tried to kick in...but have not yet taken the time to look up "sunk costs". The brief summary of that idea is - SECU has already financially incurred the investment portfolio loss.
ReplyDeleteSorry, look at the latest SECU monthly financial statement, if you would like confirmation from the SECU accounting staff of that fact.
I believe SECU has always published accurate financial statements - still does!
Loss Aversion Bias
ReplyDelete"We all hate to lose, isn’t it? When it comes to investments, the focus radically shifts towards avoiding losses more than making gains. In the process, they lose out on chances that can augment their gains. In the long run, this can prove to be detrimental to wealth creation. While it’s prudent to adopt risk-mitigating strategies, it’s equally essential to look for opportunities to bolster gains.
Also, due to this bias, investors continue with loss-making investments because they want to avoid the pain of making a loss. However, it drags overall returns and proves to be a roadblock in achieving financial freedom."
Agree with that comment. A more down to earth example is why we have attics. We put stuff up there because 1) we don't want to throw it out (and take the loss), 2) we're sure that we'll have a use for the "stuff" in the future (avoidance), 3) after the funeral the kids throw the "stuff" out and recognize the loss (and have the costs of "cleaning up")
DeleteUGH!!! You had to remind me ... :)
Deleteand the stuff I kept I should have thrown away and the stuff I threw away I should have kept!!!
DeleteIt's a cruel world out there ... ;)
we have met the enemy, and it's us!
ReplyDeleteHopefully not if we have strong Board and management leadership. We'll find out I guess.
DeleteI think its probably worth pointing out that while the cause of SVB's failure is the same (underwater treasuries), they were particularly prone to a bank run because they had large amounts of uninsured (over FDIC limits) deposits. Presumably SECU is all the way on the other end of that scale (though it would be interesting to know how far exactly).
ReplyDeleteWhat I'm not understanding is why it matters whether the underwater securities are sold. Obviously, the loss has already occurred in a "real" sense. The question is simply where it goes on the books. Is the idea to change the term? Sell the longer term securities and buy shorter term. With the yield curve still inverted, seems like the longer term has more upside than the shorter term (downside if you're holding them, obviously). And looking forward, by holding and rolling shorter term securities, SECU will be better positioned to adjust with the market (at the expense of not locking in current rates if rates were to drop, but if that happens then retail rates will go down, and it will be easier to remain competitive there).
It’s six of one or half dozen of the other. If we knew the future there wouldn’t be losses. Believe thought is current strategy reduces further downside exposure and allows SECU to retain and grow income needed to raise interest rates faster. If there was a no brainer, believe the trained professionals (same ones that were there under the past 4 CEOs) would do it.
DeleteBTW, the Fed covered everything even those who had amounts above the 250K ... we live in a world that has no consequences' ... or do we?
DeleteAbout that 10:55 AM comment: Those professionals would have already restructured the portfolio to lower the risk to SECU and better served the members, if at least 1 of the 4 were still there. Suspect that 1 other might do the same. A third one doesn't have the most enviable record of investment astuteness.
DeleteBut, it really doesn't matter does it? Because the decision rests with the current SECU CEO...and the current SECU Board. Touche!
The 10:42 comment: Nice thoughts. Your "presumably" (SVB and SECU depositors are different) in the first paragraph begs two questions: 1) What if the 2 institutions are more similar than you think? 2) Under any circumstances, how long do you think SECU depositors will "sit tight" at 1.1% when they could be earning @ 5%? If you could eliminate your "presumption", would you do it? Why take the risk?
DeleteAs an aside, the old "rule of thumb" in most institutions (not SVB as noted) is that @ 20% of the # of depositors in an institution hold @ 80% of the $$ on deposit. And, as we all know SECU knows what the exposure is or should ...there is a program to run deposit balances vis-a-vis SS#s...so if you have that data (scrubbed of any personal identifiers) SECU wouldn't have to "presume" anything.
Lastly, one of your statements is exactly right (no presumption!): "Obviously, the loss has occurred in a "real" sense." That's right, sound finance!
But, this question is exactly wrong (no presumption!): "The question is simply where it goes on the books..." (now I'm becoming a "yes butt"!) No, it matters hugely to the SECU members!
Here's the test question: "If you could restructure the investment portfolio, without harming the safety and soundness of SECU and eliminate the risk of continued deposit run-off, would you? Let's try to go again with a simple Y/N to that one, please - OK?
Regarding the restructing question: yes, of course.
DeleteAs far as the flight of deposits (since I'm probably not capable of a one-line response), yes, that's certainly true regarding rates. Frankly, I've been surprised that deposits haven't dropped more than they have. (I would guess that it's because the average account size is smaller, and a smaller depositor is probably slower to move, because the total dollar return in exchange for the effort is less. But even if that's true, their patience isn't unlimited.) As a separate issue, though, there's no (well, less) reason to pull insured deposits because of fear of losing principal in a collapse, which is all I meant. (And yes, the SVB depositors were made whole, but they couldn't be sure of that ahead of time.) However, if there are more uninsured deposits at SECU than I would have guessed, then that would be unnerving.
