# Analysing St. Jarlath's Credit Union and St Columba's



## Brendan Burgess (4 Dec 2013)

I did the analysis of Sandymount Credit Union which I thought should return funds to its members. But St Jarlath's Credit Union in Galway is even more astonishing. 



Members' shares| €119m
Members' Reserves|€20m
Total Members' funds|€139m 
|
|
Loans to members|€ 25m
Less bad debt provisions|€4m
Net loans to members|€21m
As a percentage of funds|15%They could return almost all their savings to their members and still fund the loan book. 

*

How protected are they against bad debts? 

*

 Loans to members|€25,465,762
|
|
Provisions for bad debts|€4,660,270 
Members' reserves|€19,888,395
Total |€24,548,665
Percentage of loans|96.4%
In other words, if they recover only 4% of all money due, they would still be solvent. 

This is crazy. People are putting their money on deposit with the credit union for them to go across the road and put it on deposit with banks.

Despite that, they say

"The surplus for the year amounted to  €2.4m . The board are proposing to pay a dividend of 0.5% at a cost of  €580k with the balance going to our reserves in line with our agreed  strategy to strengthen our balance sheet".
The only thing which they could be strengthening their balance sheet against is a collapse in one of the banks where they have investments. They are not listed in the accounts and there does not seem to be any provision against any of these investments.


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## Brendan Burgess (10 Dec 2013)

Here are the figures for St Columba's Credit Union, also in Galway 



Members' shares and deposits| €61m
Members' Reserves|€10m
Total Members' funds|€71m 
|
|
Loans to members|€ 16m
Less bad debt provisions|€3m
Net loans to members|€13m
As a percentage of funds|18%Again, they could return almost all their savings to their members and still fund the loan book. 



 Net loans|€13m
Member's reserves|€10mThey received €1.9m in interest on investments and  bank deposits of €54m which is a "deposit rate" of 3.5% (Seems quite high?) 

They are reducing their dividend to members from 0.75% to 0.5%. 

The got interest of €1.6m on members' loans of €16m, so an average rate of 10%. 

*So what is the story here? 

*They have built up €13m of reserves and provisions over the years. 

They have taken in €61m in shares and deposits from members.

They lend out €16m 

And they go across the road to put €54m on deposit in the banks. 

They earn an income of €3.5m in interest. 
They pay €2m to run the credit union
They make a provision of €0.5m for bad debts 
They add around €0.6m to reserves 
And they pay their members €0.4m in dividends. 

*So they cut a rate of 3.5% to 0.5% !

*Why do their members not just place the money on deposit directly? 

It would be less risky and they would get a higher return. 


*

How protected are they against bad debts? 

*

 Loans to members|€16m
|
|
Provisions for bad debts|€3m
Members' reserves|€10
Total |€13
Percentage of loans|81%
In other words, they could lose up to 80% of all loans and  they would still be solvent.


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## Bronte (11 Dec 2013)

So are you saying the following:

Both those credit unions are very solvent. But they are incorrectly putting members money in bank deposits and getting a very bad return. What should they do instead to generate more of an income for the members. Loan more money?

Or should they put the savings into a slightly more risky investment that would generate a better return. 

What about the management costs. Are they reasonable for the Credit unions, do credit unions still have voluntary members. I wonder, after the debacle with the charitable sector and what has been going on there, is there anything odd about either salaries, top ups, or pension arrangments, do the accounts for CU's show these details.

What's the difference between members shares, deposits and reserves?

Both the above CU's are giving members a .5% return. But they are getting 3.5% from the bank and getting an even higher percentage back from loans. How is that reflected in the table.

Do the CU state which banks they are putting money in.  Surely for a deposit in the many millions you'd be able to negotiate a better interest rate than the norm.  I wonder do they pay much in bank charges.


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## Brendan Burgess (23 Dec 2013)

HI Bronte

Sorry, I missed this post at the time. 



Bronte said:


> So are you saying the following:
> 
> Both those credit unions are very solvent. But they are incorrectly putting members money in bank deposits and getting a very bad return. What should they do instead to generate more of an income for the members. Loan more money?
> 
> Or should they put the savings into a slightly more risky investment that would generate a better return.




I am saying that *members *are incorrectly putting their money on deposit with the credit unions at 0.5% instead of directly with the financial institutions at a higher rate. 

The Credit Unions are doing everything they can to lend more money to credit worthy borrowers. There is little demand for borrowing from the credit unions.  A lot of people who need to borrow have damaged their ICB record. People have held onto and built up their savings over the past few years and so have less need to borrow. 

The Credit Unions should definitely not seek to put the money in investments looking for a better return. They don't have the skills to do that. The last time, they got burned on all the products sold to them by Davys. 




> What about the management costs. Are they reasonable for the Credit unions, do credit unions still have voluntary members. I wonder, after the debacle with the charitable sector and what has been going on there, is there anything odd about either salaries, top ups, or pension arrangments, do the accounts for CU's show these details.


I don't really have a standard to measure the costs by, so I don't know if they are reasonable.  Sandymount CU spent around €700k on loans of €8m, so it cost almost 10% to administer the loans. Of course, they are administering deposits of €17m as well. 

In the accounts I have seen, a figure is given for "salaries and related costs".  I don't think that credit union managers get paid very high salaries, but there are probably some cases where they do. The board is not paid anything, except the treasurer. In 2012, the Treasurer in Sandymount got an honorarium of €10,000 which was cut to €750 in 2013. 






> What's the difference between members shares, deposits and reserves?


Shares and deposits are very similar. They are the money put into the credit union by individual members. As such, the members can withdraw them.  Shares give you membership of the credit union and account for the majority of the money. The interest on the shares is paid as "dividends" at the end of the year.

