Everyone in the financial services sector is decrying about tight interest margins and some are experiencing increasing late payments and defaults, yet many credit unions are still handing out money like candy.
Credit unions have doled out whopping dividends over the last month. The $315 million FAA Credit Union of Oklahoma City paid out $271,152 to over 38,000 members. Financial Plus Credit Union gave its members a 10% bonus dividend, with an average payment per member of $32.20 and the highest single payout tallying over $1,300. And, of course, $1.8 billion DFCU Financial has 'returned' to its credit union roots after attempting a conversion to a mutual savings bank two years ago with a $17 million dividend for last year on top of $17.5 million the year before.
While Credit Union Times loves to hear about and report on all these rebates, I hope the news is making it beyond the trade press as well, to the local, and even national, mainstream media. This is one very tangible way credit unions differentiate themselves from banks, which continue to increase fees and loan rates while lowering interest on deposits.
The funds for dividends come out of excess retained earnings: capital. Capital can be a controversial topic of discussion among credit union execs, volunteers, and regulators. Credit unions must decide how much cushion is enough for a rainy day but not too much to impede the institution's fiduciary duty to serve its member-owners. Some are into riskier business than others, such as business lending, and regulators feel more comfortable with some extra padding. CEOs are pressured by boards or succumb to peer pressure; after all, NCUA provides peer analysis of 5300 reports right on its Web site (www.ncua.gov).
Banks accuse credit unions of sitting on capital while simultaneously arguing against a risk-based capital system that could free up capital for most credit unions, such as that in the Credit Union Regulatory Improvements Act (H.R. 1537).
The goal should be, industry analysts have told me, not maintaining capital based on regulatory standards--though obviously that's important--but achieving an optimal level of capital. Credit unions need to be able to find the best use and retention of capital. Some credit unions sit on 16% or 25% or even nearly 50% capital cushions. The industry average is over 11%. Some may need extra capital for the risk they take on or future plans while some others could make better use of it.
Others intentionally operate just a click or two above the 7% regulatory requirement before prompt corrective action hits in an effort to make use of as much capital as possible.
Industry review of the risk-based capital framework in CURIA, which has been modeled after banks' Basel II requirements, would raise the capital portion of the CAMEL scores of the vast majority of credit unions, maintain a handful, and lower a few. The analysis demonstrates credit unions' conservative nature. But with the changes in the PCA buckets under CURIA, capital would be freed up to do more of what credit unions are chartered to do--serve their fields of membership.
This, and not concerns for safety and soundness, is what I believe frightens the banks into action to stop credit unions from modernizing the capital system under which they operate. If credit unions had more capital to invest in new branches or new technology or community outreach, credit unions would be an even greater competetive force.
Then there's this debate over secondary capital, highlighted in the recent Filene Research Institute report. I must say I'm torn on the issue, but twist my arm and I'd probably come down against it.
Sure, credit unions could do a lot more good work with secondary capital deposits, which is why the option is currently available to low-income designated credit unions to help meet the additional challenges they face. With alternative capital, credit unions could offer more low-income savings incentives, compete with the local check cashers and payday lenders, provide truly small business loans, or launch major marketing and awareness campaigns.
Still investors are funny about their money--they want control over it. I don't believe many are wealthy enough to fork over a ton of money and say 'it's yours, whatever happens to it.' Even those with the funds naturally continue to feel ownership of it in our capitalist American culture. Yes, you can agree to no withdrawals over a certain period and pay higher dividends to these depositors for their risk, but at a cost.
Credit unions are democratic microcosms but I can't imagine someone depositing $1 million in an institution and accepting that he or she has just one vote equal to the typical middle-class financial services user, or none at all if the depositor is not a member. Think of the implications of this in terms of pushing a mutual savings bank conversion--that alternative capital depositor could stand to gain a fortune.
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