Open Letters from NSFCU President Mark Summers

Part II - An Open Letter to Our Members
The Facts about Credit Tightening

As I mentioned in the first Letter to Our Members the current financial problems have continued and in a variety of ways.  While there is much attention paid to these issues by national media, it is very important to understand how this may, or may not, affect us locally.

 The latest issue to gain attention is the problem of “credit tightening”.  At first, this was something noticed only by larger businesses on the East Coast but has now affected most areas of our country in basic ways, like car dealers not having availability to credit for their customers.

 I think it is important to define the term “credit tightening”.  I believe most people assume that means lenders have made their approval criteria stricter, that fewer people qualify for credit.  This may, in fact, be the case with some lenders but a bigger factor is simply having the available funds to lend.  Cash flow, or liquidity as it is referred to in our industry, is very important right now.  The large banks and investment houses need liquid funds to maintain their struggling operations.  Large institutions like that operate on narrow liquidity margins and when that cash flow is interrupted, due to bonds or mortgage loans that cease making their scheduled payments, they need to hold onto any available liquid funds for their daily business obligations.  For the same reasons, these same institutions are borrowing huge amounts of the available credit.  Combine these two factors and the result is predictable: there is substantially less credit available throughout the rest of our economy.

 It’s a much different story at North Shore Federal.  Because most of our assets are loans to our members, and are of the highest credit quality, we have no problems with defaults or interrupted payments.  Additionally, nearly all the funds used to make these loans come right from our members deposits.  This is a stable, predictable source of liquidity that is not influenced by matters on Wall Street to any great extent.  In fact, we have seen an increase in deposits as the stock market has struggled and our members have shifted their investments to the Credit Union.

What does that mean to you?  Your Credit Union has not changed its credit criteria in any way.  Furthermore, we have money to lend and have continued to do so in the same fashion as we always have.  All of the issues getting great attention in the media have not changed our operations in any way.  While this is not always easy to understand, this “self sufficiency” is one of the many strengths of our operations.  It’s a great reward for being a grass roots, hometown organization. 

Part I - An Open Letter to Our Members 
Regarding Recent Financial News

Because of questions and concerns expressed by some of our members, I wanted to address the current financial markets troubles.  Recent events that have occurred are serious and quite complicated.  I am quite certain that we will see more of the same in the next weeks and months.  Let me briefly explain how this has occurred and why it does not have negative ramifications for North Shore Federal Credit Union.  

New financial instruments have been created on Wall Street over the last decade at an astounding rate, as has the complexity of the instruments being traded by many financial services firms.  This is not necessarily bad as these innovations have provided credit in new ways including financing avenues for borrowers that may have poor credit profiles.

At the risk of oversimplifying, this is where a substantial part of the troubles started.  Most mortgages are packaged together with similar mortgages and turned into securities.  The underlying mortgages are the collateral for these securities.  Some of these were a variety called “sub-prime” meaning not of the highest credit quality.  These securities have been hugely popular among large investment banks as the yields were attractive and, due to rising home prices, considered safe.

As the housing market turned down and foreclosures increased dramatically, the value of the securities plummeted and the cash flows from these pools became erratic.  Since many investment banks and large financial services conglomerates either held these mortgages directly or in the form of large pools of securities collateralized by these mortgages, the financial impacts were shocking and devastating. 

The good news for NSFCU members is that your Credit Union does not hold any of these mortgage types or securities.  Thanks to the continued support of our members, all our available deposits are used to fund safe, sound loans such as car loans, high quality home mortgages and small business loans.  Our credit quality is of the highest level as we have virtually no loan losses.  Furthermore, our reserves are at the highest levels in the long history of our credit union and we are enjoying another record year of financial performance.

In summary, these are troubling times for some large investment houses and banks.  Thankfully, there is no impact on NSFCU and it is important for all members to know they can have complete confidence in the safety and soundness of their Credit Union..