How Latest Economic Events Affect LAFCU
Written by Mike on September 22nd, 2008
Last week’s economic news regarding the failures of large national brokerage firms and troubled banks has been on everyone’s mind resulting in confusion, anxiety and even fear. The U.S. government’s race to the rescue is unprecedented in its scope and questions remain as to what this action’s cost will be to the American taxpayer over time. The reasons underlying today’s challenges are many but certainly greed, loose financial oversight, federal regulators slow to recognize problems brewing in the mortgage markets, low interest rates that were held too low and for too long under the previous Fed Chairman and of course the financial wizards of wall street who devised ever more complicated and risky mortgage instruments are certainly at least partially to blame.
How do these events affect LAFCU today and into the future?
Our credit union as most business and financial institutions are impacted by the general direction and level of economic activity in the country. It is the relatively low degree of impact to Los Angeles Firemen’s Credit Union that I wish to chat with you about today.
Your Credit Union is in exceptionally strong condition and is doing very well financially due to a number of factors:
- First and foremost, it is because of the special nature of our members and the “exclusivity” as to who may be a member and participate. Yes we have been called a special club by some and I am pretty darn proud of that club that I have been working with for over 28 years now.
Our Credit Union began as a financial co-operative serving firefighters of the City of Los Angeles. Today we proudly and successfully offer our services to paid, professional firefighters and their immediate families throughout the State of California. Our new membership base has provided the Credit Union diversification (added safety) and the opportunity to come together with firefighters across the state who perform the same life saving and heroic deeds on a daily basis.
An important foundation to our ongoing success is that our members are paid by cities and counties (tax supported) who rely on fire and emergency service personnel to protect citizens. Thus our primary base of members have very stable, well paying jobs and are willing and able to pay their debts because they can afford to and because they have high moral integrity. Thus our delinquencies and charge offs remain well below credit union industry levels.
- The Credit Union operates safely and conservatively and does not and will not engage in “high risk” lending or investment activity.
- LAFCU has grown its reserve base to over $80 million dollars, well in excess of required regulated reserve levels. Our projections also call for over $5 million dollars in net income for 2008.
- LAFCU, its CEO, Board and staff have always and will continue to place the safety and soundness of our member’s life savings at the forefront of our business model. We know and understand that our “fire family” has come to trust that their funds are safe and well secured by those who have the member’s best interests at heart.
- LAFCU chooses its business and investment partners carefully and chooses high integrity, high performing partners and monitors their safety and soundness with vigilance.
A couple of notes of information:
LAFCU is very limited as to what types of investments we can make and as a result primarily invests in U.S. government and agency securities in addition to certificates of deposits with a well diversified group of corporate central credit unions. We are not allowed to invest in corporate stocks and, of course, do not do so.
Thanks for reading this, I look forward to your replies and I can always be reached at the Credit Union at 323-550-2240 if you wish to chat.
Mike Mastro
President/CEO
Los Angeles Firemen’s Credit Union
What sort of U.S. govt. & agency securities do you invest in?
U.S.gov’t is over 50 trillion dollar in debts(including
unfunded debts such as social sercurity and medicare)
and soon over 80 million baby boomers will be collecting
them. And if foreign countries such as Japan, China, and
Euro. want their money back or they start paying in dollars they have to pay for trades between U.S. and them, then the value of dollar will be nothing. What will happen to the Credit Union money then?
How can the U.S.government gurantee anything when they
posted on September 23rd, 2008 at 12:29 pmcan not even pay U.S. debts? We are service oriented country now. Once production countries like China figured out that U.S. can not pay back their debts, they
will dump all their U.S. dollars, won’t they?
When those things happened, how safe C/U’s money?
Thanks for a good job!
posted on September 23rd, 2008 at 2:40 pmMember since 1959.
The types of U.S. government and agency securities that the Credit Union has invested directly in are U.S. treasury issues and federal agency issues. Today our investments in the governmental arena are in federal home loan bank securities.
