Competition Between Credit Unions and Banks

How Public Policies are Changing the Competitive Market for Banking Services in ew Hampshire March 2013

Prepared by:

brian@poleconresearch.com

Table of Contents EXECUTIVE SUMMARY ...........................................................................................................................................3 I.

I TRODUCTIO ..............................................................................................................................................5 A.

II.

THE PUBLIC POLICY DISTINCTIONS BETWEEN CREDIT UNIONS AND COMMUNITY BANKS ................................5 KEY TRE DS I CREDIT U IO A D COMMU ITY BA KI G I DUSTRIES ..............................7

A. CREDIT UNIONS ARE CAPTURING A LARGER SHARE OF THE PROFITS OF NEW HAMPSHIRE DEPOSITORY INSTITUTIONS ............................................................................................................................................................ 10 B. THE CREDIT UNION INDUSTRY IS CONSOLIDATING AND DOMINATED BY LARGE INSTITUTIONS ..................... 11 C. BANKS AND CREDIT UNIONS PROVIDE SIMILAR BUT NOT THE SAME SERVICES .............................................. 13 D. BUSINESS LOANS ARE A KEY DIFFERENCE ...................................................................................................... 14 E. IMPLICATIONS .................................................................................................................................................. 15 III. A. B. C. D. E. IV. A. B. C. D. E.

DOES THE PERFORMA CE OF CREDIT U IO S JUSTIFY THEIR TAX EXEMPTIO ? ............ 16 NATIONAL DATA SUGGEST THAT CREDIT UNIONS SERVE FEWER LOW INCOME RESIDENTS .......................... 16 NH BANKS ARE MORE LIKELY TO SERVE LOWER INCOME REGIONS THAN ARE NH CREDIT UNIONS ............ 18 CREDIT UNIONS PROVIDE MORE FAVORABLE RATES ON SOME DEPOSITS AND LOANS................................... 19 LOAN YIELDS ARE SIMILAR AT NH CREDIT UNIONS AND COMMUNITY BANKS .............................................. 20 NET INTEREST MARGINS ARE LOWER AT CREDIT UNIONS............................................................................... 21 THE PROFITABILITY OF CREDIT U IO S A D COMMU ITY BA KS ........................................ 22 THE EFFECT OF REMOVING CREDIT UNIONS’ TAX EXEMPTION ....................................................................... 22 FEE INCOME HAS NEARLY DOUBLED AS A PERCENT OF CREDIT UNION ASSETS ............................................. 23 CREDIT UNIONS RELY MORE ON NON-LOAN SOURCES OF INCOME THAN DO BANKS .................................... 24 THE IMPORTANCE OF MAINTAINING THE CREDIT UNION “BRAND” ................................................................. 25 BANKS WITH SIMILAR OWNERSHIP (NOT OWNED BY STOCKHOLDERS) RECEIVE NO TAX SUBSIDY............... 26

V.

THE TAX EXEMPTIO MAY I CREASE EXPE SES RATIOS AT CREDIT U IO S .................... 26

VI.

IMPLICATIO S FOR STATE REVE UE .................................................................................................. 28

VII. CO CLUSIO S ............................................................................................................................................... 30 REFERE CES ............................................................................................................................................................ 31 APPE DIX A .............................................................................................................................................................. 32

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Executive Summary This study examines trends in the market for banking services in New Hampshire and compares the performance of New Hampshire credit unions and community banks during the time period from 2001 through 2012. The study compares the size and market share of credit unions and community banks in New Hampshire, examines similarities and differences in the sources of income, revenues, expenses, and profitability of credit unions and community banks, and considers factors, outside of consumer choice, that contribute to key trends and changes in the market shares of credit unions and community banks. State and federal policymakers are especially concerned with regulations or tax policies that unintentionally alter or distort competitive markets. This study examines the original public policy rationale for the corporate tax exemption provided to credit unions and whether it still applies. In addition, the study examines the impact that exemption from corporate taxes has on credit unions, their members, state government revenues, and the competitive position of credit unions in the market for financial services.

