Friday, December 22, 2023

SECU - November, 2023 Financials [Have added a few notes 12/23]

 Got several "not so" comments, so here's a broader outline...

😎 Not much new here as we move toward year-end...


* SECU remains strongly capitalized; in fact, well over its Board approved target and range. Ranges seem to be more ornamental than meaningful in terms of directing Board action.

Folks often get confused about "capital" in a credit union, especially since it's frequently called by different names including "member equity", "statutory reserves", "safety fund".  Basically, "capital" in a credit union is the same as your personal "rainy day fund" for unexpected emergencies. Federal law mandates that a credit union accumulate capital - a rainy day fund - equal to at least  7% of assets to be considered "well capitalized - and safe and sound". So, SECU at 10.36% is very highly capitalized; in fact SECU is probably "over-capitalized", but that is a story for another day.

Lets just deal with the idea that SECU's capital at 10.36% is above the Board established range and well above the Board capital target of 9%. What does that mean to you as a member? Remember, the ratio compares capital to assets; 10.36% of $51.7 billion in assets = @$5 billion. SECU has a rainy day fund (member equity, statutory reserve, capital) of over $5 billion, which has been set aside over the last 87 years.  The Board target of 9% would indicate that all that is needed in the rainy day fund is $4.5 billion (9% x $51.7 billion assets = $4.5 billion) which means the Board has withheld $500 million ($5 billion - $4.5 billion = $500 million) from the members, perhaps unnecessarily. In past years, former SECU Boards set a capital range of 6% to 8% and managed SECU closely to always remain well-capitalized above the 7% target goal. At an 8% capital target, the Board would be withholding over a $1 billion which could have been paid out to the membership in some form of better rates or service.

* Expenses continue to rise and are well above historical benchmarks of less than 2.00%. This is over a $200+ million annual increase in operating costs. Getting back to the 2.00% target won't happen in 2024.

In the recent past, the typical expense to asset ratio was @ 1.85%, rather than the current 2.34%. That difference of .49% (2.34% - 1.85% = .49%) is costing the membership @ $245 million ($51.7 billion assets x .49% = $245 million) in excess operating costs each year.

* Return on assets has moderated as more funds are being returned to member savers - a move in the right direction.

The SECU Board has evidently gotten the message that savings rates are non-competitive and has lowered monthly earnings ("return on assets") in order to raise savings rates (on MMSA from 1.10% to 1.25%), which will also help slow down the further accumulation of excess capital. Unfortunately, 1.25% remains non-competitive in the market. SECU could move faster to correct the over-capitalization and non-competitive rates problems, but "professional pride", so far, seems to have claimed a priority over the members' best interests.

* Loan growth has moderated as market interest rates have increased, but the points to watch are the ever rising delinquency and charge offs. Clearly there are major and operational problems that need to be addressed in SECU lending - as critical as the issue of risk-based lending.

  The decline in new loan originations during November, 2023 may signal that the growth in loans may be subsiding. New personal, auto and mortgage loans originated in November, 2023 totaled $758 million vs originations in November, 2022 of $883 million, off -$125 million.  Operational problems such as collections appear to remain unaddressed. Best illustrated with the "provision for loan losses" in the first 5 months of this fiscal year at $91.4 million up 232% over last year ($27.5 million). That increase warrants a further explanation to the membership. 

* Assets have actually declined by over -4% (rather than the reported "+0.96%")  since last November, 2022, but the ratio is being artificially inflated by unnecessary short term borrowings - which increased to $2.25 billion during November, 2023. Reaching the "4.50% growth target" this year appears fanciful, even with the artificial boost from borrowings. Member deposits are down -$2.4 billion year-over-year.

Some commenters claim this doesn't matter. Here are two examples of why it does. If you deduct the "short term borrowings" of $2.25 billion from the $51 billion in "reported" assets and use the un-inflated total of @$49 billion in assets, then your capital-to-assets percentage jumps closer to 11% (rather than the reported 10.34%) and your expense-to-assets percentage jumps to around 2.50% (rather than the reported 2.34%) - the real capital and cost concerns are being effectively understated. The borrowings are also a bit silly given the $9-10 billion pool of available liquid investments. Far better funding/income options ("arbitrages") on behalf of the membership are readily available - except for that unfortunately limiting "professional pride".  

* Assets per full-time equivalent employee is an obscure ratio, but continues to reflect the 1000+ employees added over the last two years - as assets, # of branches and service levels declined. 

The Board seems oblivious to the many laments coming from both members and staff over the decline in service. Are those claims true? How does the Board know, or why is it afraid to find out? Pretty obvious that the "We Are SECU" pr campaign was an expensive joke; could the "faux member surveys" (the survey models being used are statistically irrelevant) also be misleading?  Joke and hoax - look out.

  .... interesting times!