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Message from CEO James Gergen

The Failure of Silicon Valley Bank and Signature Bank

CPM is unaffected by the failure of Silicon Valley Bank (SVB) which was closed on Friday, and Signature Bank which was closed on Sunday. We have no deposits, loans, or other dealings with them, we operate very differently from them, and we remain strong and secure. Credit unions operate very differently from large commercial banks, we were not a part of any past financial crisis, and we are not a part of the current problem.

SVB concentrated on startup companies, primarily technology startups, and wealthy individuals. Signature was closely tied to the crypto industry. Accounts at both banks were federally insured to $250,000 but they both sought out very large deposit accounts, and only the first $250,000 was insured. You may have seen in the news that Roku announced their account at SVB had a balance of approximately $487 million. At SVB 89% of total deposits were uninsured. At Signature 94% of total deposits were uninsured. CPM has very few accounts with balances over $250,000, and less than 4% of our total deposits are uninsured. With all that uninsured money, both SVB and Signature were primed for a run on the bank if things went wrong.

Things went very wrong for SVB. In 2021, they added almost $88 billion in new deposits. They didn’t have loan demand to put that money to work, so they made investments. They chose secure investments, but inexplicably they loaded up on long-term fixed-rate investments.  Lots of the large deposits they scooped up came from startups and tech companies which were very likely to need their money back in the near term. Companies raising money from venture capitalists, from initial public offerings, and through debt issuance, temporarily parked it at SVB, but they did not raise that money to leave it in a low-rate bank account for the long term.

In 2021, the Fed slashed rates to record lows to stimulate the economy out of the pandemic. Economists expected rates to increase in 2022, and they did. SVB took a massive deposit inflow which could have been expected to be followed by a massive outflow and they invested the money in long-term fixed-rate investments at record low rates, when rates were almost certain to increase. What could go wrong.

When you looked at SVB’s financial reporting you saw the massive scale of their losses on those investments. These weren’t credit losses. These were losses because higher rates on new securities caused the value of their lower rate securities to fall. The total equity of the bank at the end of 2022 was just over $15 billion. The unrealized losses on their hold to maturity (HTM) securities at the end of 2022? Just over $15 billion. Uh oh. If folks noticed and got rattled a run would start. So, SVB worked to sell some of their investments at a loss and raise capital to offset that loss, but those actions called attention to their predicament. The uninsured depositors got rattled, the bank run was on big time on Thursday March 9th, and by Friday morning March 10th SVB was put into receivership.  Ball game over.

Regulators realized some other banks could be in a similar predicament, and on Friday they suspended trading in the stock of Signature Bank, and on Sunday they closed the bank. Could other banks or credit unions also have investments which were less than when they purchased them? Sure, and CPM does, but nothing like the situation at SVB. The equity ratio of SVB at year-end 2022 was 7.39%.  That is good enough to exceed the 6.00% ratio a credit union must have to be considered “well capitalized”. But if you adjusted for their unrealized losses their equity ratio dropped to 0.14%.  Uh oh.

If you similarly adjust CPM’s equity ratio for our minimal unrealized losses we are still far above the level required to be “well capitalized”. We were prudent with our asset liability management and SVB clearly was not. We do a lot of modeling and stress testing for different interest rate scenarios, and we know we become more profitable when rates increase. You may know the Warren Buffet quote: “When the tide goes out you find out who is not wearing a swimsuit.” We have our swimsuit on, and SVB did not. We will learn about other financial institutions soon enough.

To calm the markets, on Sunday night the Government agreed to cover the uninsured deposits at SVB and Signature. The shareholders and bondholders will be wiped out, but Roku and the other large depositors will be covered. The Government said the cost of the depositor bailout would not be borne by taxpayers but would be paid by the banking industry. We hope that cost is borne by the commercial banks and not by credit unions. Credit unions like CPM don’t have a risk from a run on uninsured deposits and we won’t want to pay to cover the risks taken by big banks. CPM operates with a very simple and sound business model, and we remain strong and secure.

CEO James GergenJames Gergen
CPM Federal Credit Union

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