REMARKS OF NCUA CHAIRMAN DENNIS DOLLAR
TO CREDIT UNION NATIONAL ASSOCIATION
GOVERMENTAL AFFAIRS CONFERENCE

The Washington Hilton - Washington, DC
February, 25, 2003

Thank you. It is an honor to be here. This is, indeed, my sixth consecutive address before the CUNA GAC during my tenure on the NCUA Board. Without a doubt, this is always one of the highlights of the year. It is very seldom that we get to speak before this size of audience and to be able to address credit union issues and what’s even more unique, is to have you be the ones to fly the planes to come see us here in Washington. Usually it’s the other way around. Still, we try every opportunity possible to get outside the beltway and to listen to the credit unions we regulate and insure and to be able to learn from you, those in trenches of the credit union movement, and to also be able to share some of the positive things that we are doing at NCUA.

I truly believe it is important for the regulator and the regulated to have an on-going dialogue. We may not always agree, but the importance of the dialogue I think is crucial. And today, what I’d like to do is continue that dialogue.

What I’d like to do is to begin by just going over a few numbers and talking a little bit about the safety and soundness of America’s credit unions today. In my introduction, it was referenced that the first and foremost priority of NCUA, as is your first and foremost priority as credit unions -- or it should be -- is the safety and soundness of your institutions.

The American credit union system has never been financially stronger than it is today. That is a credit to your leadership and; your vision – the volunteers; the management teams, the CEOs; the supervisory committees, the nominating committees, the leagues, the trade associations, all working together to make sure that we not only are able to provide the benefits of credit union service for this generation of members, but for generations to come.

I would like for us to look at a couple of numbers this morning. I don’t think you would expect to hear a regulator without seeing a few numbers on the board, would you? It is just expected. So, I want to show you a few numbers and give you some figures that I think that you will be impressed with.

First of all, let’s look at membership. The membership at federally insured credit unions at the end of the year 2002 -- 81.1 million. Now I know that some figures have been used here of 83 and 84 million today. There are some credit unions that are not federally insured credit unions that would add to this particular number. Look at where that number is just compared to two years ago, at 77.6 million. If credit unions were not meeting the needs of Americans, Americans would not be joining credit unions. And so, these numbers themselves are a sign of the success of the quality of the financial delivery services of America’s credit unions.

I want us to move on, though, to the next figures that we have here. The next figures that are going to be coming before you are the assets. The total assets of America’s credit unions at the end of 2002 -- $557 billion. Credit unions are over a half trillion in assets. Now if you look at that figure versus the year 2000 at the end of the year, the number of assets was $428 billion. So you had a 14.4 percent growth in assets between 2000 and 2001 and then an 11 percent increase in assets between 2001 and 2002. The flight to safety that we have seen in recent years has certainly been an indicator of the financial strength of America’s credit unions and the confidence that the American people have in these credit unions.

This type of asset growth, I think, is something that credit unions should be proud of, but it is also a challenge, because two consecutive years of double-digit deposit growth has very seldom happened in our history. 1991-92 was the last time we had two back-to-back years of double digit growth. And the challenge that that brings to us all is to evaluate how many of these deposits are going to still be with us six months from now or six years from now.

Once the equity markets begin to turn around, and they will, they always do, how many of those deposits will remain within the safety of the federally insured account and how many of those will return to the equity markets? If you have the answer to that, I would like you to stop by and see me this afternoon after the NCUA reception, because we may have a real place for you at NCUA. But it is more than a challenge – it is a call to diligent management. One of the things we have to keep in mind that is different today than 91-92, the last time that we had two back-to-back years of deposit growth, that the baby boomer generation, which are the primary savers in this country, are now ten years closer to retirement than they were in ’91 and ’92. The time they have to be able to recoup loses in the equity markets is a much shorter period of time than they had in ’91 and ’92. I personally believe that you are going to see more of those deposits stay in federally insured accounts than has been the case in previous times. Managing these deposits will remain a challenge for all of us in the credit union community.

