Feature Stories - November 2006

Nevada's Credit Unions

Engaged in a Delicate Balancing Act

by Doresa Banning

Nevada’s credit unions offer an array of financial services; however, much more goes on behind the scenes. They’re constantly handling new regulations, fierce competition, escalating fraud, fluctuating interest rates and more. In essence, they engage in a continuous balancing act: providing the most benefits to members, while dealing with the challenges that threaten to undermine that goal.

According to July 2006 data provided by the California Credit Union League (CCUL), Nevada is home to 29 state- or federally-chartered credit unions. The CCUL provides Nevada credit unions with information, education, advocacy and support services. Combined, Nevada’s credit unions have $4.7 billion in assets and 467,120 members. Credit unions originated in Germany in the mid-1800s, according to the Credit Union National Association, the national trade association serving credit unions. “Credit unions originally were intended as cooperatives where ordinary people could pool their resources and create a source for credit and other financial services. That basic concept continues to this day,” said Brad Beal, president/chief executive officer of Nevada Federal Credit Union. With 83,000 members and $85 million in assets, NFCU serves Clark County, Pahrump and inner-city areas of Reno.

In 1900, Canadian Alphonse Desjardins organized the first credit union in the western hemisphere in Quebec. Nine years later, he founded the first U.S. credit union in New Hampshire. The country’s credit unions peaked in the late 1960s. Since then, the number of credit unions has declined due to mergers, yet membership continues to climb.

Distinctive Characteristics

Unlike banks, credit unions are owned by their members and are governed by a volunteer board of directors. Each member is afforded one vote in electing the board. Banks, on the other hand, have their stockholders elect the board of directors, whose members are often paid for their service. Stockholders may have more than one vote, depending upon how much stock they own. Credit unions are not-for-profit organizations, whereas banks are for-profit institutions. Because of their status, credit unions are exempt from paying federal income tax on earnings.

“Our motive is to give as much back as we can to our member owners. That goes hand in hand with our not-for-profit structure,” said Bruce Rodela, president/CEO of Reno-based Frontier Financial Credit Union. FFCU has $71 million in assets and serves 8,600 members who primarily are government and healthcare workers in Washoe and contiguous counties.

Credit union presidents argue that because their organizations focus on serving the membership rather than on maximizing profits for stockholders, they’re able to offer members better rates on loans, higher returns on savings and a greater number of no-fee services. Clark County Credit Union gives back a bonus dividend to its members at each year’s end ($12 million in 2005), said Wayne Tew, president/CEO. CCCU has 37,000 members, $560 million and serves employees of specific Clark County government groups, Clark County medical professionals, employees of the cities of Las Vegas and Henderson and contributing members of KNPR public radio in Las Vegas.

Credit unions also are self-insured. “A percentage of member deposits goes into a deposit insurance fund to add safety and soundness to the entire industry,” Rodela said. His credit union, Frontier Financial, insures members’ shares for up to $500,000 per account.

Credit unions are restricted in ways that banks aren’t. Their capital must come only from retained earnings, whereas banks can issue stock. Credit unions are also limited on who their members can be and what regions they can serve.

Evolution Over Time

Despite these restrictions, the state’s credit unions have grown in size, and many have expanded their membership fields. For example, Nevada Federal Credit Union, formed in 1950, originally served about 200 of the state’s major employers. In 2001, however, it changed to a community credit union serving anyone who lives in Clark County.

Frontier Financial Credit Union, founded in 1958, originally served employees of Washoe County and Washoe Medical Center, along with 13 employer groups. Now its membership encompasses all government and healthcare workers in Washoe and neighboring counties, unions in Northern Nevada and employees of any business associated with the Builders Association of Northern Nevada.

The scope of services credit unions provide also has expanded, dictated by members’ needs and wishes. When many credit unions started, they offered what the industry calls “plain vanilla services” – savings accounts and one or two loan options, Rodela said. Today, however, the range of services is much wider and includes everything from certificates of deposit to mortgage loans. Other offerings are checking accounts, credit cards, ATMs, online banking, e-statements, commercial loans, home equity loans and more.