The corporate income tax subsidy provided to credit unions was originally justified as an incentive for credit unions to provide banking services to lower income areas and individuals. The findings of this study and studies nationally, however, indicate that banks serve higher percentages of lower income residents and geographic areas than do credit unions.

Our results suggest that the primary impact on New Hampshire credit unions of the corporate tax subsidy is to increase profits and their retained earnings, providing them with the capital necessary to increase market share. Only about one-quarter of the benefits of the tax subsidy are passed-on to depositors and borrowers, and another one-quarter of the impact is absorbed in higher (than New Hampshire community banks) non-interest expenses of credit unions. The remainder of the subsidy is used to fund credit union expansion.

The results of this study suggest that the original justifications for exempting credit unions from the corporate income tax no longer appear appropriate. Policymakers must decide whether the benefits of credit union tax exemption, and their allocation among depositors, borrowers, employees, and owners, warrants a continuation of the exemption. In addition, policymakers must consider the impact that the tax exemption is having on the competitive landscape of the financial services market and the impact that an increasing share of financial services captured by credit unions will have on government revenues.

Other key findings of the report include: •

Credit unions are now the largest depository institutions headquartered in the State of New Hampshire and deposits at credit unions are increasingly consolidated in a small number of New Hampshire credit unions.

•

Based on the reported income of New Hampshire credit unions, the corporate tax exemption costs the State of New Hampshire approximately three million dollars annually in business profits taxes.

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•

New Hampshire credit unions have generally been more profitable than New Hampshire community banks over the past decade, despite having higher expense ratios.

•

Only 15 percent (14 branches) of the 93 in-state branches of New Hampshire credit unions serve the state’s less wealthy counties, while 44 percent (68 branches) of 154 New Hampshire’s community bank branches serve New Hampshire’s least wealthy counties.

•

New Hampshire credit unions rely more on non-interest income for their profitability than do New Hampshire’s community banks. Along with the corporate tax exemption, this allows credit unions to offer marginally lower interest rates on some types of loans (notably new and used car loans but not on mortgage loans), and higher rates on some types of deposits.

•

New Hampshire credit unions are increasingly relying on fee-based income for profitability. Fee-based income at New Hampshire credit unions has risen faster than has fee-based income at New Hampshire community banks.

•

Credit unions are capturing a larger share of the profits of depository institutions headquartered in New Hampshire.

•

New Hampshire credit unions hold about one-third of the assets of depository institutions headquartered in New Hampshire while community banks hold about two-thirds.

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I. Introduction The market for banking services has changed dramatically in New Hampshire and the nation over the past several decades. This change is reflected in where retail banking customers choose to keep their deposits and from which institutions they choose to borrow. Between 10 and 20 percent of customers change their financial institution each year. Across the country, both credit unions and smaller community banks appear to have increased their share of the market for retail deposit and loan customers. In part, this movement toward smaller institutions was in response to fallout from the housing market crash and financial crisis of the past decade, but it also reflects perceived differences in the satisfaction with, and price of, the service customers receive at banking institutions. Customer satisfaction surveys show that the public continues to have a high level of satisfaction with community banks and credit unions.1 New Hampshire credit unions are expanding their share of the financial services market, relative to both large commercial banks and smaller community banks. With public satisfaction with community banks and credit unions similarly high, it is fair to ask whether differences in regulation and tax treatment are contributing to changes in market share and differences in growth rates between the credit unions and community banks. This report examines the market for retail banking services in New Hampshire and compares key aspects of the characteristics and performance of community banks headquartered in New Hampshire with New Hampshire headquartered credit unions.2 A. The Public Policy Distinctions Between Credit Unions and Community Banks Credit unions are the only depository institutions that are exempt from the federal corporate income tax. Until 1951, all savings and loans (S&Ls) were exempt from federal income taxes under the same tax code provision. The Revenue Act of 1951 repealed the tax exemption for S&Ls, but the exemption for federal and state credit unions was continued under a separate tax code provision.3 One reason that the credit unions' tax exemption was not repealed at that time was that credit union membership was limited to those with a “common bond” while savings and loans membership was available to everyone. The original restrictions on credit unions were designed to limit their ability to compete with banks by strictly defining who could be a depositor and borrower from a credit union, with the idea that credit unions would use their tax advantage to serve low-income borrowers and depositors. According to the Federal Credit Union Act of 1934, federal credit union memberships “shall be limited to groups having a common bond of occupation, or association or to groups within a well-defined neighborhood, community or rural district”. The common bond criterion takes many forms:

