It’s been 33 years since the Louisville & Nashville Railroad Co. vanished from the American landscape through a series of transportation industry mergers and became one element of Florida-based CSX Transportation, which has 21,000 miles of track in 23 states and two provinces of Canada.
But one institution created by an iconic railroad that dates to 1850 wasn’t hauled away to the CSX corporate headquarters in Jacksonville.
The L&N Federal Credit Union was founded in 1954 as a benefit for employees in Louisville. Not only does it retain the railroad’s signature initials, it has grown into one of the largest credit unions in the state. It has a substantial presence in nine counties that radiate out from Louisville, five counties in Eastern Kentucky, parts of six counties in Northern Kentucky and from there over the Ohio River into two Indiana counties and Hamilton County, Ohio, which includes Cincinnati.
What started with 14 members and $12,000 in assets at the end of its first year now has more than 70,000 members and assets of $960 million, which ranks as Kentucky’s third largest credit union.
“When they first started,” said Tim Root, L&N’s chief marketing officer, “they had volunteer collectors who would walk through the yard on a given day and see who wanted to make a deposit; they would put the money in an envelope and give them a handwritten receipt.”
Along the way, the L&N Federal Credit Union also became the target of criticism last October from the American Bankers Association, which represents U.S. banks that are longtime rivals of the credit union industry, which was first chartered and regulated by the federal government in 1934 during the Great Depression.
At the national level and in Kentucky, banks say credit unions – which are member owned – have an unfair advantage in an industry where they both offer, for the most part, the same financial services.
“Credit unions are nonprofit entities and because of that they don’t pay federal taxes, and the banks think that that gives them a competitive advantage,” said Charles Vice, commissioner of the state’s Department of Financial Institutions, which oversees state-chartered banks and credit unions. “They’re (the banks) paying 33-34 percent in (corporate) taxes, and the credit unions don’t pay that.”
Market conditions, of course, change over the course of eight decades.
‘A pricing advantage’
“We’re fierce competitors in the marketplace, and banks always look at it as a disadvantaged competition,” said Ballard Cassady, president and CEO of the Kentucky Bankers Association and an outspoken critic of credit unions. “That (tax exemption) immediately gives you a 35 percent pricing advantage on anything you do.”
“In the very beginning, Congress granted them a tax exemption so they could meet the credit needs of people of modest means. They don’t do that anymore,” said Cassady, who argues that most credit union customers no longer meet that “modest means” criterion.
Although Cassady and the national bankers group have singled out L&N for comment about aggressive commercial lending practices, it is far from alone in Kentucky, where there are 73 credit unions. The state granted charters to 24, and 49 operate as federal entities regulated by the National Credit Union Administration.
Credit unions report about 790,000 members in Kentucky.
The 24 state-chartered credit unions had consolidated assets of about $3.1 billion at the end of last year, according to the most recent annual report from the Kentucky Department of Financial Institutions. That equals 6.3 percent of the $49.1 billion in assets reported by the 147 banks operating under state charters at the end of 2014.
Credit union assets equal 14.1 percent of what banks have when federal institutions are included.
As of June 30, the Federal Deposit Insurance Corp. said the 172 banks with offices in Kentucky, including those the state chartered, had assets of about $54.6 billion. For state and federal credit unions, the comparable number is about $7.7 billion, said Wendell Lyons, president of the Kentucky Credit Union League, an advocacy group for the industry in Kentucky.
At the national level, credit unions had about a 7 percent share of the financial services business in 2013, the last year for which a figure is available, Lyons said. That share of the market has inched up from 5.6 percent in 1992, he said.
John Fairbanks, a spokesman for the NCUA, cautioned against assigning too much importance to a comparison of banks and credit unions.
“It’s a little apples-to-oranges,” Fairbanks said, “because credit unions, unless they hold a community charter, don’t serve the general public.
“Anyone can walk into a bank and open an account. Credit unions have defined fields of membership, and unless you fit into one of those … you can’t join. So there’s really no way to determine direct market share vs. banks,” he said by e-mail.