“We have every loan product there is, every checking and savings product there is,” said Carol Schumacher of IBEW Plus, a 30,000-member, $130 million credit union that serves Southern Nevada union workers and select employer groups. “We have had to evolve to be competitive in the market.”

Facing Competition

Because credit unions offer as many services as banks, they compete for the same customers. Financial Horizons, which serves 9,200 members in rural Nevada, struggles to compete in Fallon, where about 10 financial institutions exist.

“The banks are growing faster than the community is growing,” said Barbara Reuter, president. “Everyone is getting their share of the growth, but it is a challenge to grow in that particular area because of all the other options.”

Credit unions use various methods to draw potential members. “A major challenge for us is helping folks understand what makes credit unions different, particularly people living in the community who aren’t credit union members,” Beal said. “We work hard to help them understand and let them know that they’re eligible for membership.”

Strategies include advertising through radio, television, newspapers, billboards and employer groups, along with direct mail, newsletters, e-mail, on-hold messages, event sponsorship and word of mouth. “We’re always looking for new ways to reach out,” said Reuter, whose credit union relies primarily on radio and newspaper advertising.

Generally, Nevada’s credit union heads describe competition with banks as healthy and beneficial for consumers. However, they have to expend time and resources defending against legislative attacks by banks. Many of Nevada’s credit unions contribute money annually to the California Credit Union League, which advocates on their behalf, Schumacher said.

One complaint bankers lodge is that the playing field for the two types of entities is uneven because credit unions don’t pay federal income taxes. “Those banks chose their structures,” Rodela said. “I really believe there is room for both types of organizations. The real bottom line for the bankers is that they want to own the playing field. They’re going to lawyer up and lobby to try to do away with us. If you look at how the banks operate, in my opinion, they’re against anybody in the financial arena that competes with them.”

Walter Murray, president/CEO of Greater Nevada Credit Union (GNCU), said banks have advantages in their ability to raise capital and grow. “The playing field has not been level since Day One because we’re not-for-profit and they’re for-profit,” he said. With $495 million and 51,000 members, GNCU serves Northern Nevada.

Reuter said the complaint is a non-issue. “Banks are great big business, and credit unions aren’t,” she said. Banks’ earnings and growth history over the last several years, along with the number of new banks being formed in Nevada, prove this fact, said Beal. Further, a number of banks are assuming a subchapter S status, which, with some limitations, allows stockholders to own a portion at a very similar tax structure to that of credit unions. “It’s readily apparent that credit unions are not damaging the banks in a competitive way,” he said.

Bankers also argue that credit unions have become large and bank-like, and therefore should pay taxes. “Credit unions as a whole have reached those plateaus and their structures because of the wishes of their members using those services, and have done it over many years,” Rodela said. “While there are some very large credit unions, they’re certainly eclipsed by the Bank of Americas, the Citigroups and the Wells Fargos. They’ll never be able to reach that size unless their tax exemption is revoked and they end up becoming a bank structure of some form and they grow even further. The bankers would like to see that take place so they can buy out these institutions down the road. That’s another form of wanting to see the credit unions go away.”

Another criticism is that credit unions don’t contribute to the tax base. “That is erroneous,” Beal said. “Credit unions pay real estate, payroll, Social Security and unemployment taxes.”

Credit union money benefits commerce locally, Rodela added. “The beauty of credit unions is that they’re locally owned and operated,” he said. “The funds stay in the community and are reinvested in the community.”

Along with banks, credit unions compete with other financial institutions and companies offering financial services. Those include insurance companies, auto dealerships, mortgage lending companies and industrial loan corporations (ILCs). ILCs are state-chartered companies, oftentimes non-financial institutions, with broad banking powers, such as Target, General Motors and BMW. Nevada is one of seven states that permit these charters. Wal-Mart and Home Depot applied earlier this year for industrial bank charters.

