Note: The story below is an excerpt from our March/April 2015 issue. For the full story download our FREE iOS app or view our digital edition for FREE today!
Dan Smith
Paul Phillips’ dad was a traditional banker and the younger Phillips began his career as a chip off the old block. Turmoil in the banking business soon cost Phillips his job and he went hunting. He wound up with the hated competition: a credit union. Now, he is president and CEO of First Federal Credit Union and he says, “I’m doing what I love.”
What he loves is quite different from traditional banking in several respects. First, credit unions were set up initially to serve individual companies and small geographic areas. They weren’t – and still aren’t – taxed, a sore spot for their bigger competitors.
The Roanoke Valley has nine federal credit unions, according to the website creditunionaccess.com and there are 7,000 credit unions in the U.S. (down dramatically from 25,000 at one time). Current membership is 97 million people and institutions. Total deposits are a bit over a trillion dollars, about as much as one of the top four banks in the U.S.
In 2012, credit unions held about 1.7 percent of household financial assets, a market share that has not changed significantly in more than 25 years. According to a 2013 study (Federal Reserve Bank of St. Louis) credit union membership represented “more than half of American families, and provided 16.7 percent of outstanding consumer credit.” The 1998 Credit Union Membership Access Act (CUMAA) relaxed membership regulations for credit unions creating groups with broader memberships.
There’s a limit on the amount of commercial business a CU can have and most of its depositors are medium- to low-income people. The federal mandate says CUs should “encourage thrift, loan for productive purposes” and especially to “serve people of modest means.”
“We need a diverse group of business,” says Phillips. “There should be balance across business lines. We don’t want to be pigeonholed too much.”
In the next 10 years, Phillips says, “We’ll face the same challenges: complexity, consumer preference and compliance,” which, he says, “will drive up consolidation.” In the past 30 years, “our share of the financial industry hasn’t moved from six percent.”
Phillips says about 65 percent of FF’s members are low to moderate income and 80 percent are “below the average median income for the market.” Phillips says FF has concentrated in affordable housing, transportation, Solarize Roanoke (solar heating/cooling program) and financing the truck driving program at Virginia Western Community College, among other things. “These are programs we fully embrace.”
The business loan emphasis can be “a slippery slope,” says Phillips. “We need a diverse business group … and we need to develop balance across business lines.” That kind of loan is federally regulated closely by credit unions’ limited geography and membership requirements.
Frank Carter of MemberOne FCU says, “Recent changes with mergers and buyouts of other institutions only strengthens [our] commitment. Our business principles won’t change because they were predicated upon helping people since the inception of Member One in 1940. With the current landscape, we will just add scale and adapt to help more people who may find themselves without a financial home. It is important we stay true to our core values and beliefs to remain stable for the areas – and people – we serve. Continuing to add convenient banking options and investing in the community will be our primary objectives.”
Credit unions were formed as cooperatives, operated by members and not stockholders. They offer free or low-fee basic accounts and basic banking (depositing paychecks, paying bills and making debit card purchases).
Carter insists the tax-free status makes sense.
“Credit unions maintain that status because we are not-for-profit … We reinvest our profits back to the members, our products and services, and the community. When we give back, we are not able to use those donations as tax incentives that a for-profit corporation uses to its advantage. We also do not give back out of mandates or government programs, but out of our mission as a financial cooperative. Our business principles couldn’t be more different.”
Tax free status creates an imbalance in the competition, says HomeTown Bank CEO Susan Still. “It’s not a level playing field. If credit unions had to plow back 30 percent of their income” to the government, as do banks, the competition would be more fair.
“They are trying to morph into banks,” says Ellis Gutshall of BNC (until recently Valley Bank).
“We pay 30 percent in taxes and if we could remove that requirement … We’re competing with banks that get a [30 percent] advance.”
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