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Credit unions flourish, outpacing banks

Photo by Pete Grady. CapEd Credit Union Todd Erickson said his credit union is getting into business lending as a means of diversifying its lending portfolio.

CapEd Credit Union Todd Erickson said his credit union is getting into business lending as a means of diversifying its lending portfolio. Photo by Pete Grady.

Idaho’s credit unions have more than doubled in size in the past decade, recently leading the nation in growth and surpassing the steady increase of the state’s banks.

The two types of financial services companies are playing by different rules and laws and answering to different federal regulators. While some bankers say credit unions have systemic advantages in attracting customers, including lower tax requirements, credit union officials say they’re providing better service and have fared better than banks after the Great Recession.

“Banks were given bad light in the press for receiving TARP money and having loans that were done not in the best interests of their customers and they had to tighten their lending standards to cover their loan losses,” said Todd Erickson, president and CEO of CapEd Credit Union in Meridian. He said the many of the state’s new credit union members have moved their money from banks because of negative experiences.

Credit unions fared relatively well in the recession, Erickson said. They were able to continue lending through the economic downturn. “Our loan losses and delinquencies didn’t really change,” he said.

Banking leaders, however, say credit unions are able to offer better interest rates on loans or deposits because credit unions don’t pay the income taxes that banks do. Both types of institutions pay property and employment taxes.

“We can’t directly compete with them for a lot of different types of business because we are taxed and they are not,” said Mike Mooney, regional president of Bank of the Cascades. He said banks and credit unions are competing on a playing field that isn’t level.

“The banking industry has no problem with the smaller credit unions that have stayed true to their missions,” Mooney said.

“Our objection is with the large credit unions that no longer serve people of modest means, and are aggressively pursuing commercial loans – all while enjoying a free tax ride,” Dawn Justice, executive director of the Idaho Banking Association, said in an email.

Erickson and others said the tax status isn’t the reason for credit unions’ growth.

“It’s an old, worn-out argument. There are banks that compete very well with credit unions,” he said.

“In my opinion, the field’s pretty level. We can offer better rates by giving back what we would have paid in taxes, but banks have more availability and fewer limitations on their products,” said Travis Franklin, marketing director for Icon Credit Union.

Banks with branches in Idaho still hold far more money than credit unions, with $20.2 billion in deposits last year. The number of bank deposits has grown by nearly $6.5 billion since 2004, a 46 percent total increase and 18 percent increase adjusted for inflation. Idaho-based credit unions, however, have seen their assets grow from $2.5 billion in 2004 to $5.3 billion last year, a 113 percent increase, adjusted down to 73 percent growth with inflation.

Comparing bank deposits to credit union assets isn’t an apples-to-apples comparison, since it excludes some banks’ non-deposit assets, but it’s the best readily available data. Even the top state regulator of both banks and credit unions, Idaho Department of Finance Director Gavin Gee, says his agency has difficulty getting perfectly comparable data the federal regulators, the Federal Deposit Insurance Corp.  for banks and National Credit Union Administration for credit unions. The data also excludes credit unions outside Idaho, such as the expanding Mountain America Credit Union from Utah, that have Idaho customers.

“It leaves an incomplete picture, unfortunately,” Gee said about the data.

One clear picture, though is that Idaho credit unions could soon pass the banks that have headquarters in Idaho. Idaho-based banks, which have roughly a quarter of all bank deposits in the state, had $6.4 billion in assets at the end of 2013, according to the FDIC. That amount has dropped for two straight years. Credit unions, however, have grown their assets by an average of 8 percent the past three years.

Credit union growth has also been concentrated at the top.

“For the most part, the smaller banks and credit unions have not seen the rapid growth of the larger, more aggressive institutions,” Gee said.

The state’s four largest credit unions, Idaho Central Credit Union, Potlatch No. 1 Credit Union, Westmark Credit Union and CapEd, have more than have the state’s assets and all but Westmark have grown faster than the state average the past three years.

Credit unions are nonprofit financial institutions that are owned by their members. They have been around in the U.S. since the early 1900s, with the first federal regulations coming into place in the 1930s. Nationally, credit unions started growing in the 1970s as the requirements to become a member were relaxed. As credit unions grew in size, they were able to offer a wider range of financial services. Today, many Idaho credit unions offer mortgages, personal loans and free checking accounts, as well as amenities like online and mobile banking.

“We can become their primary financial institution, where they couldn’t in the past. People are coming to us to replace their bank,” said Franklin.

The growth in credit unions has been steady in recent years in part to a 1998 federal law that allows them to offer services to members of multiple groups. That law, which followed a U.S. Supreme Court case overturning a similar law, allows credit unions now to serve large areas. Idaho Central Credit Union, the largest in the state, lets anyone in 34 of Idaho’s 44 counties be a member, as well as employees of Micron Technology Corp. or Idaho public sector employees. Members at ICCU and other credit unions require a one-time fee, after which they function similar to a bank in many ways.

Justice said credit unions’ membership requirements have been corrupted over the years. That change helped lead credit unions to become a $1 trillion industry nationally that’s growing faster than banks.

“It’s plain wrong when Congress allows a taxpayer-subsidized industry to compete with a tax-paying industry,” she said.

Erickson, on the other hand, said credit unions serve their communities.  CapEd specifically offers grants to teachers, which resonates with its members.

“Education touches a lot of different people, who are interested in making sure their children, grandchildren or nieces or nephews have a great education,” he said.

Gee said the increase in size of credit unions and expansion of credit unions from outside the state is generally beneficial to consumers, since all financial services companies will be pressed to offer better rates or service.

“You’re seeing increased competition in that space, he said. “Now credit unions are making essentially the same kinds of loans.”

That includes business lending, including for commercial real estate, which has traditionally been the providence of banks. More Idaho credit unions are getting into commercial lending. That includes CapEd, which started business lending earlier this year.

“Credit unions are limited, though, on their commercial lending,” Gee said. The main limit is a federal  limit on credit union’s business lending to 12.25 percent of its total assets, something the credit union industry is trying to change in Washington.

Erickson said CapEd’s recent expansion into business lending included adding business lenders from banks and other credit unions. It gives the credit union another avenue to make loans, diversifying the credit union’s car and home mortgage lending.

“We are limited and regulated quite heavily on the business side of things, but we think there’s a place for CapEd and credit unions on the commercial side of things,” Erickson said.

CapEd has doubled its membership from 25,000 to 50,000 people since Erickson joined in 2008 and has nearly doubled its assets, rising from $195 million to $380 million.

While business lending is still new for CapEd, he thinks it will grow and that the bank could hit the federal limit.

“We’re going to have to deal with that down the road,” he said.

Northwest Bank President and CEO Rob Perez said the expansion into business lending makes it harder for banks to compete, especially given credit unions’ tax status.

“What banks have argued is, you can’t be like a bank but not pay income taxes. It’s an uneven playing field,” Perez said. He also said banks face some stricter regulatory on commercial lending that credit unions don’t, but perhaps should, face.

In addition to the growth in deposits and assets, Gee also said he’s seen branch expansion in recent months. Idaho Central Credit Union, for example,  is adding five branches in 2014. The department will soon release a report with more information.


About Brad Iverson-Long

Brad Iverson-Long is a reporter for the Idaho Business Review, covering banks, financial services, technology and new business.