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ARLINGTON, Va. – Edinburgh Teachers CU wants to keep a high capital level to shield its members from eventual taxation. “We have deliberately sought a strong capital position because we consider that inevitably credit unions will be taxed,” explained Jeff Moats, CEO of Edinburgh Teachers Credit Union, a $62 million CU headquartered in Edinburgh, Texas. The CU had a capital of 21.71% as of the first quarter of 2006 according to NCUA and Moats said that the CU had made the decision to try to build up the institution’s capital position to try to insulate the members from the costs that eventual taxation may bring. “It’s a reasonable projection that federal taxation could up our costs by a third,” Moats said, “and we wanted to provide a cushion that would allow us to keep our loan rates and fees lower and our deposit rates higher despite the additional costs. If we succeed, even after taxation, our members won’t feel the taxes for at least five years after the date we start paying.” But doesn’t that mean that the members are feeling the taxman’s pinch in advance, paying higher than needed rates and fees, in order to build up the reserves for something that may not happen? Not at all, Moats replied. The CU has kept very competitive loan rates, fees and deposit rates. Where the CU has made the money has been on keeping itself streamlined and its costs low. “We have one of the lowest numbers of employees for a CU of our size anywhere,” Moats pointed out, noting that the $62 million CU runs on 18 full-time employees and a mix of different part timers. This is an increase from the first quarter of 2006 when the CU reported to NCUA that it had 12 full-time employees and 10 part-timers. Moats also pointed out that the additional capital has given the CU the room it needs to be aggressive about lending in an area which includes some of the most impoverished areas in the country. “Edinburgh is right on the border with Mexico,” Moats explained. “If you go to South Padre Island, that popular Spring-break site, and head due west 75 miles, you hit Edinburgh. We have some of the Colonias areas nearby and if you are going to lend in this area you are going to have to be ready to accept some higher losses than you might in other places,” he said, looking back at his time working for CUs in the Washington metropolitan area where the membership was, on the whole, more financially successful. NCUA’s data bear him out on this point as well. Although the CU had an ROA that is almost double the average of its peers, Edinburgh also has a loan delinquency ratio of almost four times those peers. So, given that the CU has a policy of storing up the capital in advance of possible taxation, how much is enough? Moats believes the CU has reached that level now and said that it didn’t plan to keep building its capital as aggressively, but will aggressively price its loan products in the future.

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