Branching Out
US Bankers Struggle To Contain Growth Of Credit Unions |
By BERNARD WYSOCKI JR.
March 7, 2006; Page A1
SALT LAKE CITY -- Harris H. Simmons is the banker credit-union executives love to hate.
As some credit unions have used loosened rules to grow into multibillion-dollar institutions, Mr. Simmons has made it his mission to keep them in check. The chief executive of Zions Bancorp <http://online.wsj.com/quotes/main.html?type=djn&symbol=ZION> , who also leads the American Bankers Association, is stirring up battles in the courts and in Washington over advantages enjoyed by credit unions -- especially their tax-free status.
"My bank paid $263.4 million in state and federal taxes last year," Mr. Simmons says. "Credit unions paid zip."
Such talk appalls Dan Mica, the chief executive of the Credit Union National Association, who says the tax exemption is a "life-and-death issue." Last month, Mr. Mica, a former Florida congressman, warned 4,200 of his members gathered in Washington that "Harris Simmons is crisscrossing the country attacking us everywhere he goes." After years of "hand-to-hand combat" between banks and credit unions, Mr. Mica said, the rivalry "could break out into open nuclear warfare."
Traditionally sleepy local institutions, credit unions have quietly become a major threat to banks, especially in some regions and market niches. They have assets of nearly $700 billion, or about 7% of U.S. bank assets. States have relaxed laws that once limited credit unions to a single community or work group, and some credit-union executives have become eager empire-builders.
Now banks are questioning whether the breaks enjoyed by credit unions have outlived their relevance. Member-owned and not-for-profit, credit unions have traditionally provided financial services to people of "modest means." That is why Congress granted them a tax exemption during the Great Depression. The exemption has allowed credit unions, which pay neither federal nor local taxes, to offer their 87 million members low-cost loans and other financial services, often at better prices than banks.
Credit unions have muscled aside banks by offering auto loans at 5% interest, low-interest credit cards and home-equity loans at the same rates banks give to their best business customers. Nationally, real-estate loans by credit unions -- the bread and butter of many banks -- jumped to $191 billion in 2004 from about $80 billion in 1999. Business loans outstanding also zoomed during that period, raising debate about how much credit unions should be allowed to expand beyond their consumer base.
Credit-union members are supposed to have a "common bond" such as a church, employer or geographic community, but laws governing that definition have loosened. And the requirement to serve the poor doesn't bar credit unions from having rich customers, too. Banks say many credit unions are essentially banks in disguise and ought to be treated that way -- or forced back into a narrower role.
Credit unions say growth improves their financial stability and helps them serve their members better -- which is the sole purpose of credit unions, since they don't have shareholders. They also defend lending to wealthier customers. At America First Credit Union in Ogden, Utah, Chief Executive Rick Craig says some members start small but need bigger loans as they look to expand a business or buy a larger house. He says it wouldn't be fair to stop his credit union from serving these members.
In Pennsylvania, the American Bankers Association has sued the federal credit-union regulator, aiming to block the expansion of three credit unions. Skirmishes over taxing credit unions are under way in several states including California.
The most contentious battleground is Utah, where a recent court ruling and a federal decision have made it tough for some credit unions to expand.
Easing the Limits
Credit unions in Utah were once limited to single counties or employers. In 1983, a Utah regulator ruled that "county" could be interpreted as "counties." Meanwhile, some became "multiple common bond" credit unions, pulling together dozens of employers and their families into huge organizations.
America First Credit Union began in 1939 as a cooperative serving 59 people at Fort Douglas in Salt Lake City. It used the looser rules to expand and now has 347,000 members and assets of $3.2 billion. That makes it the third-largest financial institution founded in Utah, behind Zions and First Security Bank, now part of Wells Fargo & Co <http://online.wsj.com/quotes/main.html?type=djn&symbol=WFC> .
In West Jordan, a suburb of Salt Lake City, Mountain America Credit Union boasts a 100,000-square-foot glass headquarters and $1.6 billion in assets. Its membership consists of hundreds of employer groups. Mountain America is a major sponsor at Utah Jazz basketball games, donating $50 to charity whenever there's a successful three-point shot.
Credit unions serve as a vital "throttle" on usurious bank pricing and benefit consumers, says Scott Simpson, president of the Utah League of Credit Unions. "Would banks be offering totally free checking or 9% Visa cards without credit-union competition? Absolutely not."
At a credit-union industry meeting in February 2005, Mr. Mica, the head of the industry association, recited statistics on the profit levels of the U.S. banking industry. That prompted some of the credit-union executives in the audience to start chanting, "Greed. Greed. Greed."
Local bankers believe the credit unions are using their tax exemption to steal away business. James Anderson, president of Ogden-based Bank of Utah, says much of his consumer-loan business has already been lost to credit unions. These days, the battle is over business lending, which banks have long dominated.
On a recent afternoon, Mr. Anderson was weighing how hard to fight for a $4.6 million loan to a developer of an apartment complex. Normally, he would charge 1.5 percentage points above the prime rate plus a 1.5% fee. But he said he needed to cut both the rate and the fee or he would lose to a credit union.
