NCUA Chairman Norman D'Amours Speech at the NAFCU Congressional Caucus March 11, 1996 I am very happy to be here with you today. Credit unions are doing better now than they ever have. As we prepare ourselves for the next century there is not a cloud on the horizon. So these are truly wonderful days for the credit union movement. But more than that, the future augurs so well for all of us. Year-end Financials Show Picture of Health I held a press conference at the agency in mid-February to announce the good news on behalf of credit unions. The fact is that our capital is up to record levels [11%] and, very interestingly, net capital is 10.3%. Loans are up 25% since yearend 1993 [9.2% since YE 1944]. I was optimistic when we sent out Letter No. 154 in April of 1994 to all federal credit unions letting you know that we had told our examiners to lighten up when it came to examining loan-making, and to not get too focused or excited with any single category, such as delinquencies. The credit union community responded beautifully to that initiative; and, as I said, 9% in loan increases in 1995 and 15.6% the prior year totals a 25% increase over two years. Delinquencies have gone up slightly from .9 % industry-wide to 1%. The truth of the matter is, there is room for upward movement there. One of the reasons for the rise in delinquency, which remains well within safe and manageable levels, may be the risk-based lending program detailed in the "white paper" the agency wrote last August and distributed as Letter No. 174. We've been talking to credit unions about it, answering their questions, and asking a few of our own. We want managers and directors to understand the program and be comfortable with using it. In terms of industry assets, they're up 6% to just over $306.64 billion. Credit union membership, as you all know, has also grown. Investments in corporates during 1995 were up 3% to $24.7 billion. There was a lot of excitement about the corporate system last year for a number of reasons, yet confidence in the system remains strong as shown by this 3% increase. That fact should be extremely gratifying to all of us because it also proves to those on the outside looking in that credit union people still understand and recognize the value and importance of the corporate system. Loans are Up and Risky Investments Dropped One of the most interesting statistic for 1995 was in the loan area. The savings deposits increase of $15 billion and the $1 billion decline in investments were sufficient to fund increased lending, which totaled $16 billion. There were a few of us, if you remember, within the industry and the agency who were mildly concerned when we saw a dramatic 15% increase in lending in 1994 accompanied by only a 3% rise in savings deposits. There was a concomitant increase in credit union borrowing of 66% in order to fund this additional lending. Worries about a potential liquidity problem started to surface. But most fortunately, that trend did not continue, and the good news this year is that the rise in deposits and drop in total investments were sufficient on a dollar-for-dollar basis to fund the increase in loans. It is wonderful to see credit unions doing more of what they were primarily intended to do; making loans to their members. With concerns about potentially volatile CMO instruments, and steadily declining yields on Treasury Securities and other investments, the accuracy of the old adage is becoming more and more obvious: the best investment a credit union can make is a loan to its members. Everywhere we've looked, the 1995 numbers are excitingly positive: the number of failures (22) and the number of problem credit unions (267) are at their lowest levels ever. Regulatory Initiatives Let me update you on where the agency is going. The NCUA for some time has been seriously focused on deregulation, in spite of serious political distractions. We honestly do want to get out of your way as much as is prudently possible. You directors and managers know best what your members and employees need and want; you have experience running your credit unions, and some of you have been running them for decades. We simply want you to be in the best position to make a well-informed decision on what is good for your membership. Along with Deregulation Comes Increased Supervision The reality of regulation and supervision in this day and age is, as long as the tax paying public is going to indemnify, guarantee, and back the insurance fund 100 percent, there will inevitably be supervision and regulation. Some people don't like that concept. They don't like the very idea of a federal agency supervising a private-sector operation. That's understandable, but the reality is that when they ask for federal insurance, federal regulation is the price they agree to pay. Back in the early 1980s, there was an enormous amount of deregulation in the banking and thrift sector. Unfortunately, there was a concomitant and significant decrease in supervision. The results were, as you all know, extremely costly. As long as deregulation is going on, there has to be a very careful level of supervision also happening. That is a fundamental check and balance that if forgotten as it was during the 1980s, will inevitably lead to problems, as we witnessed in the late 1980s. So we're saying let's find ways to deregulate, and we're working to do that. For instance, we have allowed incentives to be paid to loan officers that were forbidden a few years ago. Loan participation rules have been significantly relaxed and upgraded in order to make them more workable. We gave small credit unions a break on Truth In Savings compliance. We conducted in-depth seminars