But to go back to my main question, obviously if the portfolio can be restructured to allow for increased deposit rates (both to better serve members, and to reduce spiraling deposit flight), then that would be ideal. I'm just missing how the restructuring allows this, given that the losses have already occurred. I also recognize that I have no knowledge of the nuts and bolts of how this stuff works, so perhaps it has to do with regulatory or accounting issues around how deposit rates can be set relative to "book" returns. That the deposit rates are tied to rate of return on the investments that they are set against as opposed to the overall cash flow? So if the loss is taken on paper (perhaps offset by a reduction in reserves?) in exchange for a higher nominal rate on the investments, that deposit rates can be raised accordingly?
I'll bite. To answer the question: Yes.
DeleteHow would that be accomplished?
If rates go up which is better to do with the 9 billion - hold or sell. If rates go down, which is better for the 9 billion - hold or sell. If rates fall flat which is better to do with the 9 billion - hold or sell? And last what is going to happen with rates?
ReplyDeleteWhat's your best guess on direction of rates over next 3 years?
DeleteYou can easily find the opinions of trained economists, the Fed and sophisticated investors on the internet.
Think you can correctly guess what their "concensus opinion" is
If I had a dollar for every time an economist was wrong - I would be the richest person on earth.
Delete"Cept you probably would have invested it all in "WeWork".....
DeleteAre paper losses different from actual losses?
ReplyDeleteNo
DeleteBetter make that "No, at a given point in time." None of us can predict the future, right?
DeleteKinda the same way with credit scores, right?
EXACTLY the same way with credit scores.
DeleteCheck at these a$$holes shipping jobs/money out of NC, sound familiar?
ReplyDeletehttps://www.wral.com/story/long-time-dmv-vendor-cries-foul-over-new-driver-s-license-contract/21139562/
Idemia Identity & Security says the North Carolina Division of Motor Vehicles violated its own rules and ran an unfair process that ultimately shifted the contract, starting next summer, to Canadian Bank Note Secure Technologies, a company that produces Canadian currency, according to a protest letter Idemia sent last month to the DMV and to state procurement and information technology officials.
your/our data is sold to the highest bidder ... no matter the security implications!
DeleteI'm thinking NC is getting to big for their britches!
I bet someone made a lot of money on this deal.
Hope it's revealed in the courts, but I'm NOT holding my breath!
I'm not that good at math but here goes. With all factors staying the same, there is $18 billion in MMSAs, each 1% increase in rates costs $180 million. If the rate was raised 2% (not great but significantly higher) it costs the credit union $360 million. Wasn't net income last year $587 million? Isn't it better to give some of that money back to the members? Seems too simple so I probably overlooked something. Help?
ReplyDelete" Seems too simple so I probably overlooked something. Help?"
DeleteGreed maybe ? ;)
Don’t let common sense get in the way of a their narrative. The only A Paper “this board” cares about are borrowers. What have they done with a a BILLION dollars over the past two years?
Deletehttps://www.secujustasking.com/2023_10_31_archive.html
None of it went to A Paper savers.
So what is this board and Brady doing with all the "profit" since they are not returning any of it to the members? is it just going into the reserves? At an all time high 10+% when this boards' stated goal is 8%. couldn't they decrease reserves to 8% remain very well capitalized and return that money to the members in MMSA rate increases? Then they would still have 587$ million to return to members EVERY year. What are they doing with the money? why isn't it coming back to us? I'm a member trying to understand what is going on here. Is this logic faulty? Please point out what I am missing in this. Why do they need 10% in reserves? historically managed to 7-8%.
DeleteLarger expected losses?
DeleteThe membership gets crumbs while we enrich ourselves muah mush muah
DeleteRaise it to 3% and it would cost $540 million. would still leave almost $50 million in Brady's "profit" measure. Why are we profiting and not returning that to the member? Sell take the loss and reinvest and you'd have another $450 million to return to the members. Raise it to 5%
DeleteWhat did the board do with a billion dollars?
DeleteCompensate "A Paper" savers fairly? No
Technology upgrades, which we were told would take 18 months and it's been two years? No
Make the lives of employees better? No
Make the lives of members better? No
What did the board do with a billion dollars?
Who knew losing a billion dollars could be so boring.
ReplyDeleteHa! Exactly!!
Deletewell what's done is done ... we now need to look ahead.
ReplyDelete"I can see clearly now the rain is gone
I can see all obstacles in my way
Gone are the dark clouds that had me blind
It's gonna be a bright, bright sun shiny day"