The Torchbearer
As bankers started to protest the rise of credit unions, Mr. Simmons took up their cause. His father, Roy, co-founded the Bank of Utah in Ogden decades earlier. In 1960, the senior Mr. Simmons was part of the group that bought the Zions Bank from the Mormon Church, formally the Church of Jesus Christ of Latter-day Saints. Zions's headquarters is still right across the street from the main Mormon Temple here.
A graduate of the University of Utah and Harvard Business School, Mr. Simmons, 51 years old, worked at a big Houston bank before returning home, joining Zions as chief financial officer. He took over as chief executive from his father in 1990 and still holds the post.
Mr. Simmons, who enjoys playing the marimba, has long had a penchant for doing rigorous, and sometimes offbeat, financial analyses to prove the encroachment of credit unions on Utah's banking industry.
Leaning forward at his desk, he revealed his latest nugget: that 40% of the checks being written by consumers at Utah grocery stores are checks drawn on credit unions. He said the national figure is more like 12%.
If credit unions have cramped Zions's style, it's hard to see on the bottom line. The bank earned $480.1 million in 2005, up 18% from a year earlier. Its stock has risen 38% in two years.
Mr. Simmons says it's the principle of everybody paying their fair share that drives him. He says that for years he tried to get the American Bankers Association to focus on the subject. "I'd bring it up at meetings and they would all look askance." In the last few years the issue has caught fire among bankers. Last fall Mr. Simmons became ABA chairman.
In 1998, his bank hired Sullivan & Cromwell, the prominent New York law firm, and fought for language in a bill before Congress creating an avenue for credit unions to convert to banks. He succeeded. Little noticed at the time, today it has become a hot trend among credit unions. About 30 have converted, including two large ones in Texas last year. In December, Michigan's biggest credit union, Dearborn Federal Credit Union, announced that it had applied to switch to a bank charter.
Although established banks pushed to allow these conversions, the trend could backfire on them because credit unions gain advantages when they convert. They have looser capital requirements, are less restricted in business lending and can attract executives by offering them stock. Nonetheless, the newly minted banks must pay taxes -- and Mr. Simmons says he's happy to deal with the competition so long as the playing field is level. Because banks often pay 40% of their income in taxes, the credit-union exemption amounts to a "huge subsidy," he says.
In Utah, bankers successfully pushed in 2003 to tax the largest credit unions chartered and regulated by the state. Amid a fierce lobbying battle, the credit unions had "perceived grass-roots power," says Howard Headlee, president of the Utah Bankers Association, but "turned out to be paper tigers."
The credit-union industry, though, had an ace up its sleeve. More than a dozen Utah credit unions, and all of the biggest ones that would have been subject to the new tax, switched to federal charters. That put them under the jurisdiction of the federal regulator, the National Credit Union Administration. Under federal law, federally chartered credit unions don't pay taxes.
The Utah unions found their new regulator to be a friendly one. Some were operating under federal "community" charters which, according to one interpretation, limited their operations to a single county. A Utah credit union asked the federal regulator in 2004 for approval to expand in six counties stretching across most of the state. It said people in these counties comprised a single community, in part because they have large numbers of Mormons. The federal regulator agreed to the expansion. Two large credit unions then filed identical requests.
The American Bankers Association sued the regulator in federal court in Salt Lake City. In December 2004, U.S. District Court Judge Dale Kimball said the credit unions hadn't made their case and sent it back to the regulator for review. He said the regulator "cannot act as a rubber stamp or cheerleader for any application brought before it."
Shortly after, America First filed a new petition asking to expand in the same six counties because they were "underserved." The National Credit Union Administration granted the application, and the bankers association sued again in November 2005. In January, the federal regulator asked the court for an extension in replying to the suit, and it declared a moratorium on such applications including the one already granted.
The result: America First and the other credit unions, while they can keep all their current operations, are allowed to expand aggressively in only one county.
One pugnacious move by the credit-union industry came last year when Mr. Simmons's bank applied to acquire a Texas bank for $1.7 billion. Mr. Mica's group unsuccessfully tried to block the deal at the Federal Reserve Board, filing the first formal complaint in the association's 71-year history on the grounds that the deal didn't serve the communities' interests. "I was flattered," Mr. Simmons says. "And I was amused."
The biggest battles are starting to unfold in Washington, where the American Bankers Association and the National Credit Union Association are major donors to politicians. On Capitol Hill, credit unions have pushed bills that would raise the limit on business loans to 20% of their portfolio from 12.25%. Bankers have been touting a 2003 study by the Government Accountability Office showing that credit unions devote less of their activities to serving low-income groups than banks do.
At a House Ways and Means Committee hearing last November, Chairman William Thomas, a Republican from California, questioned whether credit unions are fulfilling their historic mission and urged regulators to document how well credit unions are serving people of "modest means."
Mr. Mica says credit unions lend more to those of modest means than the figures suggest but acknowledges further efforts are needed. "We're doing a phenomenal job," he says. "We could do a better job." |
| ID: |
37119 |
| Author(s): |
NCRC |
| Publication date: |
07/03/06 |
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Created: 29/03/06. Last changed: 03/04/06.
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