Credit Unions Narrow Gap With Banks Under New Rules
By KATE BERRY
Local credit unions, long considered a low-cost alternative to big banks, have taken advantage of relaxed Federal regulations to boost their asset bases and take a place among the largest financial institutions in the region.
Spurred by passage of the Credit Union Membership Access Act of 1999, which lifted restrictions on credit unions marketing their products outside their core constituency, three institutions with roots in L.A.’s old economy have elbowed their way to boost assets above the $1 billion mark.
Credit union executives attribute the recent rise in membership and deposits to low interest rates, which have spurred consumers to seek out the more attractive fees and rates on car loans, money-market accounts and, increasingly, mortgage loans.
Kinecta Federal Credit Union, formed by Hughes Aircraft employees in 1940, saw a 20.8 percent jump in deposits from 2001 to 2002 and expects similar growth this year.
Wescom Federal Credit Union, founded by a group of Pacific Telephone workers, had a 5.7 percent jump in deposits in the same period. Its core checking, savings and money-market deposits have increased 27.2 percent in the first six months of 2003.
Lockheed Federal Credit Union, the third largest, had an 8.5 percent jump in deposits last year.
“Banks are going to have to defend themselves,” said Thomas Graham, president and chief executive of Kinecta, which has 20 branches and $2 billion in assets. “The economy has driven the average consumer back to a place of safety.”
Officials of these credit unions said they could not identify whether they were drawing business from large national institutions or smaller community banks.
MSC.Software, a software simulation company with 300 employees in Santa Ana, joined Wescom credit union three years ago.
“We tried to offer employees low cost benefits, and Wescom had lower interest rates and credit cards with no annual fees,” said Tracy Bologa, the company’s benefits coordinator.
Wescom recently signed up the city of West Hollywood, which joins a slew of companies like Guess Inc., Quiksilver Inc., IKEA and Watson Labs.
Officials of many of the largest banks in the region prime targets for poaching by credit unions declined to comment on the rise of the institutions.
Heng Chen, executive vice president and chief financial officer at Cathay Bancorp, said banks and credit unions offer different services with banks being “a little more traditional.”
Cathay’s deposits in Southern California fell nearly 5 percent last year even though it had a 10 percent increase in total deposits, which includes its offices in New York, Houston and Northern California. The bank has 13 branches in Southern California.
“Credit unions are really coming of age,” said Darren Williams, president and chief executive of Wescom, who estimated that half of new credit union members are coming from the local community rather than sponsor companies that is, small or medium-sized businesses that join a credit union and offer membership to their employees.
Credit unions are non-profit cooperatives that trace their roots to 19th century immigrant farmers who pooled their assets rather than pay often usurious rates charged by banks at the time.
Because of their non-profit status, profits are returned to members in the form of higher-yielding savings accounts and lower loan rates and fees.
That has raised howls from the banking industry, which has long complained that credit unions are unfairly subsidized and have been able to exploit their tax-exempt status to compete unfairly.
A 1998 Supreme Court ruling sided with banks, finding that credit union members had to have a “common bond,” such as working for the same company or living in a community. The decision overturned a 1982 ruling by the National Credit Union Administration, the federal agency that oversees the industry, that had allowed credit unions to add as many as 10 million members. The Credit Union Membership Access Act followed a year after the Supreme Court ruling, lifting many of the restrictions.
Still, some remain. Credit unions may still only solicit companies with fewer than 3,000 employees for membership. Expansion has meant an increase in jobs as well.
Credit unions have increased the number of tellers, consumer lenders and managers that handle small business loans, according to Roger Iris, senior vice president of OnStaff, a Culver City-based company that operates on-line job boards.
“The credit union market is booming,” said Iris, noting that OnStaff’s banking and credit union division has 16 offices, up from nine a few years ago and has had an increase in sales from strategic partnerships with credit unions looking to hire new employees.
Wescom is one example. It has added 14 branches since 1996 and expects to add 40,000 new members this year to its base of 200,000 customers.