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  • 20 banks that are sitting on huge potential securities losses—as was SVB

    20 banks that are sitting on huge potential securities losses—as was SVB

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    Silicon Valley Bank has failed following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.

    Trading of SVB Financial Group’s
    SIVB,
    -60.41%

    stock was halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.

    California regulators closed Silicon Valley Bank and handed the wreckage over to the Federal Deposit Insurance Administration later on Friday.

    Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we will show how much they reported in unrealized losses on securities — an item that played an important role in SVB’s crisis.

    Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses, as a percentage of total capital, as of Dec. 31.

    First, a quick look at SVB

    Some media reports have referred to SVB of Santa Clara, Calif., as a small bank, but it had $212 billion in total assets as of Dec. 31, making it the 17th largest bank in the Russell 3000 Index
    RUA,
    -1.70%

    as of Dec. 31. That makes it the largest U.S. bank failure since Washington Mutual in 2008.

    One unique aspect of SVB was its decades-long focus on the venture capital industry. The bank’s loan growth had been slowing as interest rates rose. Meanwhile, when announcing its $21 billion dollars in securities sales on Thursday, SVB said it had taken the action not only to lower its interest-rate risk, but because “client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”

    SVB estimated it would book a $1.8 billion loss on the securities sale and said it would raise $2.25 billion in capital through two offerings of new shares and a convertible bond offering. That offering wasn’t completed.

    So this appears to be an example of what can go wrong with a bank focused on a particular industry. The combination of a balance sheet heavy with securities and relatively light on loans, in a rising-rate environment in which bond prices have declined and in which depositors specific to that industry are themselves suffering from a decline in cash, led to a liquidity problem.

    Unrealized losses on securities

    Banks leverage their capital by gathering deposits or borrowing money either to lend the money out or purchase securities. They earn the spread between their average yield on loans and investments and their average cost for funds.

    The securities investments are held in two buckets:

    • Available for sale — these securities (mostly bonds) can be sold at any time, and under accounting rules are required to be marked to market each quarter. This means gains or losses are recorded for the AFS portfolio continually. The accumulated gains are added to, or losses subtracted from, total equity capital.

    • Held to maturity — these are bonds a bank intends to hold until they are repaid at face value. They are carried at cost and not marked to market each quarter.

    In its regulatory Consolidated Financial Statements for Holding Companies—FR Y-9C, filed with the Federal Reserve, SVB Financial, reported a negative $1.911 billion in accumulated other comprehensive income as of Dec. 31. That is line 26.b on Schedule HC of the report, for those keeping score at home. You can look up regulatory reports for any U.S. bank holding company, savings and loan holding company or subsidiary institution at the Federal Financial Institution Examination Council’s National Information Center. Be sure to get the name of the company or institution right — or you may be looking at the wrong entity.

    Here’s how accumulated other comprehensive income (AOCI) is defined in the report: “Includes, but is not limited to, net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and accumulated defined benefit pension and other postretirement plan adjustments.”

    In other words, it was mostly unrealized losses on SVB’s available-for-sale securities. The bank booked an estimated $1.8 billion loss when selling “substantially all” of these securities on March 8.

    The list of 10 banks with unfavorable interest margin trends

    On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.

    Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:

    Bank

    Ticker

    City

    AOCI ($mil)

    Total equity capital ($mil)

    AOCI/ TEC – AOCI

    Total assets ($mil)

    Customers Bancorp Inc.

    CUBI,
    -13.11%
    West Reading, Pa.

    -$163

    $1,403

    -10.4%

    $20,896

    First Republic Bank

    FRC,
    -14.84%
    San Francisco

    -$331

    $17,446

    -1.9%

    $213,358

    Sandy Spring Bancorp Inc.

    SASR,
    -2.91%
    Olney, Md.

    -$132

    $1,484

    -8.2%

    $13,833

    New York Community Bancorp Inc.

    NYCB,
    -5.99%
    Hicksville, N.Y.

