Is My Money Used Responsibly?

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Nik, a new Piedmont CU member, asked a great question on the piedmontcu.org contact page.

"I'd like to know a little bit about how PCU invests its members' money. How much of it goes to low-interest rate loans to families in the region? Is the credit union purposeful about its outreach to less well-off parts of town or does it try to make its members the most money possible by giving high-rate loans? I'm not sure what other specific questions to ask, but if someone could address the general question of 'Is my money used responsibly?', it'd be great. Thanks so much for taking time to do this."

Dear Nik,

I wish every member asked these kinds of questions!  I can think of no better way to start my day than to answer them!

I'm sure you know that credit unions are not-for-profit organizations. Any profit gets put back into the organization to benefit our members. So here's where the money, aka. profit, goes. First it pays expenses like employee salaries, utilities, computer systems, etc. Then it pays dividends to members. Some of it goes to an account to offset future loan losses. Finally, some money is put into an account called Undivided Earnings which serves as a sort of rainy day fund for the credit union. This is the members' equity in their credit union, their legacy so to speak. You can get an idea of how well a credit union is doing by how much money it has saved here.

Where do credit union profits come from? Some money comes from investments.  Credit unions like Piedmont CU are not allowed to invest money in anything deemed risky.  We basically have two choices; Vanilla or Vanilla Bean.  The only things we can put money in are other federally insured credit union and bank certificates, and bonds.  The only risk a credit unions is allowed to take with money is in lending to its members.  Last year, 2009, 82% of our gross income came from interest on loans.  Loan interest rates can vary greatly.  The rate is determined by the level of perceived risk at the time of the loan.  By risk I mean the liklihood that the loan will become past due in the foreseeable future.  Lower risk loans will carry a lower interest rate while higher risk loans will have a higher rate.  The most fair tool we have for measuring this risk is a credit report.  The primary reason for this connection between risk and loan rates is to offset potential losses (unpaid loans).

I guess I've only halfway addressed your question so far. Do we reach out to less well-off parts of town? Our CU has only recently opened it's doors to serve the entire community, as of January 2009. Prior to that we were only available to school employees and employees of several businesses around Danville. We really have not been purposeful about reaching out to any particular part of town yet, low income or well to do.  We've always tried to build relationships with the schools and companies we've served for the last 40 years.  For now that is still the plan.  We've gained quite a few new members over the last year simply through word of mouth that local residents can now join.

How much goes to low interest rate loans to families in the region? That's another good question, the answer to which is difficult to pin down.  We don't track whether loans go to a family or individual or really what the average income level is. Each loan application we review is a unique decision. Given that 82% of our income is from loans, our ability to make a good loan is one of the most important challenges we face.  We cannot afford to make too make too many bad loans but at the same time we must be willing to take manageble risks.  It can be a very difficult decision at times!  I believe our loan officers make a genuine effort to work something out on every loan application, even the tough ones.

Sorry to write you a book! I hope all this answers your questions. Message me back if you have any others. Again, I can't tell you how glad it makes me that there's a new member asking this. This reminds me of a blog I read recently. The writer stated that the greatest threat to credit unions is apathy. I agree with that completely. He applied it to the ability to bring in new accounts from other institutions but I believe it applies on a deeper level as well. It's when members cease to be involved and active in the operation of their credit union that it starts its demise. I hope you will always be willing to share your thoughts with us.

-Dan Veasey
Piedmont Credit Union