# Dundrum Credit Union accounts



## Complainer (5 Dec 2010)

Just got my year end accounts and AGM notice for Dundrum CU. A few questions arise (though I'm not suggesting that Dundrum is 'in trouble';

1) On the income and expenditure a/c there is a €1,850k provision for bad/doubtful debts (up from €585k last year). But, within the €2007k management expenses, the explanatory note also includes €910k for 'bad debts' written off.

Does this mean a total of approx €3,000k bad debts on loans of €43,280k? Is this ratio reasonable?

2) Management expense includes a €4k 'retired directors honorarium'. Is this some kind of pension for former directors? Is this typical? 

3) The notes refer to both the ILCU Defined Benefit pension scheme (€47k in 2010) and a new New Ireland defined contribution (€27k in 2010). No information is given as to who is in what scheme. Is this typical?

4) Related Party transactions includes 'CU Cash' of €6472, 'Current' of €1040 and under 'amounts paid to the board of directors' includes 'Entertainment costs' of €1318 and 'Directors Costs' of €4197. Is this typical?

5) AGM expenses are €16,568 - I'm presuming the bulk of this relates to the printing and distribution of the accounts. Is that likely?

Questions and comments welcome


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## Brendan Burgess (9 Dec 2010)

Hi Complainer

I had a look at these accounts and I think it's worth looking at a typical Credit Union's accounts to see how a member might interpret the accounts.

*First look at the Balance sheet
*

  |2010|2009
provision for bad debts|3,843,097|1,964,152
*Second the P & L account



 bad debts written off|910k
bad debts recovered|(102k)
Provision for bad debts|1,850k
*During the year, they actually wrote off €910,000 worth of loans as irrecoverable. That is they reduced them to zero in their accounts. They did not stop chasing them. In previous years, they also wrote off loans. But this year, €102,000 of loans previously written off were recovered. 

The Credit Union can't predict which loans will go bad. But they know that some loans are going to go bad. Under the Central Bank rules, they must make a general provision for loans which are in arrears. This provision amounted to €3.8m at the end of this year. However, at the end of the previous year, they had already made a provision of €1.9m so the increase is what is charged to the P&L account, i.e. €1.8m


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## Brendan Burgess (9 Dec 2010)

Is this reasonable? 

Provision: €3.8m
Total loan book: €43m
Percentage: 9% 

Only time will tell. I would say that a lot of customers are in arrears. But that does not mean that they won't pay off most or all of the loan. 

*Are your savings safe?*


Total assets:| 91 m  | loans to customers and deposits with banks
Total liabilities:|83m| members' shares and deposits
Net assets|8m




So if the CU was wound up today and all they got €39m for the loans, there would be €8m left over. 

Or, put it another way, they could write off another 20% of the loans to members and still be solvent. 

*What are the risks? 
*
I think that the biggest risk facing credit unions today is that their money is on deposit in Irish banks and Irish government bonds. If the state can't meet its guarantee, the credit unions would not be able to repay the deposits to the members.


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## Brendan Burgess (9 Dec 2010)

> The Pension fund is a multi-employer defined benefit plan where costs are calculated on a scheme wide basis and it is therefore not possible to identify each employers share of the assets and liabilities of the plan



I thought I had asked about this on Askaboutmoney before. It's very unusual. There is a defined benefit scheme run by  the ILCU. It is in deficit, I assume.


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## Brendan Burgess (9 Dec 2010)

> 2) Management expense includes a €4k 'retired directors honorarium'.



This was nil in 2009, so I suspect it's some sort of one-off payment. I would tend to focus on the big issues though. The voluntary members, especially the treasurer, do a huge amount of work.


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## Brendan Burgess (9 Dec 2010)

The other interesting thing about how Credit Unions manage their business, is that they don't pay a dividend until the end of the year. So if they have made no profits, they don't pay for the cost of funding. 

It's as if AIB were able to charge interest on loans but didn't have to pay any interest on the deposits. 

Last year, Dundrum CU paid 0.5% which cost them €390k. This year, they are paying nothing. 