    -$620

    $8,824

    -6.6%

    $90,616

    First Foundation Inc.

    FFWM,
    -9.11%
    Dallas

    -$12

    $1,134

    -1.0%

    $13,014

    Ally Financial Inc.

    ALLY,
    -5.70%
    Detroit

    -$4,059

    $12,859

    -24.0%

    $191,826

    Dime Community Bancshares Inc.

    DCOM,
    -2.81%
    Hauppauge, N.Y.

    -$94

    $1,170

    -7.5%

    $13,228

    Pacific Premier Bancorp Inc.

    PPBI,
    -1.95%
    Irvine, Calif.

    -$265

    $2,798

    -8.7%

    $21,729

    Prosperity Bancshare Inc.

    PB,
    -4.46%
    Houston

    -$3

    $6,699

    -0.1%

    $37,751

    Columbia Financial, Inc.

    CLBK,
    -1.78%
    Fair Lawn, N.J.

    -$179

    $1,054

    -14.5%

    $10,408

    SVB Financial Group

    SIVB,
    -60.41%
    Santa Clara, Calif.

    -$1,911

    $16,295

    -10.5%

    $211,793

    Source: FactSet

    Click on the tickers for more about each bank.

    Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

    Ally Financial Inc.
    ALLY,
    -5.70%

    — the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.

    To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.

    Banks with the highest percentage of negative AOCI to capital

    There are 108 banks in the Russell 3000 Index
    RUA,
    -1.70%

    that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:

    Bank

    Ticker

    City

    AOCI ($mil)

    Total equity capital ($mil)

    AOCI/ (TEC – AOCI)

    Total assets ($mil)

    Comerica Inc.

    CMA,
    -5.01%
    Dallas

    -$3,742

    $5,181

    -41.9%

    $85,406

    Zions Bancorporation N.A.

    ZION,
    -2.44%
    Salt Lake City

    -$3,112

    $4,893

    -38.9%

    $89,545

    Popular Inc.

    BPOP,
    -1.56%
    San Juan, Puerto Rico

    -$2,525

    $4,093

    -38.2%

    $67,638

    KeyCorp

    KEY,
    -2.55%
    Cleveland

    -$6,295

    $13,454

    -31.9%

    $189,813

    Community Bank System Inc.

    CBU,
    -0.22%
    DeWitt, N.Y.

    -$686

    $1,555

    -30.6%

    $15,911

    Commerce Bancshares Inc.

    CBSH,
    -1.61%
    Kansas City, Mo.

    -$1,087

    $2,482

    -30.5%

    $31,876

    Cullen/Frost Bankers Inc.

    CFR,
    -1.08%
    San Antonio

    -$1,348

    $3,137

    -30.1%

    $52,892

    First Financial Bankshares Inc.

    FFIN,
    -0.90%
    Abilene, Texas

    -$535

    $1,266

    -29.7%

    $12,974

    Eastern Bankshares Inc.

    EBC,
    -3.16%
    Boston

    -$923

    $2,472

    -27.2%

    $22,686

    Heartland Financial USA Inc.

    HTLF,
    -1.26%
    Denver

    -$620

    $1,735

    -26.3%

    $20,244

    First Bancorp

    FBNC,
    -0.31%
    Southern Pines, N.C.

    -$342

    $1,032

    -24.9%

    $10,644

    Silvergate Capital Corp. Class A

    SI,
    -11.27%
    La Jolla, Calif.

    -$199

    $603

    -24.8%

    $11,356

    Bank of Hawaii Corp

    BOH,
    -6.15%
    Honolulu

    -$435

    $1,317

    -24.8%

    $23,607

    Synovus Financial Corp.

    SNV,
    -2.91%
    Columbus, Ga.

    -$1,442

    $4,476

    -24.4%

    $59,911

    Ally Financial Inc

    ALLY,
    -5.70%
    Detroit

    -$4,059

    $12,859

    -24.0%

    $191,826

    WSFS Financial Corp.

