At first, after Franklin Roosevelt signed the Federal Credit Union Act of 1934 in a post-Depression plan to extend credit and other financial services to people of limited means, community banks and credit unions played nice in the sandbox.
About 25 years ago, however, when credit union member numbers escalated into the tens of thousands and their assets grew closer to $1 billion, community banks took offense.
In a fight for market share that’s most fiery in Washington, banks complain that large, multi-purpose credit unions don’t pay taxes, don’t suffer under the same regulations and that credit unions leverage this “tax-exempt” status to compete with taxpaying community banks.
Duking it Out
Community bank presidents get just as hot under the collar about credit union taxation, regulation and membership.
“There’s no question” that local community banks compete head-to-head with credit unions, said Randy Allison, president of Home National Bank, 6705 E. 81st St., Ste. 190. “Anymore, all banks are in direct competition with credit unions.”
Home National Bank competes with credit unions for deposits and loans, Allison said. He was once working with a “substantial customer” of several years on a loan, and a group of California credit unions entered into Oklahoma via a broker and offered the customer a 10-year fixed-rate loan at a rate that was, “frankly, below my cost of funds,” he said.
Keeping Everyone Honest
Competition is healthy, said Les Rector, president of Tulsa Teachers Credit Union, headquartered at 3720 E. 31st St. Credit unions have every right to leverage their ownership structures to compete against banks in the market place, he said.
“The biggest different between a community bank and a credit union is the form of ownership,” he said. “Because credit unions are a financial cooperative, we’re owned by our membership. We don’t have somebody who owns us and are expecting to get profits off the business.”
As for whether or not credit unions compete with local community banks, “I think we do for the consumer loans and consumer business. But, I think that competition is good. It gives the consumer a choice, and it keeps both forms of ownership honest and competitive.”
The playing field is fairly level, Rector said.
“They have some advantages in that they can invest in some things that we can’t. We’re not allowed to invest in anything that isn’t federally insured, so we can’t invest in stocks or things that could pose a higher risk to our members’ money. In a way, this prevents us from making the same kind of returns.”
With Tulsa-area credit union assets in the neighborhood of $2.02 billion, credit unions say they pose little threat to the continued profitability of the local banking industry.
Tax or the Ax
A main argument from the community bankers’ camp is that credit unions don’t pay taxes comparable to those required of banks and that this gives credit unions an unfair advantage, especially when they “act like banks” and are aggressive in expanding their fields of membership.
Rector contends that though his state-chartered credit union doesn’t pay federal income taxes, it pays an in-lieu tax to the state, “and that tax is structured exactly the same as state income tax,” he said.
I suspect this credit union pays as much or more tax, because of our size, than a lot of the smaller community banks.”
“A lot of those community banks are S corporations. The tax issue goes away to the greatest extent. I don’t think that changes their viewpoint, because I think they’re convinced that there’s an unfair advantage,” said Phil Hart, president of Tulsa Federal Employees Credit Union, 9323 E. 21st St.
Both TTCU and TFECU are state-chartered credit unions, which are regulated by the Oklahoma State Banking Department.
Now It’s Personal
Credit unions were created to service citizens with a “common bond,” which until the Credit Union Membership Act of 1998 meant a set of people narrowly defined by, say, a common employer or industry.
“Today, the concept of common bond no longer exists,” Allison said. “If you can fog a mirror, you can be a member of a credit union.”
Credit unions claim 87 million members nationwide – 21 million of those members belong to 100 unions with assets of over $1 billion, according to Credit Union National Association.
Community banks are independent, locally owned and operated institutions with assets ranging from less than $10 million to multi-billion dollar institutions. About 44 percent of banks in the U.S. have assets under $100 million, according to the Independent Community Bankers’ Association.
Allison complained that not only has membership at credit unions grown, but, contrary to their obligation to the underserved, credit unions are going after high net-worth individuals.
“So, why are my tax dollars going to support them? If they’re serving the low-to-moderate income people, we as banks don’t have any problem with them.”
Not all credit unions are after community charters, which allows them to serve anyone who lives, works, worships, or attends school within a geographical field of membership. That doesn’t mean that they can’t have thousands of members, though.
“We’re not a community-charter credit union – we’re a select employee group. We’re more traditional, in many ways, in our field of membership,” Rector said.
TTCU, the largest state-chartered credit union in Oklahoma, draws its membership of 75,442 from 14 counties.
Rector doesn’t see a problem with community charters, though.
“That philosophy goes back to that everybody should have a choice of which type of financial institution they want to do business with,” he said.
When TFECU was first chartered, it served the Corps of Engineers. It later expanded its field of membership to serve other government agencies and, when it became legal to do so, to anyone who lives in the seven-county MSA.
“It really helped us, because before, when we went to advertise, it was very difficult to advertise to a very specific segment of people,” Hart said. ?