and went to great lengths to educate managers and directors on the benefits and pitfalls of risk-based lending. We facilitated real estate appraisal standards, and we have through Interpretive Ruling and Policy Statement (IRPS) 94-1 eased guidelines for some field of membership expansions and streamlined expansion procedures (SEP). NCUA has taken a number of actions, and will continue to look for ways to make it easier for directors and managers to run their shops the way they see fit. We hope to get better cooperation from credit unions in this endeavor. On the other hand, we must never let ourselves forget that there is a supervisory responsibility credit unions and Congress expect NCUA to fulfill. As deregulation occurs, the need for careful supervision continues and becomes ever more important. The question is, who will supervise? Credit Unions Should Be Primary Supervisor of CUs My preference is that the supervision be done for the most part, at and by the credit union with NCUA acting as a back-up supervisor. In order to promote this objective, our approach at NCUA over the past few years has been, and will continue to be, that it ought to be the directors who are exercising that supervisory function. I was severely criticized in the early part of my chairmanship because I stressed the importance of directors and the critical role they should play in leading the credit union movement. The criticism shocked me because that role was not prescribed by me but by the movement's founders, including Filene and Bergengren. When I talk about the importance of directors leading the credit union movement and doing the supervision at the credit union level, I don't mean to detract in any way, not even an iota, from the critical importance that management also brings to credit unions and to our movement. As a matter of fact, I've met so many managers who are just as deeply committed to the credit union spirit and philosophy and who have an understanding of what's important to credit unions that, quite frankly, I am certain several of them would stay involved in the same way even if they were not being paid. Managers, especially well-trained and knowledgeable managers who understand the principles of our movement and who also understand the importance of supervision for safety and soundness, are critically important to the stability of this movement, and thank God for them. That does not change the fact that the founders and early leaders of the credit union movement believed that one of the things that was most vital to the continuity of this movement was the involvement of the volunteer director. It is the volunteer directors who have the responsibility, and accept it gladly, of seeing that the credit union is run safely and in the best interest of the member and in the best interest of the entire system. What we are doing at NCUA, quite frankly, is trying to help directors get the information that will better enable them to understand what is really happening at their credit union. A director who understands the full ramifications of a manager's decision to invest in this or that type of security will be a better director. A manager who is required to report that information to his or her board will be a better manager. In this regard, I've observed a few things lately that I think should be addressed if only because they represent a minority viewpoint that obfuscates this important point. I have seen some recent statements in financial publications that I think are very disrespectful of the abilities of credit union directors. Moreover, NCUA has received some comments to Part 703, our proposed Natural Person Investment Regulation, indicating that we are asking too much of directors; that directors are simply not up to this, that directors are only part-time, only volunteers. My opinion is that people who hold such opinions are only a small minority in the credit union movement and that, consequently, it's not something to be overly concerned about. However, it's certainly worth mentioning because it goes directly against the good of credit unions and against our whole direction at NCUA. It is because of our great faith in and respect for the abilities of directors and their functions, that NCUA is propounding rules like FAS 115 and amendments to Part 703. We believe those news rules will put directors in a position where they can better and more frequently monitor the results of investment decisions made by themselves and by management on the credit union's bottom line. You don't have to be a rocket scientist to do this. I sometimes hear some credit union people saying of their volunteers, "Well, you can't expect them to be as knowledgeable as bank directors. After all, bank directors are paid and some are professionals." I'm sorry folks, but that's not the way it works. I believe credit union people are, at least, and I mean at least, as competent to do the job, to fulfill the functions of directorship as bank directors are just as smart as bank directors and they are. They're doing it out of love; they're doing it out of an interest in the membership. They're doing it because they believe in the importance of credit unions and the positive impact credit unions have on people's lives. That is in my view a far better motivator than money or prestige. Directors Should Maximize Educational Opportunities There is nothing in FAS 115 or our proposed investment regulation that an average American adult with common sense and an interest cannot understand or even master. It's true that directors should take advantage of educational opportunities provided by leagues, CUNA, NAFCU and NCUA. But monitoring investments is not something