Poorly managed CU capital!
😎 Know casual readers are probably tired of talking about capital/reserves and want to move on, but bear with it one more round or two. Why? Because those reserves/capital belong to you as a member-owner of your credit union. Is it being managed effectively, in your best interest?
"That's what you don't get. 7.01% is not a safe level, even if over the well-cap MINIMUM of 7%. How do I know that? Because in 2008 and 2009 you were unsuccessful keeping it above 7%. Explain how your statement that we've always been well-capitalized is not a lie. "
Our commenter is correctly "holding my feet to the capital fire"! SECU did fall below 7% in 2008 and 2009 and under federal law was considered "adequately capitalized". What happened in 2008/2009 that caused the drop? What does the "plunge" (to 6.97%/6.83%) indicate about capital adequacy at SECU?
First, way back then, SECU managed its capital/reserves to a board-approved range of between 6% to 8%, with a target of 7%. SECU wanted to be well-capitalized (7%+). If the ratio fell below, it would be increased; and would be reduced, if it rose above 8%. That range reflected the well-analyzed and well-considered risk on the SECU balance sheet (potential loan losses, operational snafus and other similar facts of life!)
Here's the SECU capital track record at year-end, per NCUA data - prior to "new/new":
2003 - 7.34%; 2004 - 7.55%; 2005 - 7.55%; 2006 - 7.32%; 2007 - 7.24%; 2008 - 6.97%; 2009 - 6.83%; 2010 - 7.29%; 2011 - 7.43%; 2012 - 7.39%; 2013 - 7.32%; 2014 - 7.80%; 2015- 7.84%; 2016 - 7.75%; 2017 - 8.01%; 2018 - 8.43%; 2019 - 8.50%; 2020 - 7.95%; 2021 - 8.37%. (Pretty consistent !)
During this 18 year period, SECU grew from $11 billion in assets to $51 billion in assets, added @1.5 million members, grew every year, added 100+ branches, and never suffered a loss.
✔ So your questions to consider:
1) Was SECU appropriately and adequately capitalized during this period?
2) Why the crash in capital in 2008/2009?
3) Was the board approved capital plan effective?
3) Why wouldn't an "industry standard" capital ratio of @11% be better?
😎 Talk to you tomorrow...
Capital preservation is more efficient at scale. If the goal is growth, maybe disbursing is better. If the goal is to use the capital for growth, maybe disbursement is better.
ReplyDelete1:27pm Hate to point this out, but that comment makes absolutely no sense at all! Was there a typo? Perhaps you should try again to help us understand?
DeleteGood post. Following are thoughts, and answers to these questions.
ReplyDelete1) Adequate is an objective term under PCA regs, and > 6% is considered adequately capitalized. So yes, SECU was adequately capitalized during this period, by objective definition. Appropriately is a subjective term. Many might say the capital ratio should be based on the risk on the balance sheet, which literally means there is a different answer to that question for every credit union. IMO, SECU was not appropriately capitalized below 7% and in the low 7's, but for most of the period, the level of capital was appropriate for the risk of the balance sheet.
The approved Board range of 6-8%, was imprudent, however. A policy that permit being below well-capitalized brings unnecessary regulatory risk to the credit union. Under PCA rules, regulators can take formal actions when capital is under 7%, and none of those actions help members - and they don't have to consider earnings, balance sheet risk, etc. If they want to take an action, they can. Above 7%, regulators can and do still mess with a CU but do it through safety and soundness (exam) authority, not formal PCA rules. In that case, they would likely act if they thought capital was too low for the risk, and / or if there was an earnings issue.
2:18pm Most of us are simple folks. Could you clarify your thoughts in a more direct (and briefer!) manner... like yes, no, here's why?
DeleteHelp us understand your insight.... you're coming across as an economist... never a clear answer, nor conclusion! Thanks!
Addressed adequacy. No, not appropriate, for reasons given.
Delete8:02pm Again, help a bit more, What were "the reasons given"? Thank you!
Delete2) Not sure one would (or did) characterize the decline in NW ratio as a "crash", but it was driven by primarily by a flight to quality and an increase in deposits - specifically in money market. Importantly, in 2008 and 2009, both earnings and the capital, in absolute dollars, increased at a greater rate than the years prior. The ratio decreased because assets grew at a greater rate than the rate of growth in capital. Important distinction. If the ratio went down because of negative earnings, that's a whole different story, and a far worse one.
