Branching out | Maine credit unions combine services for members, and banks cry foul

Three hundred and fifty credit union executives received the heads-up in New Orleans last month. Growth in their industry slowed significantly during 2004, according to Debbie Matz, board member of the National Credit Union Administration. Her advice: Develop lending strategies to attract new membership, and aim specifically for opportunities among the growing Latino, Asian and African American populations across the United States.

"Credit unions cannot safely sustain this pace into the future," she told the group. "The best way for credit unions to regain strong asset growth is to make loans to new members."

Her instructions rang a bit hollow in Maine, the state that is, racially speaking, the whitest in the nation. And if Matz's warning sounded dire, it went out to an industry that has increased assets nationwide by 48% since 1999, to more than $610 billion in 2003. Maine credit unions grew 38% during the same period, to $3.6 billion, spread among 77 unions.

The challenge to maintain that trajectory is bringing credit unions into more direct competition with banks, many of which also see themselves in a fight to lend or die. As the co-op feel of credit unions gives way to ever more bank-like products, services and marketing schemes ˆ— including a recent move by eight Maine credit unions to offer shared branching to their members ˆ— questions are being more loudly raised regarding their traditional tax-exempt, nonprofit status.

While no legislation had been introduced threatening credit union tax status in Maine as of Nov. 23, status-altering efforts are underway in Utah, Indiana, Texas, Missouri and Iowa, to name a few. At the federal level, the American Bankers Association launched Operation Credit Unions last year, a campaign intended to convince legislators that growing credit unions have overstepped their nonprofit bounds.

"Credit unions serve a very useful interest, but there has been a bit of empire building that's been going on in that industry," said Robert Strong, a finance professor at the University of Maine in Orono and a Bangor Savings Bank trustee. "The typical credit union for the small customer who doesn't have much money and doesn't trust anybody ˆ— that's a fantasy from long ago."

Indeed, credit unions in Maine have more than 600,000 members ˆ— about half the population. But it's not necessarily the wealthiest half. Divided into total credit union assets, members average about $6,000 each. Banks, by comparison, control a total of $12.7 billion in assets in Maine, an average of more than $20,000 for each remaining resident in the state. (These calculations don't take into account the fact that consumers frequently hold multiple accounts at one or more institutions.)

Maine credit union executives aren't shy about wanting their institutions to continue growing. But they insist that, rather than being empire builders, credit unions represent a form of financial democracy. They are owned by their members, and each member receives one vote ˆ— no more, no less ˆ— in electing the organization's ruling volunteer board. All profits, they say, are reinvested to improve interest rates and increase dividends to members. "We're not trying to satisfy a stockholders group. What we're trying to do is satisfy the service delivery requirements of our membership," said Joe Gervais, senior vice president of lending at the Orono-based University Credit Union. "We're not as driven by the pure numbers in the decision-making process."

Growth by design
Credit unions like University and the Maine State Employees Credit Union (with more than 20,000 members) operate on what are called association charters, limiting membership to a specific group of constituents. Community charters are broader, allowing unions to cater to members who live in specific towns or counties. (See "Evolution of an institution," p. 19.) The number of credit unions in Maine peaked in 1969 at more than 200; most of those were association-based.

As Maine's traditional industries declined, however, so did employee groups, and many credit unions rechartered as community-based organizations. Federal rule changes in the 1990s allowed credit unions to begin overlapping the memberships in order to survive. The unions grew fewer, and larger, and began marketing to less clear-cut constituencies.

Assets, however, continued to grow. University Credit Union, for example, was formed to serve the Orono campus in the 1960s; today, its core constituents are faculty, students and alumni of the entire University of Maine system. The union's Portland branch, opened in 1994 to serve University of Southern Maine members, has grown to $42 million in assets.

Gervais said University aims for net income of one percent of assets (e.g., $1.38 million on its current $138 million in assets) and growth of 10% of assets per year. The union has topped that in recent years; it hasn't seen the kind of slowdown that Matz reports is overtaking credit unions nationwide this year. With more than 17,000 members, University, the fourth largest union in Maine, also has been increasing its membership by roughly 10% per year. Its Portland branch currently serves 3,000 of the more than 19,000 USM alumni living or working in the Portland area. The remaining 16,000, Gervais said, provide plenty of potential for growth.

Shared branching has become a key strategy in pursuing that growth. The concept, which began in the 1970s, went interstate a decade ago. The network now shares 1,550 branches in the United States and five foreign countries, including 18 locations in 12 towns in Maine. Members of participating unions (eight Maine credit unions serving 200,000 members have joined) can walk through the door and have access to the full range of loan, checking and credit services they would receive at home.