    WSFS,
    -2.78%
    Wilmington, Del.

    -$676

    $2,202

    -23.5%

    $19,915

    Fifth Third Bancorp

    FITB,
    -4.17%
    Cincinnati

    -$5,110

    $17,327

    -22.8%

    $207,452

    First Hawaiian Inc.

    FHB,
    -3.48%
    Honolulu

    -$639

    $2,269

    -22.0%

    $24,666

    UMB Financial Corp.

    UMBF,
    -3.35%
    Kansas City, Mo.

    -$703

    $2,667

    -20.9%

    $38,854

    Signature Bank

    SBNY,
    -22.87%
    New York

    -$1,997

    $8,013

    -20.0%

    $110,635

    Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has hurt SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc.
    CMA,
    -5.01%
    ,
    which tops the list, also improved its interest margin the most over the past four quarters, as shown here.

    But it is interesting to note that Silvergate Capital Corp.
    SI,
    -11.27%
    ,
    which focused on serving clients in the virtual currency industry, made the list. It is shuttering its bank subsidiary voluntarily.

    Another bank on the list facing concern among depositors is Signature Bank
    SBNY,
    -22.87%

    of New York, which has a diverse business model, but has also faced a backlash related to the services it provides to the virtual currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.

    Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”

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  • The government may stop issuing Social Security payments after the debt limit is hit — here’s why

    The government may stop issuing Social Security payments after the debt limit is hit — here’s why

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    There’s a very real possibility the government will stop issuing Social Security payments after the debt limit is hit.

    Scary as that prospect is, however, the alternative might be even worse: A little-known provision of a 1996 law could be interpreted to allow the Social Security trust fund to be used not only to pay Social Security’s monthly checks but also to circumvent the debt limit and pay all the government’s otherwise overdue bills.

    If that happens, any short-term relief to Social Security recipients would come with a potentially huge long-term price tag: The Social Security trust fund could be exhausted much sooner than currently projected—in just a couple of years, in fact.

    Read: I’ll be 60, have $95,000 in cash and no debts — I think I can retire, but financial seminars ‘say otherwise’

    These dire possibilities emerge from an analysis conducted by Steve Robinson, the chief economist for The Concord Coalition, a group that describes itself as “a nonpartisan organization dedicated to educating the public and finding common sense solutions to our nation’s fiscal policy challenges.”

    An issue brief he wrote, entitled “Social Security’s Debt Limit Escape Clause,” is available on the group’s website.

    Let me hasten to add that Robinson is not advocating that the Social Security trust fund be used in this way. In an interview, he instead stressed that he wrote his issue brief because we need to be aware not only that this “escape clause” exists but that its use could have unintended consequences. Though hardly anyone outside Washington knows that it even exists, and relatively few on Capitol Hill, the Treasury Department and the Social Security Administration are very much aware of it.

    Read: ChatGPT is about to make the business of retirement planning and financial advice profoundly human

    Before reviewing the details of this escape clause, it’s worth focusing on the political dynamics that surround it. Because the escape clause lessens the pressure on Congress and the president to come up with a solution to the debt crisis, neither side has an incentive to publicize its existence. But if the government is otherwise pushed to the edge of the fiscal cliff, and it’s facing the potentially huge consequences of an outright default (including the nonpayment of monthly Social Security checks), the political pressure to use the escape clause could be intense.

    The 1996 law that creates the escape clause was passed in the wake of the government hitting its debt limit in 1995 and 1996. Ironically, the intent of that law was to prevent the Social Security trust fund from being used for anything other than paying Social Security benefits. But, Robinson explains, that’s unworkable in the real world. That’s because Social Security checks are sent out by the Treasury’s general account, and if that account is in default the checks would bounce.