ReplyDeleteAnd, to the risk topic, the 2+ billion increase in MM in 2009 was put primarily in the investment portfolio. At the end of 2009, we had 45% of our assets in the investment portfolio. Arguably, the balance sheet was less risky in 2009 when the ratio was 6.83% than in 2007, when the ratio was 7.24%.
2:24pm I am trying to avoid saying that this is " a less than intelligent" answer... borderline bizarre! (Hoping it is just " bargain basement AI"!)
DeleteDo like the part about: "Arguably, the balance sheet was less risky in 2009 when the ratio was 6.83% than in 2007, when the ratio was 7.24%."
But perhaps the fault is mine in poorly phrasing the original question: "2) Why the crash in capital in 2008/2009?"
Try this: Beyond the end of our nose perspective at SECU, did anything of economic significance happen in 2008/9 in the broader economic world, which might have precipitated the crash in capital at SECU?
Can you think of anything important?
The capital didn’t crash, by any reasonable definition. I led with increased deposits based on a flight to quality. Happens in recessions. I assumed interested folks remember there was a Great Recession in 08/09. Apparently a lot sssumption my bad.
Delete8:06pm There was a recession in 2008/2009? So what, recessions aren't that uncommon.
DeleteTake it that the "flight to quality" was member deposits flooding into SECU because knew its track record of safety and soundness?
You don't believe that being at 6.97% capital, .0003 below target of 7 is not a crash... what would you call it?
In 09, the CU’s net worth increased by over 100 million. The capital ratio dropped 27 basis points because assets grew at a higher rate than capital. No universal definition of how much it needs to drop to constitute a “crash”. So the flight to quality was systemic. Of course your interpretation was that SECU’s wad somehow safer than the NCUA or FDIC insured deposits if other CU’s or banks. The more likely driver was the 50 bps above market rates paid to some of the members.
DeleteBut let’s go with your crash thing, can you tell us why it was start to keep the cap ratio so low it that it was more at risk that your crash would put it below the boards target and the regulatory well capitalized level? Seems pretty irresponsible to me.
3.) Not a simple answer to that question. In strictest sense, yes, it was mostly effectively as it was within the board approved range most, but not all of the period. And, for most of the period, I believe the level of capital was appropriate for the level of risk. However, all Boards have to decide on a) their risk appetite; b) how much of the members capital should be deployed, and c) where to deploy it. The right capital ratio is simply a byproduct of that decision. So while capital was largely managed well during this period based on the risk, I would argue that a) not enough risk was taken; and b) capital wasn't deployed broadly enough.
ReplyDeleteIn 2009, our COF was 2.22 vs. 1.77 with peers. Our members money - we didn't hoard it - we gave it back to them in the form of higher rates. All good right? Well, money market drove 75% of the increase in deposits in 2009, but only 1/4th of our members had a money market account. Those extra MM $$ were invested largely in a low-risk investment portfolio. That doesn't help members with lower loan rates, lower fees, etc. There is a spread earned, which helps the CU do what? Increase income and in turn capital. So we deployed capital to increase rates and for 1/4th of our members, and for the most part, it wasn't re-invested in ways that help individual members.
Take the flip side. In 2009, 80% of the loans we had on the balance sheet were mortgages. 87k of them in fact, or 6% of our members. Another way of looking at that.. We had 1.337 billion in capital (6.83% of assets), and $880 million of that was being held against the mortgage portfolio. So most of the capital of 1.5+ million members was being deployed to support the borrowing needs of 6% of the members. Meanwhile, our borrowers to members ratio of 36% was very, very low to peers, who were at 54%.
Takeaway: risk was held low, capital was deployed at a high rate (e.g. 6.83%), and where it was deployed was very concentrated among some member groups. Begs the question in terms of how / if the members capital could have been used differently - lend more in non-mortgage products, lend on more fixed rate mortgages to protect members, increase investments in tech and people, etc, etc, etc. In 2009, 95% of our assets were mortgages and the investment portfolio, with the latter driven by ~50 bps higher COF that was re-invested in the very few...