Let’s now look at loans real quick. The loans – up to $342 billion. That’s up from $301 billion just two years ago. That’s a 7 percent growth in 2001 and a 6.3 percent growth in 2002. So loans have grown about 15 percent over two years. That is less growth than deposits. Yet it does show that credit unions are not just sitting on those deposits. They are using their diligent management. They are keeping some liquid, knowing that there will be some outflow, but others of those dollars they are being able to use to be able to make a difference in the lives of their members. Remember, credit unions were not organized to be investment clubs. Credit unions were organized to make loans to their members for provident and productive purposes. That is one of the primary purposes of credit unions. We are pleased to see credit unions using that diligent management to determine which of these deposits need to be retained for liquidity purposes in more cash-oriented accounts and those that are available to be loaned. The growth in the loan numbers is a sign that credit unions are still about the business of making a difference in the lives of their members. That is why your members come to you. And, as long as you do so safely and soundly, we like to see those lending numbers trending up.

The loan-to-share ratio is going down a little bit, and that is natural. When you have the amount of growth in deposits that we have had, your loan-to-share ratio is going to go down. But even over the tremendous growth -- over a 25 percent growth in deposits over the last two years -- the loan-to-share ratio in America’s credit unions is still over 70 percent, an impressive number, again showing that credit unions are reaching out and meeting the needs of their members.

A lot of people will say, “Well, if your loans growing that fast in a high deposit era, then you must be having a real increase in your delinquency rates, because credit unions are making all of these risky loans with this new money.”
Well, let’s look at delinquency and charge-offs very quickly. Delinquency for the last two years: in 2001, the delinquency rate was .85 and the charge-off rate was .46. Delinquency is actually down by 5 basis points. Notice that charge-offs are up exactly 5 basis points. You have a combined rate of 1.31, exactly the same over the last two years. Despite the growth in the loan numbers we have, the reality is that credit unions are not only making more loans, they are making more good loans. I commend you for that. That is a sign of solid and diligent management.

I want to look at return on assets just very quickly because this past year we have seen a return on assets of 1.07 percent. Here is a comparison to where it was in 2001 at less than 1 percent. This 1.07 percent return on assets in 2002 is the highest since l996. Over the last six years, this is credit unions’ highest return on assets. If anybody had told me that the average investment in a credit union portfolio would be paying around 2 percent; loan rates would be down to where car loans that used to be made at 6.9%, you can’t make at 6.9% anymore – car loan rates are actually lower than that today – if anybody had said, “You’re going to have that kind of rates and yet have a return on assets percentage of 1.07,” I’d have said, “Well, that would require some outstanding management and leadership in America’s credit unions to make that happen.” My friends, we have that level of success, and that is a credit to those of you who have said, “Even though we like to be able to say that credit unions have by far the best rates in town, the reality is that those rates must be in line with marketplace trends.” That is what diligent management and good safety and soundness practice is all about. You have been able to accomplish that; and I commend you for it.

Reserves. Just real quickly, look at the reserves. Two years ago, credit unions had $50 billion in reserves. Today, we have $60.5 billion. That is an increase of almost 20 percent since the year 2000. You see, we had almost a 10 percent growth in reserves in 2001 and over a 10 percent growth in reserves in 2002. Let’s face it. Credit unions can only build their net worth through retained earnings. Credit unions cannot issue stock to be able to build additional net worth. Credit unions, by their nature and by the present law, can only build net worth through retained earnings. That is why there is always a danger, when our supposed friends say that they want to tax or impact in some way our retained earnings. When you impact retained earnings, you impact the net worth of a credit union. Credit unions’ net worth position has never been as strong as it is today. That net worth is the only protection against the share insurance fund, which is the only protection for the American taxpayer. My friends, we can proudly say that there has never been one penny of taxpayers’ dollars that has been paid to bail out a credit union in the United States of America. May it always be that way. May that always be able to be said. This net worth that you have built is the buffer against the share insurance fund, which is the buffer against the American taxpayer, and that is, and must be, our highest priority if we want to see credit unions not only positively impacting this generation of members, but generations to come.