    Read: These 3 things will bring you happiness in retirement — and life

    If and when the debt limit is hit, therefore, the only way—in practice—for Social Security checks to continue being issued and cleared through the banking system would be for the Social Security trust fund to “lend” the Treasury sufficient funds that it could pay all the government’s unmet obligations. (I put “lend” in quotes because that’s not exactly how it works; the key is that the “loan” can be structured in ways that don’t count against the debt limit. If you’re interested in reading more about the complex logistics involved, you should read Robinson’s issue brief.)

    Therefore, if the debt limit is hit, which it is projected to do perhaps as early as June, Congress and the president will be on the horns of a huge dilemma:

    • Do they allow Social Security checks to continue getting paid, risking the political fallout of being accused of “raiding” the Social Security trust fund?

    • Or do they stop issuing Social Security payments, risking the political fallout of not issuing Social Security payments, on whom the very livelihoods of many elderly currently depend?

    You can appreciate why Congress and the president don’t want us to know that this escape clause exists. Once we are aware of it, they are put in a no-win situation.

    So fasten your seat belts for a wild ride in coming months as both parties play political brinkmanship over the debt limit and, by extension, Social Security. With both sides by the day hardening their stances, there’s a very real possibility that the debt limit will be hit.

    If that happens, we’ll be hearing a lot more about the little-known provision of a nearly 30-year-old law.

    Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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  • Rain rates in California during newest storm may reach 1 inch per hour | CNN

    Rain rates in California during newest storm may reach 1 inch per hour | CNN

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    CNN
     — 

    Millions of Californians already hammered by ferocious snowfall were hit Thursday by a new storm, with torrential rain threatening to cause dangerous flooding and the Weather Prediction Center increasing its excessive rainfall outlook for parts of the state to a level 4 of 4.

    “If you have feet of snow on your roof, all of a sudden that’s going to get very, very heavy. That snow is going to absorb the rainfall,” CNN Meteorologist Chad Myers warned Thursday.

    “And then in the higher elevations, it will wash away some of that snowfall. So, rain on snow will begin to fill up parts of the San Joaquin Valley.”

    About 16.7 million people are under flood watches in California and slices of Nevada. Hourly rainfall rates will steadily increase in intensity across California from Thursday overnight through Friday morning, potentially reaching 1 inch per hour.

    The level 4 excessive rainfall warning is targeted to two sections in central California – the coast from Salinas southward to San Luis Obispo and areas in the foothills of the Sierras near Fresno – Thursday overnight into Friday. The last time the Bay Area and Central Coast were in “high risk” was in 2010, the National Weather Service office in San Francisco said.

    Much of the state is under some risk of excessive rainfall Thursday and Friday.

    “An atmospheric river will bring anomalous moisture to California Thursday and Friday. The combination of heavy precipitation and rapid snow melt below 5,000 feet will result in flooding,” the prediction center said Wednesday, adding that “numerous” floods are likely for millions.

    The most vulnerable areas for flooding from rain and snowmelt are creeks and streams in the foothills of the Sierra Nevada, the prediction center said.

    Higher elevations will see heavy, wet snow. “This will lead to difficult travel, and combined with an already deep snowpack, may lead to increasing impacts from the depth and weight of the snow,” the prediction center said.

    The bleak forecast spurred officials across central and Northern California to urge residents to prepare, with residents in one area advised to stock up on essentials for two weeks. Others were asked to use sandbags to protect their properties and clear their waterways to lessen any flooding impacts.

    “We are asking people to watch their news, stay informed, have a full tank of gas in case they need to evacuate, get snow off of their roof if they can, if it’s safe,” Lt. Gov. Eleni Kounalakis told CNN on Thursday. “And just be very vigilant and prepared, because we are in the era of extreme weather, and that’s what we are seeing this week.”

