Secondary capital, which is available to low-income designated credit unions, is the single most powerful financial tool available to low-income credit unions that provides tremendous benefits to members. Because secondary capital is included in a credit union’s net worth ratio, it allows the financial cooperative to spread its wings and better serve its members. If your credit union has a low-income designation (or could qualify for one), here are five important ways which the increased earnings from a well-developed and well-managed secondary capital plan can benefit your members.
- Meet current and future loan demand
Current economic indicators show our economy is the strongest it’s been since the peak before the recession 10 years ago. There’s low unemployment, high consumer confidence, and one very important economic measure for credit unions: consumer lending is up. According to a recent CUNA report, credit union loans grew 11% in 2017, the fourth straight year of double digit loan growth.
If your loan demand exceeds your retained earnings growth, you’ve probably had to put the brakes on lending to protect your capital levels. Or, perhaps you’ve had to participate or sell your loans to maintain board set limits. Secondary capital, which remember is included in your net worth, allows you to grow your balance sheet to meet the loan demands of your members, retain member loans you have underwritten, maintain a healthy loan-to-share ratio and increase your net income.
- Serve low- and moderate-Income families
Serving low- and moderate-income families can carry additional risk, especially when lending. Secondary capital provides you two ways to defer this risk. First, it provides an extra risk cushion (net worth) that allows you to serve this economically vulnerable group. Your credit union can rescue low and moderate-income families from the predatory lenders that charge unreasonable rates and fees and prevent them from making financial progress. Secondly, the additional earnings generated from the additional loan growth enhance net worth and provide even more protection from additional risk.
- Build communities
When you expand lending activity in a community, whether you’re serving small businesses, low-income consumers or a select employment group, your credit union creates economic activity for your entire footprint, not just those that received the loans. Several studies validate that lending has a statistically significant and positive effect on local GDP and benefits not only the borrower but your entire community as well.
- Improve service
Secondary capital provides your credit union with the ability to expand member service in multiple ways. You can add or make upgrades to your digital service channels, which increase access to consumers in all income brackets. Technological upgrades improve the member experience, which allows your credit union to better compete against financial service providers that don’t have your members’ best interests in mind. If you’re losing business to big banks, non-bank financial services providers or even the community bank down the street because they provide services you don’t, secondary capital can help reverse that negative money flow.
- Expand community based programs
The increased earnings derived from an effective secondary capital plan enables your LICU to expand the community-based programs that you already provide in the effort to benefit your entire community. As you are well aware, these programs are vital to specific members and households in your area. However, these programs require money to operate. Additional earnings allow for the continuation or expansion of these programs, so they may reach even more members of your community.
The Low-Income designation gives credit unions a valuable and powerful tool needed to remain viable in an increasingly competitive financial services market. It is crucial that your credit union explore low-income designation. If you are already an LICU, ensure that you use all the tools available to you, including secondary capital, to serve this important market.