The impact of a scenario where the dollar declines precipitously and foreigners are less willing to finance U.S. debt could cause a significant increase in inflation as well as the general level of interest rates in the U.S. economy as credit tightens. Some of you may recall the exceptionally high interest rates of the late 70’s and early ‘80 where CD rates regularly exceeded 10%. The impact on the Credit Union would be that our cost of funds would rise very quickly as we would be paying higher rates on money market and CD accounts. Our Credit Union in conjunction with our Asset Liability Management Committee and our Financial Planning Committee regularly assess our ability to meet that type of scenario. Our projections indicate that LAFCU would meet that challenge successfully.
posted on September 24th, 2008 at 12:09 pmAre we affected by this real estate turndown? Do we have more losses, foreclosures and things? Are we upside down on loan-to-value ratios with the decrease in the real estate market?
And with the new “Bush Bail Out Scheme” trying to save everyone – it lists everyone: banks, savings and loans – and among them it listed credit unions. If credit unions are so safe and regulated why would they need to be bailed out?
posted on September 24th, 2008 at 1:33 pmThe housing market and home prices have declined over the past year or so. LAFCU makes the vast majority of its loans at 70% or 80% loan to value (LTV). With the decline of home values loan to value ratios have generally increased for seasoned portfolio loans. But the difference between our portfolio and other lenders is that when we underwrite our loans, we are using actual TRUE income as opposed to “stated income” now known as “liar loans”- you get the idea. Additionally we do not simply look at LTV at the time the loan is originated but the member’s ability to pay as well as the stability and credit position of our borrowers. Since we did not do sub-prime lending, higher LTVs are quite manageable. Having said that our delinquency ratio is .17% as of the end of last month compared to other financial institutions overall that are in the 5%+ range now. The majority of our delinquencies are in the consumer lending arena and not necessarily in our mortgage loan portfolio. We are seeing more delinquencies and charge offs this year than last but as you can see our experience is significantly better than peer.
Another important point to consider is that a very high percentage of the foreclosures that are occurring in the general marketplace today is due to the fact that these individuals were qualified under a stated income program and truly couldn’t afford the mortgage payments right out of the gate. Our underwriting guidelines require us to verify income which ensures the members are able to afford the mortgage payments. So, even in a depreciating market, our members can and do continue to pay on time. Additionally, many of the sub-prime borrowers took out negative amortization loans and as the property values decreased their loan balances increased thus making payments that much more challenging.
I believe it is crucial to drive to clarification of what a non-profit credit union is and in particular what LAFCU is. The members of the credit union elect the board who is composed primarily of firefighters who look out for the best interest of the membership and are not a paid group of stockholders who stand to gain from profits. It should also be noted that your directors do not receive any compensation for their dedicated and professional efforts.
To the question of why CUs are being included in the bailout and why is that, if they are secure.
My comments as to LAFCU’s safety and soundness was not intended to speak to the Credit Union Industry at large. Although credit unions did not for the most part make sub-prime loans, some did and some engaged in riskier lending practices than LAFCU. There are CUs in trouble. Additionally many credit unions have expanded their fields of membership to include anyone who resides within a designated community and are now subject to the opportunities and challenges that exist within that more expansive group. LAFCU’s by contrast only allows into our exclusive membership California’s paid, professional firefighters and their immediate family. Some corporate credit unions retain investments on their balance sheets that are below market value but the investments are paying interest and principal and are not impaired.
Safety and soundness typically depends a great deal on how many dollars are in reserves and how large the asset base is. It’s about size and scope; but, also about professional commitment. Let’s chat about those items for a moment.
LAFCU has grown to approximately $850 million dollars in assets and in addition to those traditional assets we also manage members off balance sheet assets of approximately $70 million dollars. Those off balance sheet assets include the money members have invested in the financial markets through FIREHOUSE Financial as well as those mortgages we have sold into the secondary market that we continue to service. You can see that the combination makes your Credit Union a $900 million dollar plus, professional, full-service financial institution that remembers who we serve and that our origins and culture began at engine house 28 on Figueroa Street in Los Angeles.
