Overcoming Own Reservations, CEO Finds Revenue

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KANSAS CITY, Mo. — It is not Floyd Manley's first choice, but courtesy pay is generating $40,000 per month for Kansas City Credit Union.

Manley, president of the $21.5-million KCCU, said prior to 2010 the credit union had not previously offered overdraft privilege to its members. This was in no small part due to the fact, "I didn't like it personally when it first came out," he told Credit Union Journal.

"But with all the changes with the laws we were forced into it. Members had to sign to allow us to charge them for overdrafts, and we figured the only way to get people to get along with it was to offer overdraft protection."

Kansas City CU introduced the program in August, and as soon as it was available "our members jumped on it like crazy," Manley reported.

"I have a lot of low-income people in my membership and a lot of people who don't handle their money well. This works great for them because they can overdraft their account and our fee is only $25. They figure the bill is getting paid. When people get to $500 in overdrafts, including fees, we turn them off."

Of course, there are risks to paying so many overdrafts, Manley continued. He said when the program was launched Kansas City CU had to set up an allowance for losses, which it had to expense. The good news: in the last two months it has not had to add to the allowance. More good news: it is able to get "a lot" back in recoveries, which Manley said offsets charge-offs.

"But we have not had many charge-offs," he asserted. "I personally check these every day to make sure I don't get burned. If members have not brought their account back to positive after 30 days we turn them off, and if they hit 45 days we charge it off. We wait those 15 days because sometimes people come in to pay in full, and by waiting we don't have to pay a fee to the collections company."

Kansas City CU's net income for 2010, excluding NCUA assessments, was $36,406. It paid $0 to the NCUSIF and $47,593 to the corporate stabilization fund, leaving it with a net loss of $11,187. But its net worth ratio remains a robust 14.74%.

According to its most recent 5300 Call Report, total non-interest income for 2010 was $788,304, and of that $806,804 was fee income. It lost $18,500 on investments, meaning all non-interest income was fee income.

"We make about $40,000 per month on overdraft fees," Manley said. "People are getting a little wiser, because when their payroll comes in a lot of their money goes to paying $25 overdraft fees, so it is tapering down a little bit. We have probably put a little hurt on payday loan companies. But I guess those members who are $500 behind might still go to a payday lender."

Other Income Streams

Other sources of fee income for KCCU include ATM fee income and interchange. Manley said its ATMs are excellent fee generators thanks to location. Its main branch is near a large apartment building, which gets a great deal of traffic. Ditto the ATM located inside city hall, because it is the credit union for city employees.

Another machine that gets a lot of use is inside the municipal court building. When people have to pay parking tickets and other fines, "the city does not take checks so they use our machine," Manley said. "The fee is $1.50 for non-members."

As was the case with other CUs interviewed for this Non-Interest Income Special Report, Manley was quick to point out Kansas City Credit Union is not looking to gouge its members with fees.

"We always have had a $1 charge for members if a check does not clear; last year we raised that to $2. Other than that we really have not increased any fees."

Asked if he had any advice for other CUs looking to improve their non-interest income Manley said the most important consideration of a courtesy pay program is to "stay on top of it."

"I have talked with other managers and they let other employees keep an eye on it. I'm a hands-on person. If you stay on top of it you can keep your losses down. If we get mail back for a bad address, we cut off their overdraft privilege immediately."

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