1“

American Customer Satisfaction Index,” December, 2012 and prior years.

The Federal Deposit Insurance Corporation (FDIC) traditionally has defined community banks as those with assets under $1 billion but they also consider some larger banks as community banks if a sufficient percentage of their lending is in the same communities as their deposits. NH has three community banks with just over $1 billion in assets.

3 Congress did provide S&Ls a de facto exemption from federal income taxes by permitting a liberal allowance for bad debt reserves. This de facto exemption continued until the Revenue Act of 1962 reduced the allowance for bad debt reserves.

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1. Individuals that work for one company or who have a common occupation are allowed to form a credit union.

2. Another common bond is allowed for individuals in the same social or civic group.

3. In the early 1980s, some credit unions failed and credit unions with multiple common bonds were allowed to combine.

4. The final common bond is one of community, which allows members of defined local geographies to be members of a credit union.

The multiple common bond and geographic community bond categories essentially make credit union membership available to anyone. Several New Hampshire credit unions state on their websites that “membership is available to anyone living in New Hampshire”.

The federal government allowed credit unions tax-exempt status as an incentive to provide services to low-income working class individuals and their families but financial services markets have changed since the tax exempt status was awarded in the 1930s. While studies differ, it has been shown that overall, members of credit unions have higher average incomes, have achieved higher education levels, and have higher rates of home ownership than nonmembers.4 Later in this report we examine evidence in New Hampshire of the differences in service to lower-income residents between New Hampshire community banks and credit unions.

Since the Federal Reserve, GAO, and others have documented the tendency of credit union customers to have higher average incomes than customers of banks, the credit union industry has increasingly relied on their not-for-profit “brand” as well as their co-operative ownership (that is not owned by stockholders but by members whose accounts at credit unions make them “shareholders”) as rationales for maintaining their tax exempt status. However, many community banks are also cooperatively owned. These cooperatively owned “mutual” savings banks, despite being owned by their depositors similar to credit unions, long ago had their tax exempt status removed. In addition, as we document later in this report, New Hampshire credit unions are generally more profitable than are New Hampshire’s community banks. Although credit unions differ in some aspects from banks, our research (and the research of others nationally) shows that credit unions, their products, services, business model, and their profitability continue to erase the nominal differences between banks and credit unions.

The ability to keep a third or more of their net income because of their exemption from the corporate income tax provides credit unions with a distinct advantage over banks. That tax subsidy was originally enacted to give credit unions incentives to provide low interest loans while paying higher interest rates to depositors. Research nationally has been mixed on how much lower the interest rates are on loans or the interest paid on deposits at credit unions. Our review of studies and national data suggests that a portion of the benefits of the tax subsidy granted to credit unions is passed along to members in the form of lower loan rates (most notably on new and used car loans but not generally on mortgage loans) and higher rates on some types of deposits. However, we estimate that no more than one-quarter of the tax subsidy provided to 4

Chmura Economics & Analytics, “An Assessment of the Competitive Environment Between Credit Unions and Banks,” February, 2004. Government Accountability Office, “Greater Transparency "eeded on Who Credit Unions Serve and on Executive Compensation Arrangements,” November, 2006.

