WENDY TARIFF – Natural evolution

Mergers, acquisitions, deregulation, downsizing. Credit unions have survived all of it. But not without sometimes having to make substantial changes of their own.

In some instances, when it has become clear that drawing from an employee-based membership cannot sustain a viable business, credit unions seek to change their bylaws to a community-based model.

Last year, 10 such applications to amend bylaws were received by the state Division of Banks. Of the 289 credit unions in Massachusetts, 58 hold community-oriented charters.

In the latest activity report by the Division of Banks, three credit unions – General Electric River Works Employees Credit Union in Lynn, Southern Massachusetts Telephone Workers Credit Union in Fairhaven and Springfield Massachusetts Municipal Employees Credit Union – have applied to amend their bylaws into community-based credit unions.

“It’s an appropriate time for us, because we are an industrial credit union and the telephone company is shrinking all the time,” said Janice A. Bessette, president and chief executive officer of the $93 million-asset Southern Massachusetts Telephone Workers Credit Union.

Some credit unions may stagnate because they are dependent on customer deposits, said Robert B. Kimmett, senior vice president of the Massachusetts Credit Union League. As workers age, many no longer need products like mortgages. The deregulation of utilities also has had an impact on credit unions by producing fewer and fewer members.

“You begin to see unevenness in the balance sheet and the need for diversity in the marketplace,” said Kimmett.

The small number of members of employee credit unions is also prohibitive, said Kimmett, in that it’s difficult for credit unions to offer products such as a credit card program if there are only 600 members.

But the decision to change bylaws isn’t simply a reflection of downsizing, according to David A. L’Ecuyer, president and chief executive officer of Central One Federal Credit Union in Shrewsbury, which recently completed its change from Worcester Central Federal Credit Union.

“Certainly, when you’re faced with the prospect of severe downsizing from your corporate sponsor, you have to look at it as serious option. But in some cases, I think some people are tied to companies where they might have some downsizing just as a function of the economic cycle. A good healthy credit union should be able to survive that temporary downsizing,” he said.

That wasn’t the case with Worcester Central. “This wasn’t temporary, this was permanent,” L’Ecuyer said. “New England Electric had to actually sell off a whole division of their business due to this deregulation.”

Although the credit union holds a federal charter, the issues Central One now faces as a new community-based credit union are the same as those holding a state charter.

Of the 289 Massachusetts credit unions, 174 hold a federal charter.

Worcester Central was tied to the New England Electric System employees and their family members. With the deregulation of the utility industry came drastic downsizing. “It became readily apparent that we weren’t going to be able to grow – maybe even survive – being tied to that type of a charter,” said L’Ecuyer.

Although he was successful converting Worcester Central to Central One, L’Ecuyer chose a contentious time to file the application. In 1996, an injunction was filed to stop credit unions from signing on new member groups. The Supreme Court upheld it. Credit unions were held in limbo until the passage of the credit union parity act two years later. During that time, all applications came under intense scrutiny.

The Western Massachusetts Telephone Workers Credit Union’s decision to change to a community base in January also was born of downsizing.

“The decision to convert from a SEG [select employee group]-based to a community charter was a natural evolution from the way our business was growing,” said Wendy Tariff, sales and marketing coordinator.

“Originally, we were limited to the telephone company. When this field of membership began to diminish due to the downsizing and restructuring of the phone company, we decided to accept only Springfield-based SEGs,” she said. Since the credit union always included the family of a worker as eligible members, they began to get members from all over the state and found they had to turn away friends and neighbors of members.

“As more and more financial institutions are diversifying their services, the credit union industry strives to stay abreast with all the changes. Our expanded field of membership allows us to remain competitive in terms of our pricing as well as our technology,” she said.

But converting to a community charter doesn’t mean customers will come flocking.

According to L’Ecuyer, the credit union has had to quadruple its marketing and business development efforts.

Marketing Thrust
“The most severe change [resulting from the charter amendment] had to do with marketing. For 50 years, we were what was considered a closed-shop credit union. Basically, our main marketing thrust was word of mouth, which is very powerful,” he said.

Since the switch in 1998, the credit union has grown to 27,000 members with assets of $145 million.

“We’ve seen some growth, but really the first year or two was hard labor, trying to get the word out … after years of people driving up saying ‘hey, we want to open an account’ and having to turn them away. Now we want those same people to come back and open an account. It just takes a lot of time, effort and money,” he said.

The growth rate for Central is about 8 to 10 percent a year on the membership level. While L’Ecuyer said he’d like to see a 15 to 20 percent growth, the percentage reality is good. “I really do believe that we’re just starting out, only being community-based for a couple of years. It really takes at least two or three years to get the word out that we’re open,” he said.

Bessette said that while her credit union has plans for marketing to the community if the application should be approved, “We’re not going to go crazy [with marketing] right away. We’re going to do it very, very slowly.”

Kimmett said marketing does present a challenge to new community-based credit unions. In most cases, credit unions have to hire marketing executives when they become community-based and decide media strategy.

“[That’s] because that isn’t something the average employer-based credit union does. Almost all employer-based credit unions rely on direct communication of some sort, direct mail, Web advertising, newsletters in-plant,” said Kimmett.

Part of what advertising must address, said Kimmett, are the differences between a credit union and a community bank that consumers may not be aware of or care that much about as long as they receive low prices and good service.

The community-based credit union has long come under criticism from bank associations because of what they term as the “unfair” tax advantage. Credit unions are exempt from federal and state tax, while community banks pay substantial amounts.

According to Kevin F. Kiley, executive vice president and chief operating officer of the Massachusetts Bankers Association, banks may have a slightly broader array of powers but still come up short when competing against credit unions.

“When someone has an exemption from state and federal taxes that results in them being able to use 40 percent of their earnings to pay higher rates to reduce the cost of accounts to do direct mailings, direct advertising, you can increase the foothold of your institution in the community to a greater degree than the bank … so they’re a real serious threat to community banks,” said Kiley.

While community banks and credit unions offer many of the same services, credit unions aren’t getting away with an unfair advantage, said L’Ecuyer.

“We provide a multitude of free services that you probably can’t get at other institutions. A lot of those services are costing me a lot of money,” he said, such as free ATM access from any machine and up to $40,000 of loan protection free to the member. “If I’m giving that [the taxes credit unions don’t pay] back to my members in different free services, who’s actually benefiting from this? Society is actually benefiting from these particular services. I’m not able to do some things that a banker is able to do to make greater levels of profits, and that they fail to mention when they talk about how we have this competitive advantage of not having to pay taxes,” said L’Ecuyer.

“At a certain point in time, the Legislature has to look at where community banks fit into the whole sphere of what’s happening in the credit union,” said Kiley.

But generally, people don’t come into credit unions or banks because of a philosophical stance.

“People – I hear this over and over again – don’t really want a mortgage. They want a house … They don’t really want a relationship with an institution when they set out to do business. They have a financial need that they’re looking to meet,” said Kimmett.

After the person comes in is the time for credit unions to explain the differences, Kimmett added: “[We explain] the benefits you’re going to bring to them as a credit union specifically, and what it is you can do for them that’s going to make their life better.”