By Robert Colvin
Secondary capital has been available to low-income credit unions since 1996, but it has seldom been used by larger, healthy low-income designated institutions seeking to fuel growth, revenue and service to members.
Last year, the $570 million Jefferson Financial FCU reported record financials thanks to a $12 million infusion of secondary capital that allowed it to keep up with loan demand and complete three mergers. CU Today interviewed Jefferson Financial CEO Mark Rosa last month and published a great story about his success.
The credit union’s earnings increased a jaw-dropping 147.1%, from $3.5 million in 2016 to $8.6 million in 2017. Net worth grew 75% from $48.6 million to $84.9 million. Assets increased 82%, from $490 million to $890 million. Membership increased 46%, from 43,175 members to more than 63,191, and the credit union’s efficiency ratio also improved from 80% to 72%.
Located in Southeast Louisiana, Jefferson Financial serves a large low-income market and is one of the few financial services providers working with “at-risk” consumers. We were proud to work with Jefferson Financial to complete their secondary capital plan, which strengthened the credit union, its members and which will have a positive economic impact on the entire region.
But secondary capital does more than just help individual credit unions and their members. It’s good for the entire credit union community. Here are six reasons why.
Increases the Strength and Size of Low-Income Designated Credit Unions
Secondary capital provides an important capital cushion that allows for increased strength and size of low-income designated credit unions. This additional size and strength helps insulate the LICU from the risk inherent in lending to their core customer base, i.e. low and moderate income families. Secondary capital improves the overall health of LICU’s, further protecting them from failure. Fewer failures protects the credit union community’s reputation risk, ensuring media coverage focuses on the good work credit unions do in their communities.
Reduced NCUSIF Exposure
Secondary capital increases net worth and fuels credit union financial health, which reduces the potential for credit union failures that drain NCUSIF reserves. That in turn decreases the likelihood of additional NCUSIF assessments that hit all credit unions, lowering revenue for the entire community. Last September, the NCUA Board approved increasing the share insurance fund’s normal operating level to 1.39%. That bold move underscores the need for credit unions to use every financial tool available to ensure their safety and soundness, and protect the entire community from losses.
More Emergency Merger Options
Following the mortgage market crash, the NCUA was scrambling to find enough healthy credit unions available to merge extremely weak or failing credit unions under PCA. Secondary capital does the obvious - increase net worth - but because it also allows credit unions to make more loans and increase services to members, it also increases revenue and retained earnings. That means more, healthier credit unions that are available to support our cooperative community.
Keeps Credit Unions Relevant
Credit unions have long faced competition from national, regional and community banks. Then came the payday lenders and check cashers. Now, non-bank fin-techs are stealing market share, too. In particular, the GAFAs - Google, Apple, Facebook and Amazon - are not only entering the payments market, they’ve raised the bar when it comes to digital service for all retail providers. Secondary capital allows LICUs to make capital investments to upgrade technology and provide the level of service consumers expect. Without credit unions, consumers are left to the mercy of for-profit banks and other financial services providers.
Increases Media Coverage
When secondary capital is used to create and fund programs that help low- and moderate-income Americans, the press notices. These stories are not only good media coverage for the credit union, they’re good for all credit unions, across this great country.
Supports the American Economy
Increased secondary capital supports the pro-growth agenda of the current U.S. administration by expanding lending to consumers and small businesses. In particular, low-income credit unions can meet loan demand in low- and moderate-income communities. LICUs allow all Americans to benefit from a healthy economy, and keep the American dream alive.
Robert Colvin is President and Chief Strategist of CU Capital Market Solutions. He can be reached at rcolvin@cucmsllc.com or 913-402-2616.