Real quickly, I would just like to touch on one or two other numbers here before I close. The first is real estate mortgage loans. I want to touch on this because there has been a lot of discussion about it recently. Secretary Snow discussed it this morning. We have a number of on-going initiatives within the present administration to try to encourage greater home ownership. I had the privilege this past year of being a key presenter at the first White House Conference on Minority Homeownership to talk about the role of credit unions and the role that credit unions can play and are playing to help Americans achieve the American dream of homeownership. I want you to look at how first mortgage real estate loans have increased from 12/31/2000 - $76.4 billion; 2001 it went up 16.7 percent to $89.1 billion, and then this past year another 13 percent increase to over $100 billion for the first time. Now we all realize that real estate lending is one of the areas most necessary for diligent management to make sure you are offsetting interest rate risk in every way possible because of the long-term nature of many of these loans. However, But if you are going to be really making a difference in the lives of your members and the lives of your communities and neighborhoods, it is essential that you be able to provide them access to lower-cost mortgage lending. That is why the balancing of this risk is so important.

Here is one last slide I want to show on that point. You will see the percent of the first mortgage loans that were sold this year on the secondary market. The folks in the secondary market are doing such an impressive job trying to provide new avenues to enable smaller credit unions, medium-sized credit unions, and larger credit unions as well, the opportunity to be able to better access the mortgage market – to apply the underwriting standards they need to apply; to be able to have a source to be able to sell those loans for either liquidity purposes or risk management purposes. Look at the increase from the end of the year 2000, when we had 29.21 percent of the first mortgage loans made by credit unions sold in the secondary market going, up to over 40 percent in 2002. I have spoken to many of you who have told me, “We are writing all of our mortgages to secondary market standards. We just choose not to sell all of them, but we want you to know that we could.” That is diligent risk management. I want to commend you again for meeting this need, but also doing it safely and soundly.

If you have heard me speak recently, and certainly you have heard in these remarks today, that I have talked extensively about risk management. That is what your job is. Your job is not to avoid risk. If so, you would never make a loan, because a loan is always more risky than taking those same dollars and depositing them in U.S. Treasury securities. But you were not formed, I emphasize again, to be an investment club. You were formed to meet the needs of your members. That requires you to manage risk, not avoid risk. NCUA, as an agency, as a regulator, as an insurer, must also recognize that we should not drive you into a risk-averse posture. If so, then we are not doing our job. Our job is not to drive credit unions to being risk averse. Our job is to drive credit unions to risk management.

We have done some things over the last several years designed to encourage those credit unions that are doing good, solid, due diligence and demonstrating proven risk management to be able to continue that performance, even as we encourage those who may not be performing well stronger with their risk management efforts. I want to run down the list real quickly. Reg Flex, which we passed in 2001; incidental powers in 2001; the risk-based examination scheduling that we put in place in 2002; the risk-focused examination, likewise put in place in 2002; our revised corporate rule, Part 704, that we put in place in 2002; and we also updated PCA last year, again, designed and geared towards better risk management.

First, Reg Flex. You know, there has been a long-time feeling in Washington that every government regulation will always expand. Regulation always seems to cost you more in the long run. One of my favorite stories about this syndrome is about the lady who brought her parrot to the veterinarian. It had keeled over in the bottom of its cage and she was concerned about it. She was very close to the parrot and brought it in to the veterinarian saying, “Can you do anything? He looks so sick.” The veterinarian looked at the parrot and said, “Ma’am, I’m sorry to tell you, but your parrot has passed away. She’s dead.” She cried, “No! It can’t be! It can’t be! The polly is so important to me. Is there something that you can do?” The veterinarian repeated, “Ma’am, I’m sorry.” She cried, “Can’t you send for a second opinion?” The veterinarian buzzed the next office and a big black labrador retriever came walking into the examination room, sniffed at the parrot, looked up at the veterinarian, shook his head and walked right on out. In just a moment, a Siamese cat came prancing in. The cat jumped up on the examination table, sniffed around the parrot, hung her head, and went on out. The lady said, “I’m amazed. What is this all about?” The vet reached over to the computer and clicked out a piece of paper. He handed it to the lady her and she saw it was a bill for $250. She asked, “What is this all about?” The vet said, “Ma’am, I told you earlier that your parrot was dead.” She said, “Well then, why did it cost me $250?” He reminded her, “you wouldn’t accept my first opinion, so after the cat scan, and the lab report…”

