The big credit union crunch
With new services and wider reach, they're drawing fire from the banks
Still, banks--especially small community banks competing head-to-head--have made it a top priority to persuade legislators and regulators to rein in the credit unions. "The credit unions creating competition for me are a lot bigger than I am," says Robert Gorsuch, president and CEO of the $114 million Oak Bank in Fitchburg, Wis.
The trend toward bigness especially concerns bankers. While the number of credit unions has shrunk to about 9,500--down 60 percent from 1970--overall assets and deposits have risen 35-fold. Three quarters of those assets are held by the 1,148 unions with assets over $100 million apiece. Since credit unions don't pay federal income tax, "that certainly gives them a leg up," says Gorsuch.
Credit unions counter that they don't make a profit and thus there is nothing to tax. "A bank's motive is to make a profit that can be sent off to shareholders," says Dan Mica, president of the Credit Union National Association. "A credit union has no shareholders; it's just the credit union and its members." Bankers respond that credit union funds left over after expenses are like profit and provide capital for growth and operations.
A philosophical divide intensifies the quarrel. Banks adhere to the capitalistic idea of satisfying customers and investors. Credit unions, which trace their U.S. birth to 1909 in New Hampshire, promote a cooperative idea of people who are pooling their money to lend to one another. Even a giant like the Navy Federal Credit Union--with $22.1 billion in assets and 2.4 million members--has an all-volunteer board of directors. A point of pride is the range of people served--40 percent of the 1.3 million no-fee checking accounts at Navy Federal end the month with a balance of $100 or less.
The clincher for many clients is dollars and cents, says Greg McBride, an analyst at Bankrate.com. "Credit unions typically pay higher rates on deposits and charge lower rates on loans" (table, Page 56).
Bank shots. Leading the charge for a "level playing field" is a coalition formed this summer by the American Bankers Association, Independent Community Bankers of America, and America's Community Bankers. "Congress never intended for huge credit unions to exist with virtually no restrictions on their membership and an ability to provide virtually all types of service," says Dale Leighty, chairman of First National Bank of Las Animas, Colo., and of the Independent Community Bankers. "They are no longer just meeting unmet needs."
In addition to curtailing the credit unions' tax exemption, bankers hope to block wider authority for business loans and participation in Small Business Administration programs, reverse or slow community charters, and add more regulation. It may be a tough fight. Credit unions, whose overall finances are healthy according to federal overseers, can often muster consumer and political support while portraying bankers as "motivated by greed." In one twist, credit union leaders are telling small bankers that they should be more fearful of megabanks. And credit union economist Bill Hampel argues that new services reflect the new products at all financial outlets. "There weren't credit cards and home equity loans when credit unions started."
Some change, perhaps a limited tax coupled with expanded power to raise capital for growth, may come. But Craig Mellenthien, president of Western Division Credit Union near Buffalo, sees the cooperative fellowship of credit unions as still a strong plus. Says Scholl of CorePlus: "We're just a friendly bunch of people." Maybe so, unless there's a banker in the room.
Earn more, pay less
With no taxes or stockholders to pay, big credit unions can pay higher returns on deposits and charge lower rates on loans.
Interest paid
on deposits Credit Unions Banks
Checking accounts 0.39 pct. 0.14 pct.
Money market accounts 1.02 pct. 0.32 pct.
1-year CD 2.15 pct. 1.48 pct.
5-year CD 4.23 pct. 3.38 pct.
Interest charged
on loans Credit Unions Banks
New-car loan 5.26 pct. 7.23 pct.
Home equity loan 4.38 pct. 4.73 pct.
Variable rate
credit card 10.21 pct. 12.60 pct.
Personal loan 12.39 pct. 14.43 pct.
Note: Averages at 50 large credit unions and 50 large banks.
Source: Bankrate.com
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