Now let’s talk about the “human assets” of this Credit Union.
Those assets are impressive and of exceptionally high quality and begin with our volunteers. The Board of directors and Supervisory Committee has committed themselves to continuing financial education as they professionally perform their non-paid roles of oversight and creating vision for this organization.
Our staff serves the membership with quality and with a deep understanding and commitment to the culture of personal and caring “fire family” service. I am also pleased to tell you that the Credit Union encourages staff to continue their growth by participating in college degree programs and today we have a number of staff who are taking on those challenges.
LAFCU’s senior leadership team includes a group of very talented individuals who together with myself ensure that the Board’s vision and expectations are carried out successfully.
Dixie Abramian: Vice President, Marketing
and Business Development
Richard Romero: Chief Operations Officer
Cindy Iwamoto: Chief Financial Officer
Evany Perkins: Vice President Member Services
George Kings: Vice President Information Services
Sandy Vanover: Vice President Human Resources
Greg Seltzer: Vice President Lending
The Board of Directors, myself and my senior team are always willing to chat with our members and answer any questions you may have.
posted on September 25th, 2008 at 9:34 amThanks for the explanation Mike. As you know, many members are quite concerned due to recent events in the real estate and financial sectors.
Could you also address the LAFCU’s current situtation with respect to foreclosed real estate assets and real estate owned?
Thank you,
Leroy
posted on September 25th, 2008 at 5:00 pmMost recently – approximately 6 months ago the Credit Union foreclosed on 1 Real estate loan. That property was sold several months ago. There are no additional potential foreclosures on the horizon.
posted on September 26th, 2008 at 10:15 amI wonder why financial “experts” continue to say that we must have our money in FDIC protected accounts, and I have never heard anyone advise having our money in Credit Unions. I am glad to hear that our credit union is strong, but because of all the lies from other institutions/leaders I am afraid to feel completely safe.
posted on September 26th, 2008 at 9:34 pmI certainly understand your concerns as the economic and stock market news continues to be so negative and concerning. As a point of reference, it may be helpful to share why LAFCU chose private insurance in the first place. Our Credit Union has always been blessed with excellent savers who trust LAFCU with the vast majority of their savings. As a result, our Savings per Member ratio, which approximates $28,000 per member, is about 5 times the national average for Credit Unions nationwide and in fact we are often ranked in the top 10 credit unions in the country as it relates to our Savings per Member ratio. Having said that it takes many “high dollar savings accounts”, many well over $250,000, to obtain that ratio. Your Board of Directors moved to ensure that our high savings membership was covered well in excess of $100,000. On a related note, I am responding to this blog message from Dublin, Ohio, this evening as I am attending the ASI (American Share Insurance) advisory council meeting of which I am a member. I am pleased to report that ASI is very well capitalized and is doing quite well financially.
posted on September 27th, 2008 at 5:16 amThanks for doing a great job! We really appreciate your work, caring, and responsible managing of our ‘fire family’ funds!
–Scotty Karsokas
posted on September 29th, 2008 at 4:32 amU.S.F.S. Firefighter II
Almanor Ranger District,
Chester, CA.
Mike:
From Oscar Malm to Thelma to Doris (At Fire Station 28) to You Mike and all the Past Board Members, Present Board Members and Staff, THANK YOU for taking care of our savings and investing them wisely. We plan to continue keeping our savings with the #1 Credit Union the LAFCU.
Tino Albera
posted on September 29th, 2008 at 2:31 pmWhat happens to my money if ASI fails?
posted on September 29th, 2008 at 6:23 pmThe safety and security of member deposits is primarily determined by the financial strength of the credit union. One measure of that strength, as mentioned earlier in this blog, is the amount of capital/retained earnings that LAFCU has. That amount today is over $80 million dollars which translates into an approximate capital ratio of 10%. In an extremely unlikely scenario where ASI was to fail then several things could occur:
1. ASI would be liquidated and we would receive from zero to 100% of the deposit we maintain with them (depending on the value of their remaining assets)
2. LAFCU would move to obtain NCUSIF insurance (FDIC-like insurance for credit unions)
3. Member’s deposits would be safe and no loss of principal or earnings would result
4. LAFCU would continue to serve its members safely and soundly as it always has.
If the entire amount of our deposit was lost then our capital ratio could decline to about 9.3% from today’s 10%. Good for all to note that a “well capitalized” credit union per the definition of our regulators is above 7%. As you can readily see, we are exceptionally well capitalized in either circumstance.