It always seems that every regulation ends up with an additional price tag, doesn’t it? But with Reg Flex, we were able, for the first time in the history of NCUA, to say that there are actually some regulations, not required by Congress and not essential for safety and soundness purposes, from which we could exempt certain credit unions based upon their risk management performance. Last year, over 60 percent of federal credit unions qualified for the Reg Flex exemption from those six specified regulations. That was a monumental step towards establishing that regulation does not always have to creep towards more regulation. An effective regulator stops and examines existing regulations, trying to determine whether all are needed or perhaps whether where we may be able to exempt certain credit unions based upon their performance. Reg Flex is performance-based; it’s risk-based. That is where your future lies as a credit union movement, in managing that risk even as you keep your eyes on the needs of your members.

Another matter I would like to touch on very quickly is the PCA update that I mentioned a moment ago. PCA is the law, and NCUA believes in that law. We believe there is a viable and valuable purpose in the PCA Act that we have supported since Congress passed it in l998. But I notice discussions within this very group about the possibility of going to Congress and talking to them about revisiting the issue of PCA, some to propose the idea of some type of alternative or secondary capital. That is an action that would require Congress looking at the law again.

I would like to throw out on the table something else for you to think about as it relates to PCA. If you are going to go back to Congress, I would like to encourage CUNA as a organization, and you as individual credit unions, to think about asking them to take the same risk-based approach that we have applied to our regulations, that we have applied to our examination scheduling, that we have applied to the focus of our examinations, and look at making PCA itself more risk-based. PCA is calculated as a percentage of total assets, not risk-based assets. However, as a former credit union CEO, I can certainly assure you there is greater risk in a long-term mortgage portfolio than there is in a short-term cash deposit. Yet, under our present, one-size-fits-all PCA, a credit union gets the same credit for a long-term mortgage portfolio as they do for a short-term investment in cash at your corporate credit union. There needs to be some risk-based approach to be put in place with PCA. I know the Renaissance Committee has made one of its priorities to open up PCA with Congress in order to talk about the concept of secondary capital, a very controversial concept. I get lobbied often in favor of secondary capital. I am often lobbied equally fervently by those who are against secondary capital. I have Congressmen that I often speak with – some of them are strongly in favor of secondary capital, and some of them are vehemently opposed. This is an issue that will take time to be able to work through. While you are working through this issue, perhaps it might be worth looking at the possibility of making PCA itself more risk-based. The Basle Accords, which are the international banking capital standards, are interesting in that, if you apply credit union capital, to the standards of the Basle Accords result increases credit union net worth to an average near 20 percent. The reason – Basle is based on risk assets. The Basel Accords, however, are geared more toward banks, and I do not believe it is appropriate to apply Basel to U.S. credit unions. However, the concept behind risk-basing the capital, as Basle does, is a solid one. With changes to accommodate the credit union difference, perhaps some type of minimum core capital component, as well as an interest rate risk component which Basle does not have Basle’s risk factors are primarily calculated by credit risk rather than interest rate risk, I think it is a real possibility that we could make PCA more effective in accomplishing the purpose it was intended to accomplish. That purpose is to reward good risk management and penalize poor risk management. A one-size-fits-all approach to PCA does not do that as effectively as a risk-based approach would.

So I am just throwing this issue on the table. This is a governmental affairs conference. You are going to be looking for issues to address, perhaps not this year but in years to come with your Congressmen and Senators. I would encourage you to consider the possibility of a risk-based PCA.