that should intimidate anybody. In fact, it's critically important that directors do this because if directors have to step aside for professionals, what will we have left of a credit union movement? A movement that is based on volunteers. A movement where people making the decisions do not have a vested economic interest in the outcome of those decisions. I think that's one of the most critical foundations of our movement and so did its founders and early leaders. To those people who tell us that the average volunteer can't understand important and complex investment strategies available today I say, I'm sorry but I saw one of your so-called experts at work in Orange County, California, and I saw some of them operating in other parts of the country and at international banks and causing great harm to people, to financial institutions and to local governments. Please don't be intimidated by such people. The common sense and dedication that directors bring to the table is all that it takes to monitor the performance of investments, so long as they are given the needed information. What NCUA is trying to do is to ensure that directors have that information so that the primary supervisory responsibility will not be on the agency but on the credit unions through their directors, where it ought to be. Some of the problems that occurred in the past could have been avoided had directors simply had the knowledge that would have revealed what the affects of investment decisions were. That's what we're trying to help them obtain with tools such as FAS 115 and Part 703. Renewal is a Timely Project NCUA is also very much interested in the Renewal Project that CUNA has undertaken and that NAFCU is participating in. I have read several of the focus group reports generated by the Renewal Project and it's heartening to witness the level of understanding, the level of appreciation, the level of commitment of the rank and file credit union people responding to these focus groups. That bodes extremely well for the future. Making the CUNA system and the leagues much more democratic than they are today seems to be the overwhelming opinion of the various focus groups and in my opinion is the best thing we can do to fix the ills of the organized credit union movement. I am a firm believer in the enormous importance of CUNA to the credit union movement. CUNA is and has been the organized system. There are other extremely important groups, like NAFCU, which I don't mean to slight in the least. But when it is all said and done, CUNA represents the full length, breadth, and depth of the credit union movement. Therefore, it is vitally important that CUNA continue strong and healthy well into the next century and beyond, and I fervently hope the Renewal project will play the critical role in assuring this. "Serving the Underserved" Conference The last topic I'll touch upon is the conference on "Serving the underserved." Many of you know this red button I am wearing signifies that conference which will be held in Chicago, August 9-11 of this year. As a matter of fact, this is not as some people say, an NCUA project. It is a credit union movement project being planned by individual credit union volunteers and managers, by NCUA, CUNA Mutual, CUNA, NAFCU, the National Federation of Community Development Credit Unions, and the National Association of Credit Union Chairmen. The cooperation of the entire credit union community has been outstanding. I believe we are planning a conference that will set a helpful tone for the future. There are a lot of folks that look to me and look to you when we go to Capitol Hill and tell us, "We're all for credit unions but you have to keep assuring us that you're keeping your eye on the ball." As the sign in Madison has it, "Keeping Purpose Constant." Now we all know the movement has been doing that and has done it very well over the years. But I believe we should be constantly looking for additional ways to fulfill our mission and to show those on the outside of this great movement that credit unions are making a difference and are always looking for ways to do it even better. Not only because it should be done, but because it also sends exactly the right signals to those people on whose understanding we depend; the Administration, the Congress and the general public. The Cooperative Spirit at Work We want the Chicago conference to have in attendance people who have never been to a credit union conference before. For that purpose, the conference advisory group has created a scholarship fund. This fund will be used to defray the expenses of people who qualify and would like to come to the conference but because their credit unions are small and have limited resources they do not have the funds or cannot leave the credit union unmanned. Therefore, we also have established a mentoring program whereby several small credit unions will be matched up with larger credit unions who are willing to sponsor their costs of attending the conference, or provide staff free of charge to fill in for the CEOs and managers who otherwise would not make the trip. I wish all of you could witness one of our advisory group meetings when we're all together planning this conference. It is the credit union movement working together so beautifully it would warm your heart. In closing, let me simply repeat that these are wonderful times for credit unions. There are no dark clouds on our horizon. I believe credit unions and NCUA are going to enter the next century and perform into the next millennium, in a way that will make all of us and our descendants very proud to have been associated with the credit union movement. Thank you folks very much.