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credit unions is passed through to their depositors and borrowers in the form of higher deposit and lower loan rates. The remainder of the subsidy provided credit unions is allocated in the following ways: •

•

It increases credit union retained earnings, providing them with additional capital that allows for faster asset growth relative to banks who must pay approximately one-third of their earnings in corporate income taxes. This impact of the tax subsidy absorbs about one-half of the benefits of the subsidy.

It increases credit union personnel and operating expenditures compared to similarly owned mutual and cooperative banks who are subject to the corporate income tax. This impact absorbs about one-quarter of the tax subsidy.

Like all banks, mutual and cooperative community banks are required to serve low and moderate income consumers yet they do not receive the same tax benefits as credit unions. Credit unions have increased in size, expanded their range of services and geographic reach, and weakened or eliminated their common bond requirements. At the same time, the primary objectives of credit unions appear to have shifted from serving low and moderate income consumers to capturing market share and boosting un-taxed earnings to provide additional capital for expansion.

Fiscal and efficiency concerns require that the subsidy in the form of a tax exemption for credit unions must be evaluated from many perspectives; does the tax exemption achieve desired objectives, what are the fiscal costs of the subsidy, who receives the benefits of the subsidy, and how does the subsidy affect the competitive market for financial services. This study examines trends in the credit union and community banking industries in New Hampshire, the performance of these industries in the state, how the trends are shaping the market for deposit and loan services in New Hampshire and the fiscal impacts of the corporate tax exemption provided to credit unions.

II.

Key Trends in Credit Union and Community Banking Industries

Over the past decade, deposits at New Hampshire credit unions have grown faster than have deposits at commercial and savings banks located in the state. Figure 1 shows that deposits at New Hampshire credit unions have grown about 30 percent more than have deposits at banks in New Hampshire (including all bank branches in NH even those of banks headquartered in other states) since the middle of the past decade. In part, this reflects a movement of some deposits away from larger national and regional banks that has benefited smaller institutions (both credit unions and community banks experienced larger growth in deposits in New Hampshire with credit union deposits growing by a larger percentage). But aggressive competition for deposits by larger credit unions with multiple branches in the state has helped credit unions gain an increasingly large share of the deposit market in New Hampshire.

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Deposits at NH credit unions were about $4.8 billion at the end of 2012, compared to about $7.4 billion in the NH branches of community banks headquartered in the state and $27 billion overall in deposits at all bank branches in New Hampshire. Increases in deposits at credit unions will generate larger percentage increases than similar increases among the $27 billion in deposits at all bank branches in NH. Any increase in deposits at NH community banks that comes at the expense of large banks produces no net increase in market share of deposits for the

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overall banking industry.

The overall trend in the deposit market is that credit unions are capturing a larger share of the market in NH, and that trend has accelerated since the housing market crash and subsequent financial crisis that began in 2008 (Figure 2). Figure 2 understates somewhat the market share of deposits at credit unions in NH because deposits in NH that are in NH branches of credit unions located in another state are not included in the market share for credit unions, while deposits at all bank branches in NH (regardless of where the banks are headquartered) are included. The largest credit union in Massachusetts (and one of the largest in the country - Digital Federal Credit Union) has opened four branches in Southern New Hampshire and their deposits are not included in these totals.

Table 1 The 25 Institutions With the Most Deposits in the NH Banking Market Institution ame RBS Citizens, National Association TD Bank, National Association Bank of America, National Association People's United Bank Service Federal Credit Union** Bank of New Hampshire Sovereign Bank, National Association Northeast Credit Union Lake Sunapee Bank, FSB Northway Bank Centrix Bank & Trust St. Mary’s Bank (Credit Union) Meredith Village Savings Bank Mascoma Savings Bank Merrimack County Savings Bank Triangle Credit Union Bank of New England Savings Bank of Walpole Woodsville Guaranty Savings Bank Bellwether Community Credit Union Franklin Savings Bank Ledyard National Bank Claremont Savings Bank Salem Co-operative Bank NBT Bank, National Association

