In March 2023, the Fed created a funding lifeline for financial institutions after the collapse of Silicon Valley Bank and Signature Bank sparked fears of a wider industry crisis.
The historic run on deposits caused the failure of California-based SVB, opening the door for First Citizens Bank to take over the company in a government-assisted rescue. But another Raleigh-based institution, State Employees’ Credit Union, also benefited from Fed efforts to support lenders. It took out $5 billion from the Bank Term Funding Program, which issued a combined $161 billion as of January, according to Reuters.
“We began our borrowing in July 2023 to meet operational funding, of which there were numerous days between July and November when those funds were needed,” the credit union said in an e-mailed statement. It noted that the Bank Term Funding Program, or BTFP, targeted banks and credit unions that used investments with unrealized losses as collateral.
Under the program, lenders were able to borrow money from the Fed at about 50 basis points less than the rate received for reserve balances on the day of the loan. That suggests that SECU may have gained $20 million from the arbitrage, based on $5 billion held from July through next month, when the program ends.
The Fed isn’t disclosing who borrowed money under the BTFP until next year because it didn’t want to cause unnecessary fears about the stability of institutions, says an industry attorney, who asked to remain anonymous. SECU’s borrowing was reflected in its quarterly financial report with the National Credit Union Association.
For the year, SECU reported net income of $364 million, compared with $626 million in 2022 and $557 million in 2021. Its assets increased to $54.6 billion, bolstered by the $5 billion borrowing from the Fed. It’s the second-largest U.S. credit union, with more than 2.7 million members and offices in 100 N.C. counties.
SECU characterized its results as solid, noting that loan balances increased about 13%. The credit union has changed its lending approach by providing better rates to members with stronger credit ratings. It previously had a flat-rate model that was unique among lenders.
SECU reported a record level of loan charge-offs during the year at 0.6% of average loans. It boosted its reserve for future losses to $235 million. That reserve was less than $40 million in the previous two years.
The level of losses is similar to other big credit unions, SECU said. ‘Despite the impression that the overall economy appears to be doing well, there are many North Carolinians still struggling.’
Deposits declined 4.6% after SECU didn’t boost its payout rates as rapidly as some rivals when interest rates spiked in recent years. SECU deposit balances have stabilized since July with the credit union paying $570 million in share dividends, an increase of more than $400 million from the previous year. Its payout on short-term CDs were “at the top of the market” during the last half of 2023, the credit union said.
It also slowed the growth of expenses during the year, which is continuing this year,
SECU members ousted three veteran directors from its 11-member board last year amid member dissatisfaction with the credit union.
In his blog that focuses on SECU, former SECU CEO Blaine slammed the decision to borrow $5 billion, citing a Wall Street Journal story noting how companies “gamed” the Fed program. “Some institutions, like SECU, found that they could borrow at those low emergency rates and then turn right around and reinvest the unneeded loan at higher rates – profiteering off the Federal Reserve! Kinda warms your heart and makes you proud to be an American and an SECU member, doesn’t it.”
SECU says the Fed program enabled “additional income with which we can further benefit our members.”