We have a couple more things that we will be finishing this year at NCUA. The revised investment rule, Part 703 will be dealt with before spring. An overseas branching rule, is on the agenda which would enable credit unions with branches of their sponsor groups in foreign countries to be able to do the same thing that military credit unions are able to do today, and that is offer a branch in those foreign countries for member service purposes. Member business lending. We are going to be revising the member business lending regulation. Again, consistent with the law, consistent with good, sound safety and soundness practices, Vice Chair JoAnn Johnson and Board Member Deborah Matz both of whom you’ll be hearing from tomorrow are both leading an initiative at NCUA to re-visit our member business loan rule. I support that initiative and we hope to have something coming forward on that within the next couple of months, as well.

The last is field of membership. As you know, we just completed a comment period for revision to the federal field of membership rules. I think that field of membership is important for the very risk diversification reasons that I mentioned a moment ago. The credit union of which I was formerly the President is a good example. In l975 the Gulfport VA Medical Center had about 2,000 employees. It was one of the largest employers on the Mississippi Gulf Coast. By the time I took over that credit union as President in early l992, the Gulfport VA Medical Center had only around 220 employees. If my credit union had been limited to that original field of membership with no diversification options I would have never had a credit union to become president of. The only reason that my credit union not only survived but was able to grow, prosper, and make a difference in the lives of tens of thousands of residents of our area is because of previous NCUA field of membership policies that allowed them to diversify. We have lost more credit unions, and particularly small credit unions, because of lack of diversification of field of membership than any other reason. If we are going to be effective with risk-management in our credit unions, if we are going to be effective enabling credit unions to diversity their risk to where the closing or downsizing of a sponsor does not take away what would otherwise be a strong and functioning credit union, we must have diversification in our field of membership within the bounds of what the law allows. Now I realize that our banking critics, and I understand that I heard from a cartoon version of one of those this morning in the opening, are quick to say that this is nothing but unrestrained credit union growth. This is about credit union diversification of risk. It is essential that where Congress has recognized credit unions need to diversify that risk through expanded fields of membership that we allow them to do so. We should not be more restrictive than the United States Congress has chosen to be in defining what is a legal field of membership for a credit union.

So, as we continue to work on the field of membership issue, we need to hear from you, we need to hear the stories from your credit unions of how diversification of field of membership has made the difference in your ability to be able to not only survive, but to be able to continue to serve your members from all walks of life.

The last thing. I would not be true to our Access Across America initiative if I did not give an Access Across America plug before I got off this stage today, because I think it has been one of the most successful initiatives in the history of our agency. For years we have heard speeches about serving the underserved but we have never been willing to put our policy and our process where our mouth is. A big part of what credit unions are about is serving the little guy. That is not exclusively what they are, for without some depositors, they would have no money to loan to the members who need it. But keeping that in balance requires looking for ways, again, as you diversity, to say, how can I diversity and still make the maximum difference in those underserved communities out there? Therefore, we prioritized under our Access Across America initiative the ability of credit unions to adopt underserved areas; underserved areas that have been defined by the United States Department of Treasury as underserved. Do you know how many Americans are living in Treasury Department-verified underserved areas in America today? Over 90 million. There’s over 90 million Americans living in underserved areas. Do you know another term for underserved areas that is used in the common vernacular now – “unbanked” areas. One of the things that makes them underserved or “unbanked” is that, other than the pawn shops, check cashers, and rent-to-own companies, there is no one out there serving them. The traditional for-profit institutions have fled those areas because there wasn’t enough profit there. The answer is for the not-for-profit sector to move in and to make that difference. The not-for-profit sector needs diversification opportunities. Many “unbanked” communities need an alternative to the pawn shops and the check cashers. Matching those needs is what Access Across America is all about.