The reserves are the accumulated profits retained by the Credit Union. So say we set up a new credit union.  We take in €100 in interest. We spend €20 on management costs. That leaves us with €80 at the end of the year. We pay some of that as a dividend on the shares - say€50 which leaves a retained profit of €30. This €30 and the retained profits over future years build up the reserves. 

I spoke to the Chairman of a credit union at a social event. I asked him what the reserves of his credit union were and he gave me a figure which was obviously incorrect. I said, "The reserves?". And he gave a longer answer which showed he had no idea what the word meant.


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## Brendan Burgess (23 Dec 2013)

> Both the above CU's are giving members a .5% return. But they are  getting 3.5% from the bank and getting an even higher percentage back  from loans. How is that reflected in the table.


This is what I am trying to get my head around. They are destroying value. 

Here are the  simplified figures for St Columba's 



 Income|
Interest on €16m loans|€1.6m |10%
Interest on €54m investments|€1.9m|3.5%
Total income|€3.5m
|
|
Management expenses|€2m 
Bad debts written off|€0.5m
|
Surplus before dividend |€1m Proposed dividend 0.5% of €60m = €300,000 

They have reduced a return of 3.5% to 0.5%. (They could have paid 1.5% if they had distributed the whole surplus) 




> Do the CU state which banks they are putting money in.


Sandymount are excellent in this regard.  The other ones I have seen do not give any such information. 

They give a detailed schedule of deposits by institution e.g. AIB, BoI, Irish government bonds, "Davy stockbrokers". So for example, the largest exposure is €3.8m in Irish Life and Permanent (although no such entity existed at the balance sheet date). 

They also give a detailed schedule by maturity date e.g. There is €500k maturing in 2023. 

Finally, they give a breakdown by investment type 


 Irish and EU state bonds|€2.3m
Accounts in authorised credit institutions|€12.4m
Bank bonds| 2.1m


> Surely for a  deposit in the many millions you'd be able to negotiate a  better  interest rate than the norm.  I wonder do they pay much in bank   charges.


Not sure that you can negotiate that much better. But I just don't know.  

St Columbas paid €22k in bank charges


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## RichInSpirit (23 Dec 2013)

Very interesting Brendan. ! It paints a much different picture than that generally portrayed in the media about Credit unions. 

Those figures are nearly TOO safe. Those deposits are nearly liabilities rather than assets. 

If those credit unions paid the 3.5% they would probably double their deposits.


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## Brendan Burgess (23 Dec 2013)

RichInSpirit said:


> Those figures are nearly TOO safe. Those deposits are nearly liabilities rather than assets.



Deposits are actually liabilities for the deposit taker i.e. the credit union. They must repay them.  ( Even Professors of Finance find it difficult to understand this. See Selling Anglo's Deposits) 

Depositors should simply take their money from the credit unions and put them into the bank directly. They would get a higher interest rate. They would each get the benefit of the €100k government guarantee.

From the Credit Union's point of view, they fund their management expenses by borrowing at 0.5% and putting it on deposit at 3.5%. If they didn't have this money, they would not survive. 





> If those credit unions paid the 3.5% they would probably double their deposits.



Yes, but why would they want to double their deposits?


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## RichInSpirit (23 Dec 2013)

Brendan Burgess said:


> Yes, but why would they want to double their deposits?



 Exactly,  that's the point i was trying to make. 

If they offered much more than 0.5% at the moment the deposits would increase and they don't really want that to happen. They have too much money already on deposit. 

Why have people so much money on deposit in these credit unions. ? I guess they feel safer here than in the bank.


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## Brendan Burgess (23 Dec 2013)

RichInSpirit said:


> Why have people so much money on deposit in these credit unions. ? I guess they feel safer here than in the bank.



I think that they feel that they are helping their neighbours and the community  by providing funding for loans.


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## 44brendan (23 Dec 2013)

There was an article about this in the IT so0metime in the last year. It's largely a question of mistrust of the Banks. CU depositors are generally older people who have lost faith in the banking system. The 100K Govm't guarantee means nothing to them either as they also don't trust the Govm't. CU's are seen as being the smaller more trustworthy local financial institution and a return on investment is not important. I note that my elderly parents in law recently moved their savings out of the Bank in into the local CU.


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## Brendan Burgess (23 Dec 2013)

44brendan said:


> I note that my elderly parents in law recently moved their savings out of the Bank in into the local CU.



Did you tell them that the Credit Union simply went across the road and put it back in the back whence it came?


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## SarahMc (24 Dec 2013)

Perhaps the Credit Union model simply isn't suited to areas of affluence.
I would argue they work much better in areas where the Common Bond area is mixed, such as provincial towns or rural areas, where there is a cohort of both savers and borrowers.


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## Centaur (24 Dec 2013)

Each credit union is a seperate republic and do things differently.  The credit union I'm involved with pays a 1.5% dividend but also gives me instant hassle-free access to my money as well as free insurance.  Over 50% of our membership is under 40.

Down the road however Brendan is right in that CU's have little future if the model doesn't change.  They will have to be allowed into the mortgage lending market - they know their communities and should be able to do it well.

Also the market cannot unfortunately sustain 300 CU's re-inventing the wheel (and the related costs) in every village in Ireland.


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## Bronte (3 Jan 2014)

Brendan Burgess said:


> Deposits are actually liabilities for the deposit taker i.e. the credit union. They must repay them. ( Even Professors of Finance find it difficult to understand this. See Selling Anglo's Deposits)
> 
> Yes, but why would they want to double their deposits?


 
That makes sense.  So then it would be better if credit unions didn't take in deposits.  What should they do, loan more money, and make better profits so as to increase the dividend.


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