Credit unions and banks: institutional differences.

Banks and credit unions in today's market strive to offer Alaskan customers benefits with lower percentage rates and quality service.

Although both seem to provide the same services, there are behind-the-scenes disagreements and competition.

OWNERSHIP

The main difference between banks and credit unions is ownership.

Banks are commercial businesses that offer services to gain a profit. Anyone is eligible for the services provided by a bank.

Those who buy stock in the bank own shares of the business and only those who own stock can vote for the board of directors; the customers of the bank do not have a say. The board of directors is paid a salary while paid staff performs daily operations.

Investors who may or may not use the financial intuition own banks; banks' primary purpose is to provide a sufficient return on investment to their owners.

Credit unions consist of members who pool their savings and loan their deposits to each other. They are democratically operated with each member having an equal vote in the selection of the board of directors who are elected from among the membership and voluntary serve while receiving no compensation.

Credit Unions are cooperatives, owned by members, and do not have a separate group of investor requirements.

Tom Newins, senior vice president of member services for Credit Union One, said members benefit from the differences.

"Without these additional burdens, credit unions are often able to pay a higher return on their deposits, and charge lower loan rates and less fees," he said.

HISTORY

Edward A Filene, a Boston merchant, is credited as the father of the American credit union movement. Observing the credit union philosophy in India, he envisioned that a new type of bank could turn any population's financial needs into prosperity.

According to Nancy Bear Usera, senior vice president of corporate development at Alaska USA Federal Credit Union, credit unions were chartered for the purpose of providing access to financial services for working men and women and small businesses.

The Federal Credit Union Act was passed in 1934, when banking institutions primarily served big business and the wealthy. The general public and small businesses were essentially disenfranchised from access to financial services and the credit and savings opportunities they needed to advance economically.

"As the economy has grown and small businesses and consumers have become a more and more significant factor in the economy's success, access to financial services has become even more important and credit unions have grown with their needs," she said.

For Alaska, the credit union was introduced after WWII, when the military and federal government were populating the territory. Mail service was slow and the new families needed access to loans to cover the cost of necessities between paychecks.

"In this cooperative spirit, groups of employees banded together and formed financial cooperatives-pooling their savings and loaning it out to one another. This concept grew and was particularity compatible with Alaska's cooperative spirit. At one time there were 42 credit unions in the state," Bear Usera said.

Today there are 12 credit unions in Alaska. The state has the highest per capita credit union membership in the nation, with virtually two-thirds of households having one or more credit union members.

David A Lawer is the senior vice president and general council of First National Bank Alaska as well as the Alaska chapter president of the American Bankers Association. His belief is that credit unions that keep within the original charters are fine; but the larger institutions that offer services outside the original charter are banks' main competition.

In the early 1930s, federally chartered credit unions were intended to fill a void.

"Familiarity was critical to character loans," he said. "That's what credit unions were all about."

Today, Lawer states that consumer credit is not longer a credit union product and there is no segment of most communities that does not have competition of credit at every level.

"We have federal credit unions and state credit unions. We now have some credit unions that have remained true to their mission," he said. "(Others) are engaging to compete with banks on all levels."

Today credit unions have been granted the authority to provide more services, including insurance, credit cards, security brokerage and commercial loans to non-members.

"Some now offer an entire array of credit to the populace at large," Lawer said.

He also points out that limitations on authority respecting membership have not been enforced. He states original laws originally limited credit union membership, state and federal, to those with a common bond or those living in a single community.

"Primarily, change has been enforcement," he said, adding that limitations are ignored and charters have been approved to possible membership of millions of people.

To combat the problem, Lawer said the American Bankers Association is trying to enforce the limits nationally.

"(We) do have charges in several states," he said.

Bear Usera said credit union numbers have lowered in the past 10 years because of mergers.

"Credit unions have followed a national trend toward consolidation to achieve critical mass necessary to continue providing service affordably," she said.

TAXATION

Banks are businesses that earn income and must pay taxes. They serve the general public and offer services and rates that compete with other institutions.

A bank is a for-profit business that must pay local, state and federal income tax.

Credit unions have no means of raising capital from outside sources, such as selling stock; so all reserves are accumulated through retained earnings from operations. Credit unions do not pay federal or state income taxes because they are a nonprofit company, democratically owned and operated and are chartered for the purpose of providing affordable access to financial services.