The appeal for University's client base, for example, is that students who graduate and relocate or travel can maintain their credit union accounts and access to services. The branching gives University a better chance of holding members who accept jobs beyond its basic service area, according to Gervais.

Credit union managers also say the service is a boon for retaining the industry's mainstay retirement age constituency, many of whom are snow birds. "A lot of credit union members go south or vacation during the winters," said Jon Paradise, spokesman for the Maine Credit Union League. "So it allows them to not have to transfer or change their financial institution."

Chris Pinkham, president of the Maine Association of Community Banks, sees shared branching as simply one more step credit unions are taking away from the nonprofit doctrine. "To some extent, it begs the tax issue," he said. "If you're in the same business, and make the same conveniences available to your customers, then maybe you've got everything a bank has, and maybe you ought to pay the same type of tax."

A taxing situation
As nonprofit entities, though, credit unions pay no income or sales tax. It's a competitive advantage that drives bankers to distraction. "We have some serious competition issues," said Maine Bankers Association President Joe Pietroski. "From a competitive vantage, we have to be more efficient all the time just to get into the same ball park with them."

Bankers have taken their case to the Supreme Court more than once. In February 1998, the court upheld their claims, stripping the unions' tax-exempt status. Federal legislators quickly proposed a new law to reinstate nonprofit consideration. Maine Sen. Susan Collins was among the first to stand in support of the revised law. Maine's full congressional delegation approved the measure. Support in Congress was overwhelming.

"Credit unions have always been a sort of politically hands-off topic," Strong said. "It is difficult to get a champion in Congress to level the playing field."

Bill Kelly, director of the University of Wisconsin's Center for Credit Union Research, suggests credit unions receive political support because of the services they provide.
"The only justification for [the tax exempt status] is that Congress thinks they are doing something worthwhile enough to forego the tax income they might bring in," Kelly said.

At University Credit Union, that includes offering students alternatives to the big bank credit cards with their typically brutal late payment penalties and rate-hike clauses. (See "Side by side," above.) At Maine's largest federally chartered credit union, Brunswick-based Atlantic Regional Federal Credit Union, chief executive Steve Obrin says the organization has maintained 13% growth in assets this year while serving borrowers, many of whom slip below the radar of standard banking credit requirements.

Atlantic's products include auto loans based not on credit history, but on work history and references. And Obrin says Atlantic does a brisk business in what amount to small, tide-me-over loans for its members. "We really take a lot of our pride in making loans to people in our community that maybe the other entities do not want to deal with," Obrin said. "We make $500 or $1,000 loans all the time."

Whether legislators feel such services justify credit unions' tax-free status remains to be seen. Figures from America's Community Bankers, a Washington, D.C.-based lobby, show credit unions nationally earned tax-free net income of more than $5.7 billion in 2003. Federal and state deficits are pressing legislators to reach for every viable tax revenue stream. Officers of the credit union movement realize that support for the unions is likely about to undergo its harshest test yet.

The state level test may be the lesser of the two. Rule changes at the state level could affect Maine's 15 state-chartered institutions. Those unions represent just over $900 million, about 25%, of the $3.6 billion in credit union held assets in Maine. However, credit union advocates caution against seeing large dollar signs in that asset base. "You can't just take the current revenue streams and the current capital base net and say that would be fully taxed," said Hunter King, an MCUL senior vice president. "When you look at banks, and you look at the number of dollars they take in versus the dollars on which they pay taxes, you can see how the structure changes."

Pinkham agrees that it is the larger, national credit unions that really stick in bankers' craws. Navy Federal Credit Union, for example, which has more than two million members and $4.7 billion in assets nationally, has a big market among Navy employees in Maine.

At the moment, though, banking advocates aren't overly concerned about pursuing imposition of state income taxes on the smaller, Maine-based unions. But sales tax, Pinkham said, is another matter. "We're all in that growing-your-business mindset," he said. "But there is a price to broadening your services and expanding your customer base, and there's really an open issue for sales tax."

Paradise points out that, unlike many nonprofits, credit unions do pay local property taxes. And although the nonprofit status is a competitive advantage, industry proponents argue it compensates for credit unions' limitations in pursuing new members, and the advantage afforded banks by the freedom to sell shares in order to raise capital.

"The reality is, bank profits are higher than they ever have been and credit unions have about 19% of the total assets in Maine," Paradise said. "That has remained virtually unchanged since 1995."