2:55pm Must advise that to most readers you come across as long-winded and blah, blah, blah...You lose readers and credibility in a sound bite world. Becomes meaningless and you waste everyone's time... especially yours!.
DeleteWhy not try again... briefly?
It’s plain language. You should re-read. Takeaway: I am agreeing with your apparent general view that SECU’s capital level ratio was sufficient, based on the risk of the balance sheet.
DeleteAnd, after the capital should not be withheld from members. Disagree, however, with HOW the capital was deployed, because it didn’t benefit enough members, while offering a lot of NCUA data in support of that view.
I am a member reader and Jim Blaine's assessment of your argument is spot on. Could you please speak plain English( fewer words too!) so that a regular member (but no I am not a stupid member) can understand you?
Delete901. It doesn’t get simpler. If you can’t understand it I can’t help you.
Delete4) Capital ratio isn't about better or worse. You correctly framed it - it's about appropriate, and that differs for each credit union. If those CU's are holding 11% because their risk is higher and therefore earnings are more volatile, then more capital is needed. That said, we know better. The more likely culprit of the 11% is ineffective deployment of capital and little or no growth in assets. Growth might not be an objective for CU's, but it will be a byproduct of effective capital deployment. 11% would never be better unless 11% is needed for the risk being taken. CU's need to either invest members capital (to members benefit) or give it back. Excess capital in the system is weakness and not a strength.
ReplyDelete3:02pm Yep, the effective use of capital does matter even in soft little doe-eyed credit unions.
DeleteIf a credit union isn't effectively managing capital, then both Board and ELT should go...or be sued if they don't.
While it would be pretty hard to sue a Board (and win) for holding excess capital, we agree.
Delete8:13pm If you'll hang in a bit longer in trying to understand capital, who owns it, and why giving your money away is negligence... you'll see that yjre suits are coming quickly.
DeleteLiterally billions at stake!
I agree. One size doesn't always fit all. I was always very comfortable with SECU's decision to maintain NWR @ 7%, given their financial strength, track record of excellence, and management strength. On the other hand, I think they need to now increase it. With the number of recent changes at the executive level, relative inexperience of the current management team, questionable board decision-making, and complaints from inside and outside the organization, I think they need to carry at least 10% capital. I'm sure the regulators would agree, even though they have zero experience managing credit unions...
ReplyDelete4:44pm SECU does already carry more than 10% capital... actually much more as a result of the ineffectiveness of the current regime.
DeleteEcho that. We have excess capital now and the excess should be returned to members. How it’s returned is a different question, but ideally in a way that benefits the most members.
DeleteI prefer capital preservation at scale. I would vote to keep my capital preserved at scale.
ReplyDelete5:40pm Say What? Can you translate that for the hoi polloi?
Delete5:40 pm Hello??? Looks like "Silence of the Spams"!
DeleteWhat do NCUA regulations say is a safe capital level for a credit union? required by law? 7%. That is the level for a well capitalized NCUA regulated credit union.
ReplyDeleteWhy are so many credit unions managing at 10-11%? It is because they are unable to run a credit union with out a huge cushion of the members' money. That is the members money that could be paid to members in increased savings rates or lower loan rates. That's a lot of money.
Also the members absolutely pay your salary. Anyone who works at SECU or the SECU Foundation has their salary paid by SECU members. Every single penny.
Regs define that 7% is well-capitalized status. 7% does not mean it is “safe”. The safe level of capital depends on the risk on the balance sheet and other factors like the level and volatility of earnings.
Delete9:46am Fair point! The other measure - often called 'the risk-weighted capital ratio" - is used by NCUA to measure more closely the actual risk on a credit union's balance sheet
DeleteFor example credit card loans are generally considered "riskier" than mortgage loans and higher capital levels are required for credit card loans than mortgages.
A risk capital ratio greater than 10% is considered well-capitalized. So a credit union must meet both targets to be considered "well-capitalized". Got it?
I think the new merged credit union will do a better job of managing my capital at scale
ReplyDeleteSECUliant? SECoastal? Haha
Delete9:42pm Have tried to point out that this "infantilistic" (great word, on target by Ed Speed!) gobbledygook reeks of fruitcake... can you explain what "managing capital at scale" means.