Brendan


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## kaplan (14 Dec 2010)

@complainer
Can't access accounts online but look at the cash flow statement for a decline in new lending under member's loans granted. New loans dropped from 30m to 21.7m during 2009 and if this was repeated during 2010 it means the loan book is being hollowed out - a greater percentage is in older non-performing loans. Why does this matter? loan interest income is the primary source of income augmented by investment income. Declining new loans feeds into a drop in overall loans and a reduction in operating margin and income. The decline is amplified by high provisions due to bad loans and rescheduled loans (which must carry a 20% provision for bad debts). 
Also consider the performance of the investment portfolio which took a bit of a hammering in the last few years - look for explanations how the board has been satisfied that insitutional guarantees on investments will be fulfilled. Is it holding bonds that may not be repaid in full? (Wexford credit union has had to write off 2.3m in an anglo bond)

Also look at regulatory reserves which should be 10% of total assets. Last year Dundrum had  €8m in statutory reserves and only 473k in other qualifying reserves = 8.473m V 89.687m total assets = 9.44%.


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## kaplan (15 Dec 2010)

*Dundrum credit union dividend 2010*

Dundrum's performance reflected in its dividend rate can be compared to other credit unions here. The wide divergence of rates is indicative of imprudent risks taken by credit unions many of which did not adequately provide for bad loans, investment risks and reserves during the boom and are now struggling to pay any dividend.


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## Brendan Burgess (15 Dec 2010)

Kaplan

Is there a difference in performance, especially dividend rates, between the CUDA members and the ILCU members?  Are the CUDA members generally more professionally run?  

Brendan


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## kaplan (16 Dec 2010)

Brendan,

Trade body membership doesn't beget better performance. For example Dundrum has been a member of both trade bodies. 

Although CUDA sells itself on a "progessive" tag line, its members are no more professionally run and have the same performance profile as others. 

The difference between credit unions, regardless of trade body membership, is down to competent governance and management, legal compliance and prudent investments. 

I wouldn't read too much into the higher dividend paying credit unions at this time as there is a fair degree of creative accounting going on to manage out loan impairments. For example one of the top ten (a CUDA member) managed to pay a dividend by having its new premises valued at book value in both 2009 and 2010 despite a decline in commercial property values of at least 10% over the intervening 12 months. It's property accounts for 62% of its net worth. 

The key issue is shrinking balance sheets as savings decline and new lending collapses - this feeds through in tighter margins, hollowed out loan books and with a high operating cost model there is little room for improving margins through cost reductions. Holdings of bank bonds and other investments respresent a source of potential losses. Provisions were found to 40% too low by the central bank this year - you should read bad debt provisions on a credit union balance sheet as being largely specific given the methodology used to calculate provisions.  Some have been told to stop lending and many have been directed to apply a maximum loan amount.

As far as regulatory reserves are concerned the 10% target is posing a significant challenge for many and those that are hitting it are barely getting over the line.


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## steph1 (18 Dec 2010)

Brendan Burgess said:


> This was nil in 2009, so I suspect it's some sort of one-off payment. I would tend to focus on the big issues though. The voluntary members, especially the treasurer, do a huge amount of work.



It is usual for a Treasurer of a Credit Union to receive an honorarium payment each year and this is usually voted on and passed by the members of the Credit Union at the Annual General Meeting.  I was involved in the credit union movement many years ago but have never heard of a retired director's honorarium.  Directors come from the membership and are voted into office at the Annual General Meeting which is on a voluntary basis.


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## Complainer (18 Dec 2010)

And what's the story with the 'credit union prayer' at the start of the meeting. Isn't this a bit of an anachronism at best, and a divisive measure that alienates people of other religions and no religion at worst?


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## kaplan (22 Dec 2010)

same reason why credit unions are named after saints. The catholic church or more particularly the local parish was used in the absence of trust. Few would have trusted their neighbour to mind their money unless they felt some entity was ensuring the safety and soundness of proples savings. Over time this of course is longer relevent instead credit unions now build large buildings mirroring 19th century banking's large marble halls to engender trust.


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