“The environment has changed significantly in the last 10 to 15 years,” Murray said. “Some of the other players in the marketplace are the Wal-Marts, Toyotas and industrial loan companies that exist in the marketplace like Charles Schwab and ING Direct, which are making inroads into traditional consumer banking products.”

Schumacher of IBEW Plus said her greatest competition is with mortgage/home equity lending companies that offer interest-only financing and car dealerships that offer zero-percent financing.

As for Wal-Mart entering the marketplace, Beal believes the impact could be dramatic. “There’s a lot of uncertainty about how that would impact financial services,” he said. “Do we really want Wal-Mart in that business? How much of our economy do we want Wal-Mart to control? How much of our national economy do we want centered in one place?”

Credit unions, however, say they welcome competition in any form. “I am a big believer in the free market,” Tew said. “People can make something happen, and if it’s a better widget, it ought to be available. I’m not a fan of legislation to keep people out of the marketplace. Competition is good for the consumer. It’s good for business because it forces businesses to be more efficient. If competition forces me to be introspective and improve what I’m doing, I’d better do it or I won’t survive.”

Other Challenges

Despite competition, some of Nevada’s credit unions are growing, which is problematic in its own right. “We’re challenged with growing the credit union so we continue to focus on a mission of service,” Murray said. “We don’t want to get big for the sake of getting big, but rather because what we’re doing is the right thing for people. As we continue to grow, that becomes a bigger challenge for us.”

At Clark County Credit Union, loan growth is exceeding deposit growth, Tew said. CCCU is also working hard to have the technologies to meet consumer demand for delivery of various services.

Another hurdle for some Nevada credit unions is staying current with changing and new regulations. “The regulatory environment has changed so dramatically over these last several years in the wake of 9/11, Hurricane Katrina and electronic privacy issues,” Murray said. “They all created a significant challenge for us to stay up with. It’s nothing we can’t do, but it’s very dynamic and takes effort, time and money.”

Rising interest rates are impacting Frontier Financial. “We’ve been operating at all-time lows for a couple years now,” Rodela said. “We’re starting to feel the shocks of higher rates taking hold. It takes awhile for an institution to basically reach a new plateau to be able to deal with the higher rates and maintain levels of reserves and regulatory compliances and that sort of thing to maintain its safety and soundness.”

Credit unions also strive to educate the public about sound financial practices. Nevada Federal gives free seminars and financial counseling online via a toll-free number. IBEW Plus provides financial education in elementary and high schools. It’s looking to start a $150-limit credit card program for teenagers.

The increase in fraud has credit unions on the offensive. They’re seeing the most fraud with debit cards, money orders and PIN-based transactions. “We see that people who commit fraud get very creative, and there are new schemes out there constantly,” Murray said. “It’s one of those things that take time and energy to stay up with and make sure we have the most current technological procedures possible to help prevent those frauds and catch them when they do occur.”

To combat fraud, the credit unions use various means, including fraud-detecting products, employee education, identification and other procedures, black lights for detecting fake money orders and more. Sometimes they’re forced to limit transactions or eliminate services. Greater Nevada, for example, eliminated credit card services because of fraud. IBEW Plus stopped its members from using debit cards to rent cars.

“We work with other credit unions,” Schumacher said. “We network really well. When we find something out, we call the others and let them know.”

On the Horizon

Consistent with their mission, some Nevada credit unions are exploring new services. Clark County is evaluating commercial deposits. Nevada Federal plans to offer a payroll card for consumers who don’t have deposit accounts. IBEW Plus is considering e-statements and a 24/7 call center. Greater Nevada hopes to expand small business lending, grow its real estate services and eventually offer health savings accounts. Frontier Financial is looking at a student loan program for members attending college.

Additional branches are planned as well. Greater Nevada and Frontier Financial both have branches under way in Sparks. In Southern Nevada, Clark County Credit Union has one and IBEW Plus has two new branches slated for Las Vegas.

“We do quite well just living a quiet little life and moving forward,” Tew said. “As long as we do that quietly and not get the bankers too mad at us, we do quite well.”

Doresa Banning
Doresa Banning is a freelance writer based in Northern Nevada.