    Here’s what the storm could bring:

    • Heavy rainfall: The National Weather Service in San Francisco forecasts rainfall totals through Sunday morning will be from 1.5-3 inches for most urban areas with 3-6 inches in some hilly areas. As many as 8 inches could fall on the Santa Cruz Mountains and locally up to 12 inches over some peaks and higher terrain of the Santa Lucia Mountains. The National Weather Service in Los Angeles is forecasting 2-4 inches across Santa Barbara and San Luis Obispo counties, with some areas in the latter receiving as many as 10 inches through late Friday night. The Weather Prediction Center said: “The abnormally warm and wet conditions moving in are expected to cause rapid snowmelt.”

    • Ferocious winds: More than 15 million people across central and Northern California, northern Nevada and southwestern Idaho are under high wind alerts. Wind gusts could reach up to 55 mph across lower elevations and up to 70 mph across peaks and mountains. Strong winds could knock down power lines and trees – exacerbating thousands of existing power outages from previous storms that dumped heavy snow, particularly in higher elevations.

    • More intense snow: Parts of the Sierra Nevada above 8,000 feet could get hit with 8 feet of snow. And some higher elevations across southern Oregon and the Rocky Mountains in Idaho, Montana and Wyoming could get pounded by 2 feet of snowfall between Thursday and Friday.

    Already, 34 of California’s 58 counties are under a state of emergency issued by the governor’s office due to previous storms and this week’s severe weather. The state activated its flood operations center Thursday morning.

    The forecast also led some ski resorts to announce closings. Kirkwood Mountain Resort said it would not open Friday, as did the Northstar California resort and the Heavenly resort in South Lake Tahoe, on Nevada’s border with California.

    Meanwhile, the Eastern Sierra Avalanche Center issued a backcountry avalanche warning for sections of Mono County, according to the National Weather Service in Reno, Nevada.

    Many of the areas preparing for Thursday’s storm have not had a chance to recover from the multiple rounds of fierce snow that buried some neighborhoods and made roads inaccessible as residents ran low on essential supplies.

    In hard-hit San Bernardino County, one of the recent storms claimed the life of a resident in a car crash, the sheriff’s department told CNN on Wednesday.

    video thumbnail california snowbank 81year-old

    Grandson reveals 81-year-old’s reaction after surviving in snowbank for a week

    As the storm hits central California, some urban flooding along with flooding from the smaller creeks and streams is likely. Eventually, more roads are expected to flood as the main rivers rise, said Katrina Hand, a meteorologist at the weather service’s Sacramento office.

    San Francisco officials urged small businesses to clear storm drains, stock up on inventory, use sandbags and ensure equipment is properly stored. They also suggested employers consider adjusting their work schedules for workers’ safety.

    In Merced, crews tried to clear storm drains and fortify creek banks ahead of the storm.

    City officials said flooding from previous, deadly rounds of atmospheric rivers that battered much of the state in January has made the city’s water ways unsafe.

    Atmospheric rivers are long, narrow bands of moisture in the atmosphere that carry warm air and water vapor from the tropics.

    “The city urges all residents to avoid these waterways and walking paths,” Merced officials said. “Because of ground saturation and erosion from prior storms, expect to see more debris in creek flows.”

    In San Luis Obispo, city officials on Wednesday said residents should be informed on flood insurance policies and be prepared to protect their homes. On Thursday, they issued an evacuation order for residents south of the Arroyo Grande Creek Levee.

    Evacuation warnings were also issued for residents in low-lying areas of Santa Cruz County and for people in Tulare County.

    In the Big Sur area, officials urged residents to have enough food and other essentials for at least two weeks. The Big Sur area, a roughly 90-mile stretch of California’s central coast, is one of the area’s renowned tourist attractions with rugged cliffs, mountains and hidden beaches along the Pacific Coast Highway.

    In Kern County, home to Bakersfield, fire officials urged residents to create emergency kits and to be aware of escape routes and safe areas to seek shelter if needed. Officials also encouraged the use of sandbags to protect properties.

    And in Sacramento, city officials said they intend to open overnight warming centers beginning Friday in preparation for the expected heavy rainfall and low temperatures.

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