posted on September 30th, 2008 at 1:29 pmMike:
I keep hearing that individuals should not have all their money in just one financial institution (bank) since diversification is considered a more sound financial strategy. However, having very little finances as it is right now, we have chosen to have all our accounts and loans through LAFCU. Is this still a bad idea? I wouldn’t begin to know what other banks to use that are trustworthy at this point. Thanks!!
posted on October 1st, 2008 at 8:29 pmDiversification is a sound business when it comes to properly allocating your funds when it comes to retirement accounts especially deferred compensation and 401K plans. When it comes to having your funds in multiple financial institutions, there are pros and cons. Having your funds in more than one institution may reduce your risk for loss if you have significant savings that would not be insured in the one organization. On the other side is if you had chosen Wachovia and Washington Mutual as two institutions to house your funds, you would be in a situation where both had financial difficulties and were bought out.
I know that members often see high yielding offers and specials from some of those institutions and I can offer you this advice, “the higher the rate offered, the higher the potential risk.” LAFCU has been challenged from time to time as to why we don’t match some of those higher rates. The reason is simple…we do not need to attract “hot money” because to do so would cause us to then have to chase “hot investment and lending opportunities” that could be less than safe (i.e. subprime lending). Our incoming funds are stable because the vast majority of our membership place safety above yield. I might add that most recently some of those high rate payers are the same ones that were in the news as those institutions were closed.
We chose ASI insurance for our organization because we were able to protect our member’s funds for up to $500,000 per account. Which means that your savings is protected up to $500,000, your checking account is protected up to $500,000, each certificate of deposit is protected up to $500,000, your money market is protected up to $500,000, etc.
posted on October 2nd, 2008 at 10:18 amIf you have two accounts with the credit union, i.e.,Personal and trust accounts, are they each covered to $100,00? Are grandchild accounts separate accounts even though they are under the personal account?
posted on October 2nd, 2008 at 12:47 pmRobert, both your personal and trust accounts are insured up to $500,000. Your grandchild accounts would also each be insured up to $500,000. ASI insures each and every account without limitation as to the number or nature of the accounts held. Thank you both for the great questions.
posted on October 2nd, 2008 at 1:18 pmMy deepest thanks for your kind comments. I truly believe that our “fire family” focused culture, professional and conservative financial practices, associated with an exclusive and laser-like focus on the premier membership of California’s professional firefighter community makes all the difference in the world.
We are certainly not immune from today’s economic challenges and will charge off more loans than in the past but we are nicely profitable, have great capital -over 80 million dollars and a Board, management team and staff that are exceptionally committed to this Credit Union and it’s membership.
posted on October 3rd, 2008 at 1:22 pmMike,
Exactly how many loans (and exact dollar amount) will be charged off as of the end of the 3rd quarter?
posted on October 3rd, 2008 at 3:59 pmWhile I understand that there is great concern regarding delinquencies and charge-offs of loans, I want to caution you about taking figures out of context. LAFCU is experiencing higher than normal charge-offs compared to our credit unions’ history. But a few issues need to be taken into consideration in order to put things into context. Our current delinquency ratio (loans that are currently over 30 days late) is .17% as compared to 2% to 5% in the industry. Also, stating a dollar amount without comparing it to our loan portfolio can be misleading. Our total year to date charge offs are $1,351,736 of which $245,524 was related to one foreclosure that was unrelated to the current economic climate. This number is composed of 115 charged off loans. In order to put these figures into perspective, one should compare them to our total loans of $668,000,000 or a charge off percentage of .0002%. As mentioned in previous posts, LAFCU did not participate in sub-prime loans or use stated income when granting loans. This fact and the strength of our membership positions us to weather the current economic climate. Management anticipates delinquencies and charge-offs to be higher than usual throughout the year of 2009 and thus is accruing reserves in order to protect the Credit Unions’ finances. This is a normal tactic that is practiced during high and low periods of delinquencies.
