TLDR: treasury bond’s were not the main cause, it was mortgage backed securities.
I am not going to do an entire analysis on the situation and provide the sequence of events considering just recently someone posted a great short summary of what happened, but still got some things wrong regarding their assets and also about how Charles Schwab is connected to this.
All of the following information was obtained from the most recent annual report for FY 2022.
First of all, everybody says that the bank holding treasury bonds with long-term maturities bought in the last 2 years during lower rates was a main cause, and when I mean everybody, I mean I have not one word opposing this, but it is simply wrong because so little people here actually look at financial statements.
First of all, of the Bank’s just over 200B in assets, only 16.135B were treasury bonds.
– 983M were maturing in 1yr or less with WA yield of 1.16%
– 14.373B were maturing in 1y – 5yr with a WA yield of 1.43%
– and 779M were maturing in 5-10yr with a WA of 2.96%
Clearly even with a 10-20% decline in value due to higher rates, this would not hurt them too much.
The real cause of this collapse is the 82B in MBS and similar type residential mortgage securities and obligations.
Over 95% of these assets which composed roughly 35%-40% of the total bank’s assets had maturities well over 10yr with the average yield being 1.56% meaning they are likely worth 30-35% less at the minimum than stated because they are HTM assets.
This is an unrealized loss of at least 30B and was the real destroyer of value.
Along with this, some smaller aspects besides the 120B investment securities I’ve talked about is their 74B in loans.
-41B is composed of global fund banking loans which are shorr term capital call lines of credit to PE/VC funds and are short term and majority variable rate which is good compared to the fixed rate treasuries and MBS
The other 33B is composed of:
– 10.5B of which 20% is fixed and 80% variable with 65% of all being over 15yr maturities which is also crap for the fixed rate portion though that is only 2.25B being affected.
– 8.6B in loans to Innovation C&I companies or cash burning companies with luckily almost all being variable and almost all being due within 5 years, so not too bad but the borrower is not in the best position because of economy and lack of investment flow from VC.
– The other 15B is composed of SLBOs, CREs, wine vineyard loans secured by RE, and other, with 20% being fixed and most maturing in 5 years.
Yes they do have 14B in cash which is nice and only 18B in borrowings with 13B being San Francisco FHLB (Federal Home Loan Bank) short-term borrowings which is problematic though it has 44B in collateral with MBS securities which yes have lost 30% of value but still cover and the other 5B of debt being long-term low rate fixed senior notes.
Deposits are troubling as from 2021 to 2022. Total deposits decrease from 189B to 173B with specifically 45B decrease in non-interest bearing demand deposits meaning WA interest rates increased a lot along with rates increasing.
Note: I suspect Charles Schwab is the main holder of the long-term bonds with that only being 5B, i don’t understand why the drop is so large for SCHW, though I do know the problem for them is that they are being hurt by customer money being invested in short-term securities to get some yield so they can not sweep as much to their banking subsidiaries, but overall they are a great company with a dream business model that is asset heavy, high barrier to entry, and high regulation and well-capitalized.
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