Banks vs. credit unions

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Whether business or personal, a variety of financial organizations-from national and international banks to community banks to credit unions-can provide a home for your money.

Trying to determine which one is right for you is often not as much a matter of numbers and logic as it is a matter of philosophy.

Searching for the fine line between the services offered by a credit union and the services offered by a bank proved impossible, as credit unions today offer a wide range of financial services, from debit cards to commercial lending to mortgages, much the same as any bank.

“I do think credit unions provide some excellent services for their members, but I have wondered whether the income tax exemption is fair,” said Daphne Greenwood, a professor of economics at University of Colorado at Colorado Springs. “In the past, you had to be an employee. But the federal law has changed, and now anyone can join a credit union. How is this different from a bank?”

Indeed, many bankers have a thorn in their side when it comes to credit unions, which are exempt from federal income tax by charters with the U.S. government or with individual states.

“The major difference is the tax-free status of credit unions. Credit unions at one time served a very useful purpose-for a school district, an electrical workers union, a pipe fitters union. Their customers had a common bond, typically it was the same employer,” said Jim Oaks, spokesman for The Bank at Broadmoor, which operates three branches in Colorado Springs. “But credit unions have continued to expand the definition of that common bond. Virtually everyone can be part of a credit union.”

Credit unions are organized differently from banks, which is part of the reason for their not-for-profit status. And though exempt from federal income tax, credit unions are responsible for paying property and sales taxes.

“The total asset base of all credit unions in the United States is still not as much as Citigroup,” said Mark Halbrook, CEO of Brea, Calif.-headquartered Evangelical Christian Credit Union, which will award $400 million in loans this year to religious ministries across the United States. “For banks, the first and primary obligation is to profit for its owners, whether they are private or public shareholders. For credit unions, the first priority is to serve its membership. Profits go to providing new or better services to its existing members.”

More than 80 million Americans have their money in one of more than 10,500 credit unions nationwide, and altogether those credit unions claim $617 billion in assets, which is a 6 percent market share, a number that has been relatively unchanged in a decade, even with relaxed definitions in their charters. American banks, on the other hand, claim $9.3 trillion in total assets, and the top 100 banks nationwide in 2003 had 65 percent of the market share.

Citigroup Inc., the largest financial services organization in the United States, has $1.19 trillion in assets and operates in more than 100 countries.

“Credit unions don’t have the powers that banks have, the ability to generate capital,” Halbrook said. “If credit unions were taxed, it would dismantle the system as we know it today, to the detriment of millions of credit union members across the country. Our service level would be cut by a third, or half.”

Take it to the bank

Commercial customers are the bread and butter for Vectra Bank, Colorado’s sixth largest bank with 40 branches scattered across the state.

“Banks like Vectra are capable of doing commercial lending more than credit unions are. Credit unions were established for consumers, and as a commercial bank we’re more suited to the needs of business customers,” said Market President Kim Bonniwell. “I think credit unions are limited by law about the size of commercial customers they can deal with, whereas we’re not. We can concentrate on our larger commercial customers and their needs.”

With assets of $2.6 billion, Vectra Bank was acquired by Zions Bancorporation in 1998 and also includes 17 community banks in the Denver area. Zions is a financial holding company that owns and operates more than six banks and has assets of more than $28 billion.

First Community Bank spokeswoman Karen Rodriguez said community banks, in addition to providing basic services-such as checking and savings accounts, safety deposit boxes and debit cards-offer the same array of services as any other bank, but with a friendly face.

“We offer the same services as any commercial bank: commercial loans, mortgage loans, construction loans. However, we offer it with much more personalized service,” Rodriguez said. “We know all of our customers by name, the business they’re in, the type of job they do. We’ll go up and say hello. They’ll never be just another number in our business.”

First Community has six branches in Colorado, including one in downtown Colorado Springs with 35 employees. Its parent company is First State Bank of New Mexico.

The Bank at Broadmoor, the largest independently owned community bank in El Paso County, employs 45 people. Oaks said he prefers the family atmosphere of community banks, which don’t have as much employee turnover as their national counterparts.

“You get to know your customers. It’s not this revolving door of lenders,” Oaks said. “The customer-service level is so much higher at a community bank. If we have some policy in place that’s not working, we can change it. A community bank is like a speedboat; we can turn on a dime. The big guys are like ocean liners. We’re a lot more responsive, a lot more adept.”