Al Strawn, general manager of Matanuska Valley Federal Credit Union, said credit unions are exempt because of its structure that provides service over profit.

Strawn adds credit unions do pay other taxes, including payroll and property taxes.

Lawer believes credit union nonprofit status is bogus because not all nonprofits are exempt, including mutual savings banks, mutual insurance companies and savings and loans.

"To say that they are nonprofit is absurd," he said.

Ron Kukes, president and CEO of Alaska First Bank and Trust and a member of both Community Banks Council and American Bankers Association, said while the American Bankers Association loves competition, he would like to equal taxation on both sides.

"Competition should be on a level playing field," he said.

Until credit unions pay taxes, Kukes said others must pay for its nonprofit status.

"Someone picks up the tab on that amount of taxation," he said.

Yet Bear Usera states that the tax laws of the two institutions are different, with different trade-off in the market. "If a bank were to see advantages in being a credit union, they have the option of converting their charter, and the same applies to credit unions converting to banks," she said.

Strawn said he has seen some credit unions convert into banks, but the trend is one-sided.

"In reality, you don't see banks converting to a credit union charter," he said.

Involved with Matanuska FCU since 1975, Strawn said the disagreements and strives are real.

"It is a cat and dog thing," he said, "There is absolutely room for both."

REGULATIONS

Bear Usera points out that credit unions are regulated by the NCUA and Congress has limited credit union powers granted through the Federal Credit Union Act.

"These limitations include caps on business lending, loan terms, investment authority and mandatory capital requirement among other things," she said.

The Community Reinvestment Act (CRA) was engaged by Congress in 1977; it intended to encourage depositary institutions to help meet the credit need of the community in which they operate.

Banks are required to demonstrate on an ongoing basis that its employees are providing loans, investments and financial basis that service all of the community; credit unions are not regulated by this act.

"There is no corresponding law that pertains to credit unions," Lawer said.

Strawn said credit unions are regulated and insured by the National Credit Union Administration. He said the CRA originally passed because of the bank's pattern of essentially red lining.

"Credit Unions do not have that pattern of abuse," he said. "It reflects positively on credit unions."

One credit union restriction in particular has recently been in the spotlight; H.R. 2317 is the Credit Union Regulatory Improvements Act (CURIA) would expand credit union authority to lend 20 percent of its assets to small-business loans as compared to today's rate of 12 1/4 percent.

Both must adhere to the Bank Security Act that became law to help combat the war on drugs. Since Sept. 11, 2001, Strawn said there has been increased emphasis on the law.

"BSA is something that banks and credit unions both comply with," he said.

Kukes said the customer would ultimately benefit the greatest if both banks and credit unions were on the same playing field.

"Lets just call us all financial institution and regulate us all the same," he said.

TODAY'S CHANGING INDUSTRIES

Tom Newins of Credit Union One, Alaska's only State-chartered credit union, said new advances are making access easier.

"Technology continues to dramatically change the financial industry," he said.

A majority of customers of banks and credit unions are able to review accounts on the Internet.

"Our role is to turn our members' visit from a chore to a learning experience and beneficial experience whenever it is convenient for them," he said.

RELATED ARTICLE: Battle for small-town funds.

Metlakatla is a federal Indian Reserve on Annette Island. It has a population of approximately 1,400, with an 80 percent unemployment rate.

Richard Strutz, Wells Fargo Alaska regional president, said the bank served the community from 1970 to 2005. In 1999, as a result of the economic impact of the closure of the Tongass National Forest to logging and the Metlakatla's lumber mill in 2000, the bank suffered.

"With the continued economic decline in the area since 2000, it was difficult to maintain and staff a store," Strutz said. The store was closed in May of 2005.

In the wake of the bank's closure, Susan E. Fisher, CEO and manager of Tongass Federal Credit Union, said there were requests for other institutions.

"Metlakatla Indian Community officials asked other financial intuitions (both banks and larger credit unions) to come in, but none would.

At MIC's request, Tongass FCU officers and staff met in the summer of 2005 with area residents. A modest branch was opened in 2005 in the old bank branch.

"By sharing the cost of physical space, we can make this affordable for the credit union to extend service to a whole new group of members," she said.