However, Fairbanks pointed out, a “community charter” does allow membership for anyone living inside a designated geographic area (a county, for example) and gives consumers the same kind of access to credit unions that they have to banks.
A shift from federal to state charters
Early in their history, many credit unions were established to serve people who worked for a particular company in a “single sponsor” framework such as, for example, L&N Railroad employees in Louisville.
Membership regulations changed in 1982, when credit unions essentially were given a green light to enroll people who worked for any company that did not have a credit union. This created “multi-group” or “select employee group” credit union entities, and at that point, L&N extended its membership to employees of a long list of companies that included the Jim Beam distillery and Churchill Downs, Root said.
L&N today has a federal community charter allowing members to enroll from a broad geographic area that includes parts of Ohio and Indiana.
There are only minor differences between federal- and state-chartered credit unions, but four that were federally chartered in Kentucky switched to state charters in the past four years. A fifth, Kentucky Telco in Louisville, is expected to make that switch soon.
An important factor influencing decisions to convert charters is that state regulations allow a credit union to draw members from a much larger geographic area, according to Karen Harbin, president/CEO of Commonwealth Credit Union in Frankfort, the largest state-chartered credit union in Kentucky with 85,000 members and $1.1 billion in assets.
“They (the credit unions) feel they can grow their membership” more easily with a state charter, said Harbin, who also is a member of the state’s Financial Institutions Board, which oversees the financial industry. For example, state regulations allow credit unions to enroll residents from throughout any of Kentucky’s 15 area development districts (ADD) if the credit union has an office in the district, she pointed out.
ADDs range in size from five to 17 counties, and state regulators have allowed some credit unions to draw members from two districts, Lyons said.
Autotruck Financial Credit Union, founded in Louisville in 1961 for Ford Motor Co. employees, took advantage of that provision when it switched to a state charter four years ago so it could serve the Barren River Area Development District, which includes Bowling Green and its Corvette plant, as well as the area in and around Louisville, Lyons said.
Autotruck now may draw members from 17 counties.
Members Heritage Credit Union opened in 1960 to serve IBM employees in Lexington. Today it has 45,000 members and assets of more than $300 million, but it switched from a federal to a state charter at the end of 2014, which opened Members Heritage this year to people who “…live, work, worship, attend school or have family members” in 22 counties.
Federal regulations would not allow a credit union to enroll members from such a large swath of the state, Harbin and Lyons said.
Richard Reese, president and CEO of the Kentucky Telco Federal Credit Union, heads a credit union that is in the process of switching to a state charter so that it has a clear path to grow.
“Our credit union has branches in three key metropolitan areas in Kentucky: Louisville, Lexington and Owensboro. A state charter is the only charter option that allows us to serve all three areas on a communitywide basis,” Reese said by e-mail. “If we retained our federal charter, the National Credit Union Administration would only approve our serving one community. Clearly the state charter offers better growth opportunities.”
Kentucky Telco is no newcomer to the credit union business. It was created in 1934, the year the enabling federal legislation was passed, for employees of Southern Bell Telephone and Telegraph in Louisville. Today it is the seventh largest in the state with assets of nearly
David Kennedy, president and CEO of the University of Kentucky Federal Credit Union in Lexington, said his credit union has no interest in seeking a state charter although he acknowledged that such a change is “always a possibility.”
Supreme Court allowed expansion
The core membership of the UK credit union are employees of the university as well as Eastern Kentucky University, whose credit union merged with UK’s a number of years ago, Kennedy said. It also includes employees of the Kentucky Community and Technical College System, which has 16 colleges throughout the state on some 70 campuses.
The UK concentration on educators and others who work at the colleges and universities has helped the credit union grow to about 63,000 people, Kennedy said. “That’s where our growth has been. We’ve been growing very rapidly about six to percent annually,” he said.
This “field of membership” eligibility question is another point of friction with the banking industry.
