Supreme battle brewing.

Are credit unions thieves in the night, slyly stealing away billions of dollars of business from banks under the dark mantle of tax-free operation?

Or, are banks the greedy robber barons, unwilling to share even a sliver of the financial business pie to credit unions that are merely trying to provide service to customers heretofore eschewed by the bankers?

The answer may have to come from the U.S. Supreme Court, which last week left a case involving credit union membership in its "pending" file. Given that about 350,000 Arkansans have about $850 million in credit unions, the state's financial community is keeping a close eye on Washington.

First, a history lesson on credit unions.

The Federal Credit Union Act of 1934 established credit unions as not-for-profit financial cooperatives, much like farmers' cooperatives and rural electrical cooperatives. Membership was to be "limited to groups having a common bond of occupation ... or to groups within a well-defined neighborhood, community or rural district."

The first credit unions were community-based, but over the years most credit unions were formed by large businesses and government agencies for the use of their employees.

In 1982, the National Credit Union Administration, which acts as credit unions' insurer and regulator (roughly equivalent to the relationship between banks and the Federal Deposit Insurance Corp.), ruled that credit unions could accept members from more than one employer or group. As a result, credit unions for employees of large companies began accepting members from smaller firms, and groups of small companies banded together to form credit unions.

"It was a logical progression," says Craig B. Savell, president and chief executive officer of the Arkansas Credit Union League, "because most businesses are not large enough to form their own credit unions, and people in any size business should have the right to join a credit union if they want."

But some bankers question the timing of the move. There was a recession in '82, and some smaller credit unions had gone bankrupt and others were threatened. The liberal interpretation of the Federal Credit Union Act was seen as a way for weaker institutions to broaden their ranks and merge with each other.

In 1990 the American Bankers Association and five banks in North Carolina sued the the National Credit Union Association, claiming that the AT&T federal credit union had illegally accepted members from outside the ranks of its employees. The credit unions won the original court case, but the District of Columbia Court of Appeals ruled in the bankers' favor [TABULAR DATA OMITTED] last July 30.

An injunction entered Oct. 25, 1996, prohibits federal credit unions from admitting any new groups unrelated to their "core" group." But after an appeal by the credit unions Dec. 24, a partial suspension of the injunction allows federal credit unions to sign up new members from existing groups.

The case has been appealed to the U.S. Supreme Court, which on Tuesday put off a decision on whether to hear the case.

Savell thinks there's a good chance the Supreme Court eventually will hear the case "because it's a situation in which a federal court and a federal agency [the NCUA] disagree. But even if the justices agree to hear the case, it won't come up for arguments until the August '97-April '98 session."

'Common Bond' Lost

Dan Bailey, executive director of the Arkansas Bankers Association, says the banking industry has no fundamental problem with credit unions.

"The banking industry does, however, have a problem with a handful of credit unions that have abandoned the 'common bond' concept and have, in effect, become banks," he says. "Our view is that credit unions that act like banks ought to be treated like banks. That is, they ought to have the same rules, the same regulations and they ought to be taxed the same."

According to the American Bankers Association, the credit unions' tax-exempt status costs the U.S. government about $1 billion a year in lost revenue.

Locally, Bailey says, there are "a couple of credit unions that the banking industry finds very troublesome. The 66 Federal Credit Union is a good example."

Based in Bartlesville, Okla., 66 Federal was formed for employees of Phillips Petroleum Co. It later expanded its membership to faculty members at the University of Kansas and more recently to 12,000-13,000 poultry workers at Tyson Foods Inc., many of them in Arkansas.

"Where's the 'common bond' there?" Bailey asks. "To me, that institution is a bank and ought to be taxed like one."

Mark Humphries, executive vice president of 66 Federal, notes that the Tyson employees are served by Tyson Credit Union, an affiliate of 66 Federal. The Tyson management, he says, decided it would be more cost-effective to affiliate with an established credit union rather than form one solely for company employees.

"The Tyson Credit Union is part of our organization," Humphries says. "Its members are just as much owner/shareholders as the 66 Federal members and the members from the University of Kansas. Credit unions have the authority to style themselves to best serve a variety of markets, and that's what we've done."

Savell says the American Bankers Association perceives credit unions as more of a threat than they really are.

"Banks are growing at a huge rate," he says. "Asset-wise, credit unions aren't that big a piece of the pie. We're not taking away their assets. If banks are losing out to anyone, it's to the mutual funds and the stock market."

According to the Credit Union National Association, in 1995 Arkansas banks held 87.3 percent of financial market share in terms of assets. Savings and loan associations held 10.2 percent and credit unions 2.5 percent. The state's total bank assets of $29.2 billion dwarfed credit unions' total assets of $850 million.

Arkansas Financial Institution Growth

                                 1985           1990           1995

CREDIT UNIONS

Assets                           $320           $560           $850
Asset Growth(%)(*)                              75.0           51.7
Asset Growth ('91-'95)                                         $290

BANKS

Assets                        $17,198        $21,501        $29,159
Asset Growth(%)(*)                              25.0           35.6
Asset Growth ('91-'95)                                       $7,658

SAVINGS AND LOANS

Assets                         $8,303         $2,581        $33,407
Asset Growth(%)(*)                             -68.9           32.0
Asset Growth ('91-'95)                                         $826

TOTAL DEPOSITS

Assets                        $25,821        $24,642        $33,416
Asset Growth(%)(*)                              -4.6            5.6
Asset Growth ('91-'95)
$8,774

* For previous five-year period. Figures in millions.

Sources: Credit Union National Association and Federal Deposit
Insurance Corp.

The bankers association argues, though, that credit unions have grown exponentially, especially after the 1982 NCUA ruling. Nationally, total assets in credit unions ballooned from slightly more than $100 billion in 1985 to about $311 billion now.

Savell attributes the growth of credit unions to customer service: charging lower interest rates on loans and paying higher rates on savings accounts.

Bailey says at least part of the reason for credit unions' success - and the reason for their more favorable rates - is their unfair advantage: no taxes.

"It's an unlevel playing field where banks are paying a 36 percent tax on profits and credit unions aren't being taxed at all," Bailey says.

Savell replies, "That's their sound bite: 'We want a level playing field.' Well, here's our sound bite: 'We're not even in the same game.' What I mean is, they play hardball for profit and we play soft-ball in a not-for-profit game."

Credit unions argue that because they're not-for-profits, they don't have "profits."

Yeah, right, Bailey counters.

"Credit unions may not call their revenue in excess of expenses 'profits,' but that's what they are," he says. "They have shareholders and they issue dividends. Last year credit unions had a 'profit' of $3.5 billion."