NM Business Weekly story about CUs vs. banks
The battle between banks and credit unions and recent NCUA restrictions on field of membership expansions were the focus of an article in the July 14-20 New Mexico Business Journal. The article, “Bank vs. credit union war on low simmer in New Mexico,” quoted Sandia Laboratory Federal Credit Union CEO Christopher Jillson, Four Corners Federal Credit Union President Phyllis Crawford and Chino Federal Credit Union CEO Ken Walters.
Bank vs. credit union war on low simmer in New Mexico
New Mexico Business Weekly - July 14, 2006
by Jo Taylor
NMBW Staff
The New Mexico financial community has not been wracked by the bank versus credit union wars that have played out in many state legislatures over the past several years, but the enmity between the for-profit and not-for-profit financial institutions runs just below the surface and just as deep.
This is particularly true in urban areas and densely populated suburbs where the institutions often compete toe-to-toe for the same retail customers.
“Generally speaking, New Mexico bankers are similar to those in other places; they would like to see competition on a level playing field,” says John Anderson, executive vice president of the New Mexico Bankers Association.
“The big issue from our standpoint is that credit unions are not taxed, and this gives them a big competitive advantage,” says Pat Dee, president and chief operating officer of First Community Bank.
To bankers, the “level playing field” means taxing credit unions, at least the institutions that, as nonprofit cooperatives, escape the high tax rates paid by commercial banks. The credit union tax advantage generally allows them to pay higher rates on savings and charge lower rates on loans than community banks say they can offer if they want to remain in business.
Policies of the credit union regulator, the National Credit Union Administration, that have allowed the institutions to expand their fields of membership wholesale into so-called underserved areas, and an industry push toward more business lending have further exacerbated the ill will.
The fact that there are so few mega credit unions in this largely rural and—by national standards—poor state has much to do with the comparatively low level of noise about the conflict outside Albuquerque, where the state’s five largest financial cooperatives are headquartered.
The $982.9 million-asset Sandia Laboratory Federal Credit Union is the state’s largest such institution, offering a long list of sophisticated financial products to its mostly highly educated and well-off membership of lab scientists and their family members. Its charter limits it to this discrete field of membership and its growth has been entirely the result of the growth of the installation’s scientific community.
“All we’ve done is grow with our membership,” says President and CEO Christopher Jillson, a former banker.
He says the banking industry’s claim that credit unions should be taxed once they reach a given size misses the point.
“Credit unions are owned by their members, they have a voluntary board of directors, and all profit is paid back to members in dividends or invested for growth of services. That’s the argument for the tax exemption.”
Jillson says banks face their toughest competition from other banks, a sentiment borne out by numerous industry surveys.
As for allegations of an uneven playing field, “there’s nothing unfair about it,” he says. “When you look at the numbers and the asset sizes of the banking industry versus the credit union industry, the [latter] is very small. If I were a local bank, I would be more concerned about Wal-Mart getting a charter. Wells Fargo and Bank of America—now there’s the threat.”
Community banks, with fewer ways to limit their tax liability than big banks, can escape taxation altogether at the corporate level by trading in their C corporation status for subchapter S status, and this is as popular with bankers in New Mexico as elsewhere. The banks give up their shareholders, but gain a pass-through of profits to the institution’s owners who add it to their individual tax liability.
And while a number of credit unions have recently switched their charters to become mutual savings banks, “I haven’t seen a bank yet convert to a credit union,” says Jillson. “It can’t be that great.”
But these are big city concerns, and this is not where most of the sparsely populated state’s financial institutions operate. Many of the small credit unions that serve these areas are community development institutions serving a membership that genuinely needs the kind of services that only a financial cooperative can provide.
“It’s often overlooked that there are a large number of small credit unions that do admirable jobs of serving people who truly need their services,” says Dee.
Eighty percent of Four Corners Federal Credit Union’s membership is Navajo and NCUA views the institution as one of the most financially sound of all those that serve American Indians, despite the fact that it is not growing.
“We have good members and we do right by them,” says Phyllis Crawford, president of the credit union.
This means tailoring products to meet the particular needs of people whose traditions discourage savings in the belief that putting away money for a rainy day can bring on a thunderstorm, Crawford adds.
Four Corners lends up to $2,500 to cover funeral expenses and up to $1,500 for auto repair, but will make a loan as small as $100 to cover the emergency that could otherwise send members through the doors of a payday lending operation.
These are not the kinds of loans a for-profit institution could afford to make.
Tiny $24.3 million asset Chino Federal Credit Union, whose community charter allows anyone who lives, works or goes to school in Grant and Luna counties to become a member, is not in the taxation cross hairs either.
“We have pretty good relations with the banks here; we understand what our niche is,” says President and CEO Ken Walters. “We tend to serve different types of members. The banks are after the higher dollar accounts.”
The credit union concentrates on personal and automobile loans—“and we are very good at it,” says Walters—but stays out of real estate and commercial lending. It has only recently added a home equity line of credit to its offerings.
Chino’s assets have grown by about a third since Walters became president in 2001 and has plans to expand its field of membership into neighboring Hildago County, a jurisdiction that has just one bank.
“You have to grow or pretty soon you become stagnant and your budget becomes stagnant,” Walters says. “You have to get bigger if you want to bring additional services to your members,” such as ATMs and online banking.
This and the growth of Sandia Laboratories FCU are far from the kind of credit union expansionism that brought on a lawsuit by the American Bankers Association and a group of Utah banks against NCUA. In that suit, the ABA, the Utah Bankers Association and five Utah banks argued that NCUA violated the Federal Credit Union Act when it allowed America First Federal Credit Union to expand to every major metropolitan area in Utah. In response to that suit, filed last November, the NCUA put in place severe restrictions on field of membership expansions.
But they might not have been needed in New Mexico, where credit unions seem happy to stick to their traditional sources of membership and business niches.
“Credit unions in New Mexico are just not making these wild changes in their fields of membership,” says Crawford.
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