posted on October 3rd, 2008 at 4:38 pmMike,
posted on October 3rd, 2008 at 8:43 pmI want to thank you and your staff for the great job you all do. Your staff always treats us so much better than outside banks do. These last weeks have been almost unsurpassed hard financial times for the country. I would like to share with everyone that I went to our credit union the day after the Federal bailout rescue bill failed and panic was everywhere in sight… except at our credit union. I did not see anyone making a run for their money. There was no panic there at all. Zero. So different from what I saw when I went and visited another bank recently. That is a testament of your great work and our member’s trust in our credit union. Please convey to your staff to keep up the good work.
Mike, I want to thank you for your reply and for making yourself available to the membership during these times. I’ve had the utmost confidence in our credit union since 57 years ago when they loaded my drill tower class in a bus one night and took us to the credit union where each member took out a loan of $300 to buy uniforms and turnouts. Keep up the god work!!
posted on October 3rd, 2008 at 9:50 pmI have been a member of the credit union for nearly ten years and I love it. I have always been in good standing. I have paid off a luxury car loan within 1 year of financing. I have a 30 year fixed home loan at 5%. Yes, LAFCU has been so good to me. I have recently heard in the news that some banks are “taking back or slicing” the home equity line of credit. I have a HELOC and sure would hate to have it taken away. What is your policy?
posted on October 4th, 2008 at 10:10 amOur home equity loans are based on agreed upon Loan to Value amounts which are included in your loan note. We are required by our regulators to monitor for excessive loan to value variances on home equity lines of credit. While we do not randomly reduce credit lines based on specific percentages, we do review loans and home values and communicate with our members regarding lines of credit with loan to values that are far outside of the original loan note. We look at each loan individually and make a decision based on the best interest of the member and credit union. We understand that our membership is unique and we experience a low delinquency ratio on our loans which has not caused us to overreact to the current environment.
posted on October 4th, 2008 at 12:37 pmI just wanted to give a quick thank you to LAFCU for your integrity and honesty.
posted on October 7th, 2008 at 11:12 amToday in the media average guys can’t believe anything we see. I always read your articles and place my trust in what I read. While other institutions and big dollar C.E.Os look out for their own pockets LAFCU continues to keep it’s high level of professionalism and trust. Thanks.
Thanks for your positive message. These are truly trying days for all. Our commitment to our members is to continue to operate in the “high integrity, high trust” manner that our members expect and deserve. After all, the underpinnings and resulting culture of this credit union comes from professional firefighter’s who live the highest level of trust and integrity in their daily lives through their willingness to give their lives to save others. How could the Los Angeles Firemen’s Credit Union not operate on those same principles in support of our members. Long after members compare rates, products, and services with other financial providers we hope our members see the real difference in who we are and who we serve.
posted on October 8th, 2008 at 5:59 amToday is the first time I read this section of this site. I am NOT a financial person. My deceased firefighter husband took care of our finances. I read your article re: the current financial problem, and all of the questions/replies. Thank you for the clear and understandable statement of facts. I believe that I can rest easy re: my accounts. Thank you.
posted on October 10th, 2008 at 11:50 amThank you again for your kind words. I’d also like to encourage members to attend a free session for a U.S. Economic Review seminar. Well known economic forecaster and market observer Dwight Johnson will be speaking. It is offered by the Credit Union free to members. You can get more information here.
posted on October 10th, 2008 at 2:55 pmI just want to reiterate what so many other members have posted here…..I have been so relieved in recent weeks to know that our money (no matter how little we have lol) is at least protected by your banking practices. Thanks to you and your entire staff for doing such a great job for all the members!
posted on October 14th, 2008 at 9:04 am