ReplyDeleteOr just stop being silly on this blog ... y'know, "infantilistic".
Using the logic of Mr Blaine and his cohorts: Members of the public at large would be wise to open up a single base share account at every credit union in the country and then vote to sell their credit union and keep the magical equity they just acquired.
ReplyDelete8:47am Troll-think alert!
DeleteWhat's "ridiculous" is how proud trolls are of how little they know, nor understand. They are fortunate that their "anonymice-ity" provides a shield...
You probably are familiar with Warren Buffett, but perhaps not Peter Lynch (Magellan Fund). Check him out.
Mr, Lynch, an iconic investor of first rank ( no faux anonymouse guru for sure!) frequently told the story of driving around New England with his young family in his youth, opening savings accounts at every hometown mutual S&L he could find ...and then cashed in tremendously when the S&Ls were merged and converted to for-profit institutions. Sound familiar?
That same transition is in the works in credit unions. Only tolls of limited understanding believe that the billions of dollars in credit union equity/reserves is "magical"... it's true troll-think.
So as with all foolish advice, disregard such "troll-twit"... and, yes open a $25 share account in every credit you can join... which is most!
With our example, the members of SAFE CU can open a free account at BECU and then vote to sell SAFE [as our troll suggests!!!], rather than give it away.
If you join SAFE now, a $25 share account at SAFE would return $1,629 on a pro-rata distribution of existing SAFE equity, after a sale.
Let's see a $1,600 pay out on a $25 investment in a year would be a return of @6,400%!
Ranks you right up there with Buffett and Lynch....!
If you invested $25 in a 100 different credit unions - a total investment of $2500 - and received a similar return at sale; you'd end up with how much? 100 different credit unions x $1,600 from each = ?
It's better than the lottery! No risk, fully-insured by the NCUA... even get your "lottery ticket price" ($2500 in share deposits) back!
Check out Peter Lynch...
You can’t get a return until you sell something. You can’t sell a share a share account. BTW genius, deposits are insured by the NCUA, equity isn’t.
Delete1:08pm More trolltwitter. Think this is what was actually said in the comment (see above):
Delete"It's better than the lottery! No risk, fully-insured by the NCUA... even get your "lottery ticket price" ($2500 in share deposits) back!"
Pretty clear to anyone whose ego isn't blocking their "vision", that the investment is in share accounts - all fully insured by NCUA. Also clear that the thing being sold is not the share account, it's the credit union.
But glad to note ,that we agree that the credit union can be sold... and that when a credit union is sold there is a "return" to the member-owners! (A very large one in most cases!)
Just a simple hissy oversight - no one is taking it too seriously!
Don’t agree whatsoever. A credit union cannot be sold. There are no shares of stock to buy, and there is no consideration in credit union mergers.
DeleteThat’s a lot of effort for the return. Opening up that many share accounts and then pushing each board to merge or acquire, ...
ReplyDelete8:59am For most large credit unions, joining online takes only a few minutes to plunk down your $25 bucks!
ReplyDeleteYou didn't read about Peter Lynch and therefore miss the point of what occurred with S&L mergers and conversions to for-profits.
Neither Lynch nor you have to do anything other than join...
Then, just sit back and wait. Insider self-interest and avarice will take care of the rest... especially once the billion $$$ "sell out" grab becomes "industry standard"!
So relax, invest a little time over the holidays. Google "Top 250 CUs"... and get started! Makes a great X-mas present and easier than fighting the crowds at Walmart!!
Merry Christmas!
True story about how a credit union gets sold. A fellow Examiner I helped educate left NCUA to lead a credit union about 1 year after I did. He took a credit union that was basically run out of not much more than a closet. The credit union was successful. He led it for about15 years. They lost their sponsor just before the fight for The Credit Union Member Access Act begin. He accessed a very uncertain future and determined it was better to convert to a mutual savings bank. Several Examiner friends understood the potential and deposited funds in the Savings Bank. I talked to my wife about making a deposit and the potential gain. My wife only believed one think that credit union were good and Banks were bad. She refused to go along with the plan. She controlled 51% fo the vote, so my plan for easy riches did not happen. One of the Examiners put about $40.000 into the stock of the bank when it converted from a mutual bank. About 3 years the bank was brought out. The gain was $150,000. I do not think you can sell the credit union. I believe the process is convert to a mutual saving bank, then covert to a stock bank and they be brought buy a larger bank.
