The Roanoker - March/April 2015 - 42

Credit Unions: Small for a Reason

STORY AND PHOTO
BY DAN SMITH

Member One, founded
in 1940, has expanded
significantly since.

42 MARCH/APRIL 2015

PAUL PHILLIPS' DAD
was a traditional banker
and the younger Phillips
began his career as a chip
off the old block. Turmoil in
the banking business soon
cost Phillips his job and he
went hunting. He wound
up with the hated competition: a credit union. Now,
he is president and CEO of
First Federal Credit Union
and he says, "I'm doing what I love."
What he loves is quite different from traditional
banking in several respects. First, credit unions were
set up initially to serve individual companies and
small geographic areas. They weren't - and still aren't
- taxed, a sore spot for their bigger competitors.
The Roanoke Valley has nine federal credit unions,
according to the website creditunionaccess.com and
there are 7,000 credit unions in the U.S. (down dramatically from 25,000 at one time). Current membership
is 97 million people and institutions. Total deposits
are a bit over a trillion dollars, about as much as one
of the top four banks in the U.S.
In 2012, credit unions held about 1.7 percent of
household financial assets, a market share that has not
changed significantly in more than 25 years. According
to a 2013 study (Federal Reserve Bank of St. Louis)
credit union membership represented "more than half
of American families, and provided 16.7 percent of
outstanding consumer credit." The 1998 Credit Union
Membership Access Act (CUMAA) relaxed membership regulations for credit unions creating groups with
broader memberships.
There's a limit on the amount of commercial business a CU can have and most of its depositors are
medium- to low-income people. The federal mandate
says CUs should "encourage thrift, loan for productive
purposes" and especially to "serve people of modest
means."
"We need a diverse group of business," says Phillips.
"There should be balance across business lines. We
don't want to be pigeonholed too much."
In the next 10 years, Phillips says, "We'll face the
same challenges: complexity, consumer preference and
compliance," which, he says, "will drive up consolidation." In the past 30 years, "our share of the financial
industry hasn't moved from six percent."
Phillips says about 65 percent of FF's members are

low to moderate income and 80 percent are "below
the average median income for the market." Phillips
says FF has concentrated in affordable housing, transportation, Solarize Roanoke (solar heating/cooling
program) and financing the truck driving program at
Virginia Western Community College, among other
things. "These are programs we fully embrace."
The business loan emphasis can be "a slippery
slope," says Phillips. "We need a diverse business
group ... and we need to develop balance across
business lines." That kind of loan is federally regulated closely by credit unions' limited geography and
membership requirements.
Frank Carter of MemberOne FCU says, "Recent
changes with mergers and buyouts of other institutions
only strengthens [our] commitment. Our business
principles won't change because they were predicated
upon helping people since the inception of Member
One in 1940. With the current landscape, we will just
add scale and adapt to help more people who may find
themselves without a financial home. It is important
we stay true to our core values and beliefs to remain
stable for the areas - and people - we serve. Continuing to add convenient banking options and investing
in the community will be our primary objectives."
Credit unions were formed as cooperatives, operated by members and not stockholders. They offer free
or low-fee basic accounts and basic banking (depositing paychecks, paying bills and making debit card
purchases).
Carter insists the tax-free status makes sense.
"Credit unions maintain that status because we are
not-for-profit ... We reinvest our profits back to the
members, our products and services, and the community. When we give back, we are not able to use those
donations as tax incentives that a for-profit corporation uses to its advantage. We also do not give back
out of mandates or government programs, but out of
our mission as a financial cooperative. Our business
principles couldn't be more different."
Tax free status creates an imbalance in the competition, says HomeTown Bank CEO Susan Still. "It's not
a level playing field. If credit unions had to plow back
30 percent of their income" to the government, as do
banks, the competition would be more fair.
"They are trying to morph into banks," says Ellis
Gutshall of BNC (until recently Valley Bank).
"We pay 30 percent in taxes and if we could remove
that requirement ... We're competing with banks that
get a [30 percent] advance."I
THE

R OANOKER.COM

http://www.creditunionaccess.com http://www.THEROANOKER.COM

The Roanoker - March/April 2015

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