I want to show you some numbers to demonstrate what a difference an agency that says, “we’re going to be an empowerment-oriented agency rather than an overly restrictive agency can do. Previous to the year 2001 when we really began Access Across America, it would take about 18 months to adopt an underserved area into the field of membership of a credit union. In l999, we had exactly seven credit unions that adopted underserved areas. About 354,000 people lived in those areas. In 2000, we had about 30 credit unions that adopted underserved areas. Some of them adopted more than one. About 2.3 million people were living in those areas. When we began Access Across America, in 2001 without changing a single policy, but we streamlined our process to facilitate instead of to throw stumbling blocks in the way of credit unions who wanted to reach out and make a difference in those communities, who needed diversification options, and who saw a need and were willing to reach out and meet it. In 2001 we had 164 credit unions that adopted 281 underserved areas, a total of 16.1 million. 16.1 million people at the end of the year 2001 were eligible to join a credit union that had not been eligible at the beginning of the year. I thought we couldn’t top that, but it was my goal to do so in 2002. Well, in 2002, 223 credit unions adopted 424 underserved areas. 23.5 million people who at the beginning of last year were not eligible to join a credit union at the end of the year are eligible. Will they all join? Of course not. Do I wish that they would? Yes I do. But the reality is that government has a limit to its role. Government can be an agent of access and opportunity, but government has never signed up the first credit union member. Government has never made the first credit union loan. That’s what you do. What we can be is an agent of opportunity and access. We can put in place an empowerment approach that enables opportunity and access to take place. You have stepped to the plate, and I want to commend you for doing so. I want to say that I do not believe that adopting an underserved area is right for every credit union. Remember, these numbers are from only federal credit unions. There are many states who have adopted the same type of underserved area program and there are state- chartered credit unions that are doing the same thing. Those states would drive these record numbers even further.

I do challenge, although I say it’s not right for everyone. I do challenge every credit union, at your next strategic planning session, to sit down and say, “Would adopting an underserved area be right for us? The additional risk that comes, how would we manage it? What is the potential payoff? What are the potential costs?” It deserves to be weighed. Whether you are occupational, associational, or community, you can adopt an underserved area. You bring it into your field of membership as if it were a SEG, and we will work with you to do that. I truly believe that if we are going to make a difference in the communities of America, not only should be provide an alternative to the pawn shops and the check cashers, we ought to be able to give folks who live there the opportunity to become confident investors in a member-owned financial cooperative. That is what a credit union is. That is the difference you can make in these communities.

SBA Administrator Hector Barreto earlier today before you and properly accepted your accolades for the decision of the SBA to allow credit union participation in the SBA(7a) loan guarantee program. That was a courageous stand and the right stand that he took. I commend him for it. I want to encourage you to look at member business lending as well. Again, like Access Across America, it’s not for everyone. But, with the SBA guarantees, with proper due diligence and risk management, think about what you can do in those underserved communities if we ever get to the point where credit unions are not just providing a lower cost alternative to the check cashers and the pawn shops, although that is a noble cause within itself. But what if we’re actually able to help some of these good folks to start their own business; maybe be able to borrow enough money to start that carpet cleaning company or that lawn care service no one else will provide them the funding for. A credit union can ultimately impact those communities to the point where people are not having to even go to the check cashers and the pawn shops because they are self-employed entrepreneurs, perhaps even hiring others in the neighborhood to make a real difference. Credit unions are making a difference. Credit unions can make a greater difference. And we at NCUA want to encourage that risk-management even as we empower you to make those decisions.

This afternoon at 4:45, my colleagues and I will be hosting a reception on the mezzanine level. We encourage you to come by. As I mentioned a moment ago, dialogue between the regulator and the regulated is always healthy. It is not always enjoyable, but it is always healthy. I know you do not agree with everything that we do, and sometimes we have to tell you things that you do not want to hear. But dialogue is important and we want to encourage you to come by. Board Member Matz will be there, as will Vice Chair Johnson. Each of our six Regional Directors will likewise be there. If you have an issue in your particular region that you would like to talk with a representative of NCUA, we will be available to visit with you this afternoon from 4:45 to 6:30. We encourage you to come, to encourage this dialogue to continue. As I said, the regulator and the regulated will always have a natural tension. It is inherent in our roles. But that natural tension can be a healthy tension if we will at least dialogue with each other. I thank you for the opportunity to be able to come and dialogue with you this morning. Thank you so much.

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Dennis Dollar was appointed Chairman of the National Credit Union Administration (NCUA) by President Bush in 2001. A former two-term member of the Mississippi House of Representatives, Chairman Dollar served as President and CEO of the Gulfport VA Federal Credit Union in Gulfport, Mississippi, prior to his confirmation to the NCUA Board in 1997.