DeleteThere are 8 million stories in the Naked Credit Union. This was just one of them.
B
Interesting story, but this isn’t about a credit union being sold, it’s about a credit union converting and a bank being sold - two independent actions. CU members don’t automatically become shareholders if it converts to a mutual. As you indicate, the original investment was made in the bank. NCUA 708a, and many court decisions have ruled that CU net worth is not member-distributable in conversion. A sale means just that - a buyer and a seller for consideration. A conversion isn’t that.
DeleteI would like to provide you with some insight into the thinking of NCUA and the problem on only considering capital. In the 1980s the S+L industry was very poorly capitalized for their growth and risk. Their failures sent shock waves through bank and credit union regulators
ReplyDeleteThe fear of not keeping their position at the regulatory agency and not advancing their careers has led to a cadre of bootlickers, absolutely devoid of entrepreneurial spirit.
The regulators who are federal employees are generally risk adverse people whose greatest concern is staying on the gravy train and reach retirement. They assume a "not on my watch" attitude.
The credit union regulators have attempted to secure their future by embracing a "more capital is safer for my retirement" approach to exams, rather than what is better for the credit union members..
Cynical take and you can't credibly make that claim and painting every regulator with a broad brush. The ones you've worked with - sure.
DeleteCounter-intuitive anyway. Think about it. As an examiner, If I just want to ride my gravy train until retirement, that means I want job security, the I'm rooting for low capital, issues, findings, or in fact repeat findings. Makes me feel smart and keeps my workload high enough. No regulator wants to be the maytag repair man with nothing to do. CU system is quite healthy right now - which made it a lot easier to make massive cuts and compel retirements of NCUA examiners and supervisors.
Sorry you have such a lofty view of Civil Service. First, at the Examiner level most are dedicated people. However, their major concern is getting their report sign off by the powers that be. While there is no formal play book at NCUA, to get reports approved Examiners fine out quickly what is expected. It is almost like the NCUA superior asks a question, and the smart Examiner says: "what would you like it to be" if they want a future at NCUA. This is not just NCUA, it is pretty much all Civil Service. There is no reward for out of the box thinking.
Delete11:29. Not sure what any of that means, but you sure get an award for having the most cliches in one paragraph!
DeleteShould members who had outsized contributions to building said equity receive more than someone who only contributed a $25 base share account? How would the accounting work for disbursing equity fairly?
ReplyDeleteDespite all the claims and crazy notion of all the free equity credit union members can get paid, the only cases on record where 100% of the equity has been paid out is when credit unions dissolve. That’s happened only a handful of times in modern history, and when it has, the equity is paid out on pro-rated basis based on the amount of member deposits.
Delete9:13 am Trolltwit Alert! Half- truth, but hey that's better than usual.
DeleteDoes confirm that credit union capital/reserves is owned and belongs to the members,; it's real cash that can be distributed to members.
Examples are not limited to dissolution, but also include sale, conversion, special dividends, and in mergers ELT/insider gold-digging "deals".
https://chipfilson.com/2025/12/a-merger-expplained-simply/
Not a half-truth. You really struggle with reading comprehension don’t you? .... it’s ridiculous.
Delete100% payout is limited to dissolution, that was the point
10:10am Mr. Ridiculous is back!... and sponging off the members while "anonymously" blogging.
Delete(BTW, never answered who pays you if members don't?)
100% payouts are permissible... if you say that's not accurate, please show your credible source.
If not, get on back to work... you're wasting members' "capital"!
10:19am Still struggling with your 4th grade reading comprehension? 100% payouts that have actually happened have been limited to dissolutions. Never said it wasn’t permissible.
Delete10:41am " Never said it wasn’t permissible."
DeleteThank you for the confirmation that you didn't know what you were talking about.
All readers appreciate that!
Except that readers actually read the few comments ticket get through. Never made in raise statement. Never said you stupid hair- brained idea wasn’t permissible, said it wasn’t practical in anywhere outside of your little pea brain.
Delete10:51am Again thanks for your admission and support!
Delete