Iowa's credit unions see big growth
But banks say they have an unfair advantage
Iowa’s credit unions are in the midst of a growth spurt.
And banks are crying foul.
Data provided by the Iowa Credit Union League shows that although the number of credit unions has dropped from 126 in 2012 to 113 this year, total assets and members have grown substantially.
Total assets grew 16 percent from $10.5 billion in the first quarter of 2012 to $12.2 billion in the first quarter of 2014 while membership grew 3.9 percent from 983,183 to 1,021,449 during that same time period.
A March report from the National Credit Union Administration shows that the state’s credit unions also are ranked second in the nation in annual loan growth, which grew 14.4 percent to $8.3 billion. This is compared with an 8.8 percent increase nationwide.
Jim Niederhauser, vice president of member services for the Iowa Credit Union League, attributed the growth to several factors, including the state’s strengthening economy.
But some of the state’s community banks believe another factor is driving the growth — credit unions are not-for-profits and therefore do not pay corporate income taxes. This means they can sometimes offer better interest rates on loans and savings.
And therein lies the problem.
“The public really doesn’t realize the difference,” said John Sorensen, the president and CEO of the Iowa Bankers Association (IBA). “They see the products and services offered and there is no difference.”
But Sorensen said that for the state’s largest credit unions, including Veridian Credit Union and the University of Iowa Community Credit Union, this is an unfair advantage.
“The largest credit unions are larger than 95 percent of the financial institutions in Iowa, and they pay less in income taxes than a typical family,” he said.
“That has always been a topic of discussion,” Niederhauser countered. “Here in Iowa, credit unions maintain less than 13 percent of the market share.
“If our charter is so appealing, why don’t banks get credit union charters?”
Double digit growth
Over the past five years, the University of Iowa Community Credit Union has seen double-digit growth, with assets growing between 20 percent to 27 percent each year, said Jeff Disterhoft, the credit union’s president. In 2013, total assets hit $2.16 billion.
Meanwhile, membership has grown from 62,000 people in 2009 to 116,000 this year.
“We really build a business model around efficiency,” Disterhoft said. “We’ve got great rates on loans and deposits. We may not have a branch on every corner, but we’re aggressive from a pricing standpoint.”
Waterloo-based Veridian Credit Union, the largest in Iowa, has seen similar growth. From 2009 to 2013, the credit union’s assets have grown 43.9 percent — from $1.69 billion to $2.43 billion — while membership has grown about 16.8 percent — from 153,088 to 178,794.
The credit union has 27 branches throughout the state, with construction of its 28th branch expected to be complete by early 2015.
Credit unions lending practices traditionally have been more consumer based, meaning the majority of loans given out are for home mortgages, credit cards and autos.
This is in part because of a business lending cap that Congress put into place in 1998 — the Credit Union Membership Access Act. This federal law gave credit unions many privileges, the credit union league’s Niederhauser said, but it also put some limitations in place.
Credit unions are able to lend only up to 12.25 percent of total assets to businesses.
“It can be difficult,” he said. “If a creditworthy small business owner comes to a credit union,” they may not always be able to get a loan.
The National Association of Federal Credit Unions has pushed for legislation to remove the cap and cited a study by the Small Business Administration’s Office of Advocacy that found “bank lending was largely unaffected by changes in the credit unions’ business lending, and that credit unions have the ability to offset declines in bank business lending during a recession.”
Even still, the area of commercial business loans is growing. From 2012 to 2014, the amount of loans credit unions gave out to businesses grew 25 percent from, $178.5 million to $224.47 million.
This is in part because of credit union’s assets growing. But Sorensen said he believes credit unions are finding ways to get around the cap.
He said the cap does include Small Business Administration loans, loan participations and loans under $50,000.
As loans are the major source of revenue for a bank or credit union, competition among financial institutions can be strong.
“Ask almost any bank CEO, how do you differentiate yourself? And 90 percent will say great service and great people,” said Charles Funk, president and CEO of MidWest One Financial Group, which has $1.75 billion in assets
Community banks, which are defined as having less than $10 billion in assets, made 57.9 percent of outstanding bank loans to small businesses, according to the Independent Community Bankers of America.
At MidWestOne, loans fell to $1.072 billion in March, from $1.088 billion in December 2013, according to the bank’s quarterly earnings report. Funk said the bank has a “nice mix” of agricultural, commercial and industrial and residential loans.
“We don’t make as many consumer loans these days,” he said. “A lot of those have gone to credit unions.”
“I think that when we compete against other banks, there’s a level playing field — we win some, we lose some,” he said. “But if there is an entity that does not have to pay income tax, they will probably have a competitive advantage because they can offer better rates on deposits and loans.”
There is one area where the two types of financial institutions can find common ground — the difficulties caused by financial reform and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Leaders from the associations pointed out that 2008’s financial crisis was caused by big banks and Wall Street — not community banks and credit unions — yet they are subject to the same new regulations and compliance rules as the big guys.
This means that many, smaller community banks and credit unions are consolidating.
An FDIC study found that the number of institutions with assets of less than $100 million declined 85 percent between 1985 and 2013.
“Community banks are somewhat larger than 30 years ago because, on average, when these banks fail or close, another community bank is often the acquirer,” it said.
In Iowa, there have been 83 consolidations in the last 10 years, Sorensen said, adding that since the financial crisis, this number has accelerated a little bit.
Credit unions have had to consolidate, too. As the end of 2013, there were 1,348 fewer credit unions than in 2008, according to the national credit union association — a decline of about 17 percent of the institutions have disappeared in less than five years.
“There is a complex regulatory environment today,” Niederhauser said. “Smaller credit unions don’t always have the scale or resources.”
So it’s not unusual for them to forge partnerships with larger credit unions to continue to work with their members. The bankers agree.
“You have to be a certain size to compete,” said Sharon Presnall, senior vice president of government relations and compliance at the IBA. “We’re on the same page here, and this is an issue where we can work together.”