“They have what is called the ‘air breathers’ credit union code here in Kentucky. That means that if you breathe air, you qualify,” said Cassady, the KBA leader. Membership requirements, he said, are virtually non-existent and have little meaning in the state.
A Kentucky Supreme Court decision in 2010 sided with credit unions that wanted to expand their memberships by expanding the area from which they could draw members. But the decision was not a groundbreaker, according to Debra Stamper, executive vice president and general counsel for the banking group.
“They just ratified what had been going on. It’s not like the doors just opened up in 2010,” Stamper said. “We (bankers) were challenging what was going on. Credits unions were getting broader and broader in their definitions” of who they could serve.
Harbin and Lyons disagree with Cassady’s contention that anyone can become a credit union member. There has to be a true “common bond” or commonality of interest for someone to become a member, they said.
“There has to be a legitimate association for membership,” Lyons said. “It can’t be a shell association that is just a conduit to credit union membership.”
Membership regulations have tightened in the last two years, he said.
Credit union commercial loans up
Commercial lending is another source of friction between banks and credit unions.
Cassady forwarded a chart from the American Bankers Association showing that L&N credit union’s commercial lending volume grew 80 percent from 2010 to 2014, when the L&N made $63 million in business loans. Credit unions such as L&N are competing more vigorously in commercial lending, he said.
One bank recently lost a $30 million lending opportunity to a credit union, Cassady said, adding that parties who borrow $30 million for business don’t meet the “modest means” criteria.
L&N’s Root said when an institution starts with only $6 million in commercial lending in 2010, it’s not difficult to quickly grow by 80 percent.
“Some banks didn’t want to fool around with these loans (L&N made) because the dollar amount was so low,” Root said, while others just didn’t fit into the banks’ portfolio strategies.
A commercial lending bill that banks oppose and credit unions support was introduced in September by U.S. Sen. Rand Paul, the Bowling Green Republican who is seeking his party’s 2016 nomination for president.
Paul co-sponsored a bill that would increase the business-lending cap for some credit unions from 12.25 percent of assets to 27.5 percent. The Credit Union National Association estimates the legislation would allow credit unions to lend an additional $13 billion to small businesses and help create 140,000 jobs nationwide, according to Paul’s Washington office.
Consumers looking for the highest rates of return on deposits or the lowest interest rates for a loan will find credit unions generally have more attractive rates, according to the NCUA.
But for most transactions, the differences between the two institutions are small, typically just fractions of a percentage point, the NCUA reports.
For savers, the most recent rate comparison by the NCUA in late June shows that the biggest gap between the two was on a $10,000, five-year certificate of deposit. On average, credit unions were paying 1.44 percent interest while banks paid 1.20 percent.
The FDIC and the NCUA both insure deposits up to $250,000.
Difference in philosophy, and rates
Consumers save a little more than 1 percentage point in interest with credit union credit cards, while 15-year mortgage rates were identical at 3.34 percent, according to the NCUA. On 30-year mortgages, banks beat credit unions by four-hundredths of a point, 4.07-4.11 percent.
NCUA data showed that the most consistent and substantial difference in lending rates was for car loans. Credit unions beat banks, on average, by 2.4 percentage points on 48-month used car loans and by nearly 2.1 percent for 48-month new car loans.
While interest rates might vary slightly for banks and credit unions, Cassady emphasized that the overriding difference is in the tax-exempt status.
“To me, the obvious questions is, ‘What are you doing with the money?’ If you’re not paying taxes, that’s a 35 percent break on everything you’re doing. What are you doing with the money?” Cassady said.
Banks in Kentucky paid $133 million in taxes last year while credit unions paid nothing.
But Lyons and Harbin stress that credit unions and banks have far different objectives.
“We don’t have to maximize the wealth of shareholders. The tip of the spear is that we want to maximize the wealth of credit union members,” Lyons said.
“It’s the whole philosophy of people helping people,” Harbin said. “We are not for-profit, and we don’t report to shareholders. Our purpose is to serve members, not to maximize profits. We have to make money to continue to operate so we do have to make a profit, but that’s not our primary purpose.”