Credit Union Journal encourages reader feedback. Letters to the Editor can be sent to Managing Editor Lisa Freeman at lfreeman<at>cujournal.com, or online at www.cujournal.com.
What Is Excess Capital Really?
I am responding to the comments on excess capital that appeared on page 10 of the Jan. 7 issue.
What is excess capital? If the earnings on capital are being used to bolster dividends on share accounts or to maintain lower rates on loans, what is the problem?
We have a 17% capital to asset ratio. In spite of this supposedly “high” ratio, we have returned over twice as much of our gross income in dividends to our members over the past five years than other federal credit unions. Our earnings on capital can also be used to offset losses on our loans that have risen rapidly these past five years due to economic conditions in our area. It’s great to have a strong capital base in these troubling times.
We are going to pay a 4.00% Annual Dividend Rate on our regular share accounts for the first quarter of 2008. Currently, the average regular savings rate in our state is .70% for credit unions and .96% for banks. Our return on capital assists us in paying this higher rate while maintaining profitability.
In 2007, we had only a 3.65% APR return on our equity, and a .61% return on average assets. Now that we have our equity accounts built up, we can operate on these lower returns.
We are not sitting on excess capital. We are using the earnings on capital to enable us to annually return more to our members.
Jeff Rush, CEO
Firestone FCU, Akron, Ohio
An Alternative To Going To Court
I do not have a problem with CUs paying “Unrelated Business Income Tax” so long as we are able to offset that income liability with “Unrelated Business Expense Deductions” (CUJ Jan.21).
Taking the narrow view that any CU activity not dedicated solely to “lending and collecting deposits” qualifies as “unrelated business,” a principal deduction would be member financial education. And applying any and all expenses incurred by CUs dedicated to this task would more than offset any income tax liabilities taken with such a narrow view by the IRS–for most of us, anyway. Perhaps we could even begin accumulating “tax liability credits” for member financial education, requiring the federal government to make “investment deposits” with CU’s equal to these credits. Such investments would be akin to the current whisperings of the federal government buy stock in banks to help them with their liquidity woes, only for a good cause instead of worn out need to bailout banks for their narrow-minded, business-related sins of greed.
Michael Dillon, director of marketing
South Division CU, Evergreen Park, IL (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com