Susan Parry Leake’s pride in her mission is palpable.
As the president and CEO of La Capitol Federal Credit Union, Leake defines her organization’s goal as helping customers have better financial lives. Against a backdrop of troubled economic times and financial strife, she says the services credit unions provide are more necessary than ever.
“We’re seeing a need because of people turning to us in the recession as someone they feel comfortable with, someone they trust to guide them,” she says. “We’re people helping people. That is our mission.”
The national recession has thrust credit unions into the spotlight because of their services, which include higher dividends on accounts and lower interest rates on loans. When customers are constantly looking for the best deal in an environment where lending is tight, that means significant growth for Louisiana credit unions that have brokered agreements on everything from car loans to credit cards.
Despite their growth, some credit unions feel they are facing challenges similar to community banks when it comes to federal regulations. Most credit unions—those that serve customers on a local level—did not participate in the subprime lending that is believed to have sparked the economic downturn. But they are paying for the bad behavior of other financial institutions with increased regulation on programs already compliant with federal law.
La Capitol is a case in point. When the Credit Card Reform Act was passed in June, it included a provision that customers were to be given 21 days’ notice of a payment due on their account. La Capitol, like many credit unions, uses an open-paper system that allows customers to pay weekly or biweekly on their balance in lieu of a larger monthly payment. In order to comply, the credit union had to move 13,800 loans to a monthly pay schedule, explain the changes to customers and give them the option to continue their former payment plan—by August.
“Regulation has been raining down upon us like a hailstorm,” Leake says. “We’re in the same boat as the community banks. We didn’t do any of the bad stuff, but the regulations are applying to all of us.”
The comparison is unusual. Relations between banks and credit unions are civil for the most part, but there has always been a streak of antagonism over the latter’s tax-exempt status. Banks, which are regulated by the Federal Deposit Insurance Corp., pay federal income taxes while credit unions do not because they are nonprofit entities. Credit unions are regulated by the National Credit Union Administration and are responsible for payroll taxes, sales taxes and property taxes.
The situation was exacerbated when credit unions nationwide began making changes to their organizational charters, which specify a common bond that is required to become a member. Over the past 10 years, many credit unions have adopted community charters, which open their services to whole parishes rather than select groups. For example, Neighbors Federal Credit Union initially was limited to Baton Rouge educators and their families, but changed their charter in 2004 to include anyone who lives, works, attends school or worships in the nine-parish Capital Region.
While banks and credit unions are engaged in competition on a local level because of the saturation of financial services, that competition always has been cordial, Louisiana Bankers Association Chief Executive Officer Robert Taylor says. Any tension that exists is negligible at best.
“I am aware of issues that we agree on going on in Washington right now,” he says. “I believe that the new administration and new Congress will be passing certain laws that will be detrimental to bank operations and their ability to serve their customers. That affects us both in the same way.”
But some credit unions say federal regulations—specifically governing credit cards and new mortgage standards that took effect this summer—have not had much of an impact on their bottom line. Part of that has to do with how credit unions develop their products and how much of their resources are allocated to specific services. Neighbors has about 5% of its total loan portfolio in mortgage lending, so new regulations barely caused a stir.
“None of that changed how we operate at all,” says Kathi Gill, Neighbors’ president and CEO. “We’ve done really well because we are still lending.”
Local credit unions also face the same economic uncertainty that has become a staple of doing business in financial services. The NCUA seized the two largest corporate credit unions—organizations that handle investments and loans to other credit unions—earlier this year because the institutions invested heavily in mortgage-backed securities. That means losses for local organizations, although there is no visible effect on day-to-day operations in the Baton Rouge market.
“Credit unions are going to be fine,” says Jeff Hendrickson, the president and CEO of Dow Louisiana Federal Credit Union. “We have tremendous capital as a collective. We are very well capitalized, but we do need to look from a regulatory perspective and make a change there in terms of how we move forward in the corporate credit-union system.”
So will the recession seal the fate of credit unions? Not hardly, because they traditionally grow very slowly when compared to banks. As member-owned cooperatives, they are legally required to put profits back into the organization so members reap the benefits of higher dividends on accounts and lower interest rates on loans. A bank can sell stock to raise capital almost overnight, but credit unions are very limited in terms of investments, and earnings are their only source of capital.
That’s why discounting the growth of deposits reaped as a result of rising credit-card interest rates and tightened lending standards would be a mistake. Several local credit unions report growth numbers that are astonishing by most standards. Neighbors had a 23% growth in deposits, and Dow added almost 3,000 new members this year. La Capitol saw major growth in its credit cards, with almost 176 new customers in October and November.
Part of the challenge will be to make sure customers brought in the door by the recession stay with the credit union long-term, Hendrickson says.
“We want to capitalize on all of the relationships we’ve made this year,” he says. “We want to get our value story out to everyone that has come to us and make sure they don’t see us as a one-off thing. ”
Credit unions generally are upbeat about their prospects in 2010, but the economy will continue to play a large role in what comes to pass. While more federal regulations such as changes in overdraft fees are expected, the viability of credit unions in the financial-services marketplace seems better than ever.
“There is an opportunity for us to tell our story right now,” Gill says. “What happens in 2010 and how things shake out will be interesting, but I think credit unions will rise as the choice for consumers.”
