Comments on: Credit Unions Spending to Save http://esacompany.com/catalyst/2009/12/spending-to-save-how-credit-unions-can-use-media-to-avoid-a-ncua-fine/ Your best read for local broadcast television and internet sales, retail intelligence, and media insight Tue, 25 Oct 2011 20:08:15 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: Jodi de Riszner http://esacompany.com/catalyst/2009/12/spending-to-save-how-credit-unions-can-use-media-to-avoid-a-ncua-fine/comment-page-1/#comment-2170 Jodi de Riszner Tue, 26 Jan 2010 20:36:43 +0000 http://esacompany.com/catalyst/?p=470#comment-2170 Thanks for your comments, Jeffry. You're absolutely right in pointing out that I was using the word assets in lieu of deposits when that is not accurate. I will modify the blog to reflect your comments and appreciate you keeping me on target here. So if a credit union wants to undertake a branch remodel or addition, they must ensure they can maintain their 7% capitalization rate despite having to use some of their capital reserves to pay for the project. Thus, they may still need to use media to do a CD push to drive deposits into the credit union so they can rebuild their capital reserves with fee income from turning around and loaning out those new deposits. Thanks again. - Jodi Thanks for your comments, Jeffry. You’re absolutely right in pointing out that I was using the word assets in lieu of deposits when that is not accurate. I will modify the blog to reflect your comments and appreciate you keeping me on target here. So if a credit union wants to undertake a branch remodel or addition, they must ensure they can maintain their 7% capitalization rate despite having to use some of their capital reserves to pay for the project. Thus, they may still need to use media to do a CD push to drive deposits into the credit union so they can rebuild their capital reserves with fee income from turning around and loaning out those new deposits. Thanks again. – Jodi

]]> By: Jeffry Pilcher http://esacompany.com/catalyst/2009/12/spending-to-save-how-credit-unions-can-use-media-to-avoid-a-ncua-fine/comment-page-1/#comment-1863 Jeffry Pilcher Sun, 24 Jan 2010 17:00:04 +0000 http://esacompany.com/catalyst/?p=470#comment-1863 There's a big difference between "deposits" and "capital." "Deposits" are members' money. Whether those deposits are made in checking accounts, savings accounts or CD, that money belongs to the member, not the credit union. On the credit union's balance sheet, deposits show up as "liabilities" (not as "assets," as your article suggests). Members are essentially lending their money to the credit union, but they expect it back. Financial institutions don't make money off deposits unless they (1) charge fees, like Overdraft fees or Early Withdrawal Penalties, or (2) lend that money out to someone else. "Capital" is the credit union's money. Capital is the profits the credit union has made from fees and lending activities. If the credit union wants to do something, like build a branch, they have to use their capital. They can't use members' deposits to build their branch. The NCUA requires credit unions to maintain a 7% "capital ratio." These are the credit union's "capital reserves." Example: If a credit union has $100 million in deposits, the NCUA requires the credit union have at least 7% of that in its OWN bank account. That means the credit union must have $7 million in its own profits in its own bank account. If a new member walked in the door and made a $10 million deposit, it's not like the credit union can just plop that money into its own bank account... "Voila! We now have $17 million of our OWN money in capital reserves!" It doesn't work like that. The member's $10 million deposit represents an IOU from the credit union to the member. It's the member's money, s/he is just letting the credit union use that money temporarily. But now the credit union has $110 million in deposits, so the NCUA expects them to have $7.7 million in capital reserves. The only way to do that is to make a profit on by (1) charging fees, or (2) making loans. Bottom Line: New members making lots of deposits with a credit union does not have any automatic positive effect on the health or stability of that credit union. If a credit union is unprofitable and has a crappy cap ratio, a flood of new money will not save it. It will simply continue to lose even more money faster. There’s a big difference between “deposits” and “capital.”

“Deposits” are members’ money. Whether those deposits are made in checking accounts, savings accounts or CD, that money belongs to the member, not the credit union. On the credit union’s balance sheet, deposits show up as “liabilities” (not as “assets,” as your article suggests). Members are essentially lending their money to the credit union, but they expect it back.

Financial institutions don’t make money off deposits unless they (1) charge fees, like Overdraft fees or Early Withdrawal Penalties, or (2) lend that money out to someone else.

“Capital” is the credit union’s money. Capital is the profits the credit union has made from fees and lending activities. If the credit union wants to do something, like build a branch, they have to use their capital. They can’t use members’ deposits to build their branch. The NCUA requires credit unions to maintain a 7% “capital ratio.” These are the credit union’s “capital reserves.”

Example: If a credit union has $100 million in deposits, the NCUA requires the credit union have at least 7% of that in its OWN bank account. That means the credit union must have $7 million in its own profits in its own bank account. If a new member walked in the door and made a $10 million deposit, it’s not like the credit union can just plop that money into its own bank account… “Voila! We now have $17 million of our OWN money in capital reserves!” It doesn’t work like that. The member’s $10 million deposit represents an IOU from the credit union to the member. It’s the member’s money, s/he is just letting the credit union use that money temporarily.

But now the credit union has $110 million in deposits, so the NCUA expects them to have $7.7 million in capital reserves. The only way to do that is to make a profit on by (1) charging fees, or (2) making loans.

Bottom Line: New members making lots of deposits with a credit union does not have any automatic positive effect on the health or stability of that credit union. If a credit union is unprofitable and has a crappy cap ratio, a flood of new money will not save it. It will simply continue to lose even more money faster.

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