State (Hqtrd) RI DE NC CT NH NH DE NH NH NH NH NH NH NH NH NH NH NH NH NH NH VT NH NH NY

o. of H Branches 80 72 30 29 24 23 20 15 19 17 6 11 11 9 7 8 6 4 9 3 9 6 5 1 5

Deposits at H Branches $6,772,623,000 $5,373,364,000 $4,890,497,000 $1,353,331,000 $1,027,825,465 $880,268,000 $812,815,000 $723,413,113 $687,147,000 $655,654,000 $651,366,000 $624,803,971 $531,770,000 $493,361,000 $482,456,000 $408,269,668 $318,441,000 $291,969,000 $288,562,000 $278,798,529 $275,879,000 $259,220,000 $258,255,000 $223,813,000 $220,928,000

** Service Federal Credit Union has $2.2 billion in deposits, including deposits in Massachusetts and in Germany. For this table, the amount of deposits estimated in NH is a prorated portion based on the percentage of Service Federal’s branches that are located in NH. Source: FDIC, NCUA, PolEcon

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Table 1 shows the 25 institutions (credit unions and banks) headquartered in NH with the largest share of deposits in the NH market in 2012. The table shows that credit unions are prominent among the largest depository institutions in the state, and are largest among institutions headquartered in the State of New Hampshire. Deposits at Service Credit Union are adjusted downward by 40 percent to account for the estimated percentage of that credit union’s branches that are outside the state and outside the country. Service Credit Union is the only NH-based credit union with out-of-state and out-of-country branches and unlike the Federal Deposit Insurance Corporation (the regulator of most banks), the National Credit Union Administration (the regulator of CUs) does not require or report deposits by branch location. Nevertheless, the volume of deposits in the NH market that are held at Service Credit Union is larger than all but the four largest national and regional banks with branches in the state.

Looking at only banks headquartered in New Hampshire, we see that credit unions are now the largest depository institutions headquartered in the state. Figure 3 presents the 20 largest depository institutions headquartered in New Hampshire. The chart shows that the largest (in terms of deposits) institution is a credit union, as are three of the 10 largest.

A. Credit Unions are Capturing a Larger Share of Profits Although credit unions are exempt from corporate income taxes, they generate substantial amounts of income in excess of their expenses. As an industry, credit unions are quite “profitable� from an economic perspective. As is occurring in the deposit and loan market in New Hampshire, credit unions are capturing an increasing share of the profits from retail banking activities in New Hampshire. Multistate banks do not report their profits on a state-by-state basis to the FDIC and thus there is no publicly available data to examine and compare the profits of all

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banks in NH with the profits of credit unions in the state.5 Instead, to compare the share of profits of NH credit unions with New Hampshire (headquartered banks) over time we use community banks with a consistent structure and headquarters in the state. Where mergers or acquisitions occurred among these banks they involved other NH headquartered banks and thus any changes in the aggregate profits data of these NH community banks is not affected by the mergers or combinations.

Figure 4 shows that the profits of NH credit unions now equal about 45 percent of the profits earned by NH community banks. Credit unions share of the profits earned by the entire banking industry (including all out-of-state headquartered banks) along with credit unions would be much smaller of course, but from the perspective of providing a level competitive field for all depository institutions headquartered and committed to the State of New Hampshire, as well as to understand the impact on state revenue, it is important for policymakers to understand the relative magnitudes of these two, similar industries that receive differential tax and regulatory treatment.

B. The Credit Union Industry is Consolidating and Dominated by Large Institutions The credit union industry is consolidating. A small number of credit unions are accounting for the majority of growth in the industry and increasingly dominating the credit union landscape.