Credit union campaign

Credit unions are driven by government charters, which can be occupational or geographical. Evangelical Christian Credit Union, for instance, only lends to nonprofit religious organizations but has a client base that is literally worldwide. The other kind of charter is geographical, limiting the membership to those who work or live in a defined area, which is the case with ENT Federal Credit Union.

At ENT, which operates 18 branches in Colorado-17 are in Colorado Springs-the full range of consumer financial services are offered, along with small business lending and investment programs.

Spokesman Jim Moore said the best thing about credit unions is the local focus.

“The principal pro of credit unions is the local focus, by definition, by organizational structure, by the way that credit unions tend to be chartered by our regulator. It’s not a stock company; it’s owned by its members.”

With 520 employees in Colorado Springs, ENT was established in 1957 and has one branch at Buckley Air Force Base near Denver.

“In the eight years I’ve been associated with ENT, through a variety of efficiencies in operations, we appear to be better at managing our costs,” Moore said.

Air Academy Federal Credit Union, with 40,000 members, 150 employees and nine branches in Colorado, is a major player in town and around the globe, since military members often choose to keep their accounts open overseas. Members include active-duty and retired military, school districts and more than 100 employee groups.

“Credit unions are the only democratically controlled financial institution in the United States,” said spokeswoman Karin Kovalovsky. “Our members select a volunteer board of directors who are unpaid. Whereas a bank is owned by its stockholders and has to produce profits for its stockholders, all our profits are returned to our members in the form of lower loan rates, higher savings rates or lower fees.”

Air Academy Federal Credit Union, along with ENT Federal Credit Union and many others, belong to a cooperative network of ATMS, which provides members with surcharge-free access to 17,000 machines nationwide.

At Evangelical Christian, which serves 213 ministries in Colorad
o Springs, services are for just who the name implies: evangelical Christian organizations, and does not include individuals.

“You get involved in credit unions not because you want to be the next millionaire on the block, but because you’re passionate for what credit unions are about,” Holbrook said. “There is no bank in the U.S. that specifies in serving nonprofits, let alone ministries. The difference is not primarily in the service, it’s in the structure.”

Where to park your money

The stated philosophy does not differ between community banks and credit unions. Both profess to care about individual customers, be proud of serving particular communities (whether occupational or geographical), and have socially responsible agendas-legislation forces banks to reinvest in their communities, whereas credit unions say their profits by and large are reinvested into membership services.

Community banks in particular might have a legitimate complaint when it comes to a taxing inequity.

“It’s tough to compete with someone who does not pay taxes,” Oaks said. “The tax burden on any bank is very, very large-sometimes 39 percent … The largest depository in Colorado Springs is ENT Federal Credit Union. Not only for consumer loans, but for commercial loans.”

But big-business bankers, too, perceive the difference in governmental regulation and taxes as an injustice that requires resolution.

“Today there are just under 100 credit unions that have $1 billion in assets. The largest credit union holds about $20 billion. It’s an inequity for community banks, and smaller credit unions who are staying within the guidelines of how they were originally formed, and savings and loans,” Bonniwell said. “Banks are very highly regulated. Regulations are meant to protect the public; right now, credit unions aren’t under the scrutiny that banks are.”

On the other hand, credit unions, even with relaxed definitions in their charters, continue to lag behind, and overall probably don’t manage one-tenth of the business that banks experience in this country.

“Banks sometimes make it sound like credit unions are taking business away from them. But we pool resources for the common good,” Holbrook said. “Nearly one-third of our loans are to inner city and ethnic ministries in low-income areas. What bank would want to give a loan to them?”

Statistics show that deposits in credit unions make up less than 10 percent of all deposits in the country, with the rest safely tucked away in banks or savings & loan companies.

“I’m not aware of any banks that have converted to credit union status because of the tax exemption,” Moore said. “My sense is that we provide a competitive element in the marketplace to keep rates low, to level the playing field.”

Which is right for who seems to depend on two things: whether the services one requires will be business or personal and the kind of money involved, and one’s general attitude toward the debates over credit unions’ income tax exemption.

“I have mixed feelings,” said Greenwood, a member of the University of Colorado Federal Credit Union. “I like the services, and use them, but from an economist perspective, is there really a reason for this tax exemption? But they got started, and people like them. There would be a lot of public uproar about removing the tax exemption.”