As huge paper losses on bank bond portfolios roil markets, Tucson-area banks and credit unions say they have the strength to weather the storm.
David Wichner Like banks and credit unions across the nation, Tucson-area institutions are coping with a major challenge that contributed to the failure of three banks in March — potential losses on their bond investment portfolios due to rapidly rising interest rates.
People are also reading… That’s because as interest rates rise, the value of existing bonds tends to fall. Run on the bankThat happened to Silicon Valley Bank, which failed in early March after accumulating unrealized losses on its bond portfolio of about $15 billion — nearly equaling its total capital reserves.
Unrealized losses are just that — unrealized, until the underlying assets are sold — and banks can hold things like Treasury bonds until maturity and recover the principal amount.That happened to California-based Silvergate Bank, which catered to cryptocurrency firms. Meanwhile, several national and large regional banks are under review by major credit raters, due partly to their significant paper losses on bond investments, including Zions Bancorp, which owns National Bank of Arizona and Western Alliance Bancorporation, which operates as Alliance Bank of Arizona.
Local banks respondThe leaders of two Tucson-based community banks that recovered from major financial challenges in the aftermath of the Great Recession say the banks remain financially strong despite their unrealized bond losses. Commerce’s bond portfolio is largely made up of agency-guaranteed mortgage bonds, which carry no credit or principal risk, and provide principal payments every month, Tees said, in contrast to long-dated “bullet” bonds or Treasury bonds that don’t pay back the principal until their final maturity date.
Commerce, which raised additional capital under a regulatory order in 2013, has maintained its five-star, or “superior” rating from Bauer Financial in the Florida-based rating agency’s most recent ratings. Once locally-owned, Canyon raised $9.5 million from a Texas-based investment holding company in 2015 for a controlling stake in the bank, satisfying a 2013 order by federal regulators to raise its capital resources.
“We are extremely well capitalized and finished the quarter in a strong liquidity position thanks to the deep relationships we have with our clients,” Hughes said. Vernon Babilon, Tucson Old Pueblo’s president and CEO, said the credit union remains in the “well-capitalized” regulatory category and it is carefully managing its bond portfolio.
For 2022, TOPCU outperformed an Arizona peer group of credit unions from $100 million in assets to $300 million in assets in many areas including deposit retention and growth, loan growth and operating revenue to operating expense ratios, Babilon said. In an April 4 update, Western Alliance said that its deposits had stabilized after an outflow of 11% and that it had arranged more than enough liquidity to cover any bond losses.
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