The industry consolidation contributes to a widening gap between two distinct groups of credit unions - larger credit unions which are relatively few in number, who provide a wider range of

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Profit analysis is further complicated because of the many acquisitions and ownership and other changes in bank structure. This confounds many analyses of aggregated totals but presents less of a problem when ratio analysis is employed.

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services and aggressively pursue market share in the state’s banking market, and smaller credit unions which are greater in number and provide more basic banking services.

Several credit unions are challenging banks as the largest depository institutions in New Hampshire and elsewhere. The largest credit union in NH (Service) now has 37 percent of all credit union deposits in NH, up from 27 percent just since 2005.6 The 10 largest credit unions now have 98 percent of all deposits at NH credit unions, up from 89 percent in 2001. With “common bond� and the need to serve lower income households requirements relaxed or eliminated, and with the ability to fuel growth by retaining untaxed profits, rapid expansion is possible for aggressive credit unions looking to expand and capture market share. Because some credit unions remain true to their original mission of serving low income households or providing services to smaller groups of individuals with a common bond, the credit union industry is increasingly bifurcated; some institutions emphasize growth in market share and others focus on their original mission.

Figure 5 graphically presents the concentration of assets at NH credit unions compared to the concentration of deposits at NH headquartered community banks. The chart shows how the distribution of assets at community banks is spread across all of the 20 institutions, with limited concentration of assets, while the distribution of credit union assets is heavily concentrated in just a few credit unions.

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The deposits of Service Credit Union are adjusted to account for an estimated 40% of deposits that are at one branch location in Massachusetts and 14 branches in Germany.7

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As a complement to Figure 5, Table 2 presents credit union and community banks headquartered in New Hampshire by asset size. The table shows that the credit union industry in NH is about one-half the size of New Hampshire’s community banking industry. The table also shows how concentrated credit union assets are in just a few institutions compared to NH’s community banks. Finally, the data in Table 2 shows the location of the main branch in NH for each bank and credit union. Although not highlighted, it is insightful that many of the main offices of NH’s community banks are located in NH’s more rural and less wealthy regions, compared to the main offices of NH credit unions. This is especially important when a primary justification for the subsidy given to credit unions is for service to low and moderate income households and regions.

Table 2 New Hampshire Headquartered Credit Unions and Community Banks by Asset Size (Dec. 2012) Credit Union Name Service Federal ** Northeast St. Mary's Bank Triangle Bellwether Community Granite State New Hampshire Federal Holy Rosary Members First Guardian Angel New Hampshire Postal Precision Cheshire County Emp. N.H. Community Timken Aerospace Emp. St. Joseph Hospital Emp. N G M Employees Cheshire Health Freudenberg-NOK Emp. GROPACO

Main HQ Portsmouth Portsmouth Manchester Nashua Manchester Manchester Concord Rochester Manchester Berlin Manchester Keene Keene Claremont Lebanon Nashua Keene Keene Bristol Groveton Total

Assets($000) $1,323,311 $848,434 $732,004 $487,064 $361,185 $306,836 $238,430 $185,451 $135,775 $40,939 $37,050 $16,710 $13,756 $7,929 $7,113 $5,888 $4,373 $3,490 $1,983 $828 $4,758,550

Bank Name Lake Sunapee Bank, FSB Bank of New Hampshire Mascoma Savings Bank Northway Bank Centrix Bank & Trust Meredith Village Savings Merrimack County Savings Bank of New England Salem Co-operative Bank Woodsville Guaranty Savings Franklin Savings Bank Savings Bank of Walpole Claremont Savings Bank Federal Savings Bank Sugar River Bank The First Colebrook Bank Optima Bank & Trust Co. Piscataqua Savings Bank Profile Bank, FSB Community Guaranty Savings

Main Office Newport Laconia Lebanon Berlin Bedford Meredith Concord Salem Salem Woodsville Franklin Walpole Claremont Dover Newport Colebrook Portsmouth Portsmouth Rochester Plymouth Total

Assets($000) $1,268,609 $1,128,224 $1,069,530 $869,816 $823,398 $680,234 $671,213 $491,841 $397,784 $394,562 $365,660 $325,600 $317,776 $277,303 $262,251 $250,600 $245,610 $230,772 $172,957 $104,297 $10,348,037

** Total assets at Service Federal Credit Union are over $2 billion, including assets in Massachusetts and in Germany. For this table, the amount of assets estimated in NH is a prorated portion based on the percentage of Service Federal’s branches that are located in NH Source: NCUA, FDIC, PolEcon.

C. Banks and Credit Unions Provide Similar but ot the Same Services Banks and credit unions both make loans and investments funded primarily by customer deposits. At one time, the business model of credit unions was fundamentally different than those of commercial and savings banks. Now, while small credit unions provide basic deposit and loan services to their members, an increasing number of NH credit unions are offering a

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broader variety of financial services. Beyond basic deposit and loan services, more credit unions are also offering insurance, brokerage, and other services (all exempt from taxation as long as the income from the services passes through to the credit union).7 Credit unions accept consumer and business deposits and primarily make consumer loans, although some credit unions are substantial business lenders. Banks traditionally have made a large portion of their loans to businesses. Commercial lending requires a substantial commitment of personnel and considerable expertise in business finance that was often beyond the capabilities of smaller credit unions. Nationwide, there have been efforts to increase the business loan concentration limits that currently limit business lending by credit unions. In 1992, the National Credit Union Administration (NCUA) limited member business loans in response to losses to credit unions, their members, and the National Credit Union Share Insurance Fund. NCUA established loan security requirements, limits on loans to one borrower, and an aggregate portfolio cap on construction and development loans. Credit unions are allowed a maximum of 12.25 percent of their assets to be in business loans. However, business loans that are backed by a business owner’s primary residence, business loans under $50,000, and loans for which cash collateral is held by a depository institution are not counted against this cap.

D. Business Loans are a Key Difference The issue of caps on business lending is an important and controversial one for the banking and credit union industry. As Figure 6 shows, NH credit unions have a much higher percentage of their loan portfolios in new and used vehicle loans than do NH’s community banks,

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Credit unions often offer these services via “credit union service organizations”(CUSOs) which they wholly own, invest in along with other credit unions, or contract for services with. One example is Borthwick Associates, an insurance brokerage firm that is wholly owned by Northeast Credit Union. When income generated from CUSO investments is consolidated with the credit union, it becomes tax exempt.

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while business loans have traditionally been a large portion of community bank assets, but only a small portion of credit union assets.

Banks object to raising the cap on business loans, arguing that it will not increase credit available to businesses but simply take market share from banks. Banks argue this will occur because: •

•

The tax exemption given to credit unions provides them with a substantial advantage over banks that lose one-third or more of their profits to corporate income taxes.

Credit unions are provided additional competitive advantages by being allowed to avoid the compliance costs of the Community Reinvestment Act (CRA). The CRA requires banks to insure that qualified low and moderate income borrowers have credit made available to them. The CRA exemption allows credit unions to save money in two ways. Credit unions do not have the compliance costs associated with the CRA administration and they do not face the potential loan charge-offs that banks of more than $250 million in assets have for their required community development loans.

Historically, business loans have been riskier than most consumer loans and as such are typically priced higher (they require a higher interest rate). The higher potential profit on business loans is compensation for the greater risk they present to lenders. Banks argue that the tax subsidy provided to credit unions would allow credit unions to capture a larger share of their most profitable loans. Credit unions’ capture of a larger share of the market for business loans implies a larger and more profitable portion of the loan market will become tax exempt.

E. Implications The trends highlighted above suggest that the market for financial services is changing.

Although still much smaller than the banking industry, credit unions are capturing a larger share of the financial services market. To the extent that these changes simply reflect the preferences of consumers of financial services, the market is functioning properly and policymakers have little reason for concern. If customers of some banks become dissatisfied with the services they receive or their costs, or if there are significant populations or geographies that are underserved by the banking industry, having alternatives in the form of credit unions is likely to result in efforts to improve the overall quality accessibility, and satisfaction with the financial services industry. But to the extent that changes in the market are a function of differences in how banks and credit unions are taxed or regulated, the difference can affect the competitive landscape of the financial services market and violate key principles of the nation’s and the state’s taxation and fiscal policies.

If credit unions continue to capture a larger share of financial services market, rather than simply serve underserved groups with lower-priced products, as was the original justification for their tax exempt status, a greater share of economic activity will be exempt from corporate taxation. At a time when there is concern that the subsidies received by some industries and activities contribute to relatively high rates of taxation on less favored industries and activities, there is a growing interest in eliminating preferential treatment to industries that do not yield significant public benefits. At one time, the credit union industry was a small, niche portion of 15

the financial services market that provided a limited array of services to a limited segment of the population. Lawmakers were willing to subsidize credit unions (via their corporate tax exemption) as a cost for assuring that lower-income citizens would be served by depository institutions. Services offered by credit unions have become similar to those provided by banks.

Banks are required to serve low and moderate income residents (via the Community Reinvestment Act) and are regularly examined for compliance in that area. Requirements for credit unions to serve low-income citizens have been eliminated or lack oversight. Lawmakers, economists and others increasingly are questioning whether there are benefits to the credit union subsidies that justify their costs and whether the subsidy is altering the competitive market for financial services.

III. Does the Performance of Credit Unions Justify Their Tax Exemption?

The original justification for the tax exemption of credit unions was the idea that credit unions served lower income borrowers and depositors. Savings and loans were also given this tax exemption. In 1951, the tax exemption for savings and loans was repealed. One reason that the credit unions' tax exemption was not repealed at this time is that credit union membership was limited to those with a “common bond” while savings and loans membership was available to everyone. Originally a “common bond” included having the same employer (there are still credit unions offered by employers as a benefit to their employees) or for a similar type of employers (several manufacturers together) or individuals in similar industries or occupations. The common bond was expanded to include geographic bonds, such as members of the same community.

Geographic bonds were expanded and now allow membership in many NH credit unions to anyone living in the state. More recently, credit unions were allowed to offer membership across state lines and many credit unions now have branches in more than one state. The largest credit union in Massachusetts now has four branches in NH and Service Credit Union in New Hampshire has a branch in Falmouth, Massachusetts as well as 14 branches serving military personnel and families in Germany. Thus one rationale for the tax subsidy given to credit unions, that they serve a limited number of members with a common bond, no longer applies to many credit unions and none of the larger credit unions in New Hampshire.

Appendix A contains the membership qualifications at nine of NH’s largest credit unions and shows how loose the “common bond” criteria for credit union membership has become, with NH’s largest credit unions offering membership to nearly all residents of the state and residents of some counties in neighboring states. The largest credit union in NH allows residents living anywhere in the state to become a member, except residents of the least wealthy county of the state. Only two of its 24 branches are located in any of NH’s more rural counties. One of these branches is located in the Dartmouth Hitchcock Medical Center and thus unlikely to be primarily serving lower income residents of Grafton County, and the other is located in the university community of Plymouth.

A. ational Data Suggest That Credit Unions Serve Fewer Low Income Residents There are few publicly available studies on the socioeconomic similarities and differences of credit union and bank customers or the degree to which credit unions serve lower and moderate income individuals. In 2005 testimony before the U.S. House of Representatives Committee on Ways and Means, the U.S. Government Accountability Office (GAO) stated that:

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“Information on the extent to which credit unions are lending and providing services to households with various incomes is scarce because "CUA, industry trade groups, and most states have not collected specific information describing the income of credit union members who obtain loans or benefit from other credit union services.” 8 A later 2006 report by the GAO titled “Credit Unions. Greater Transparency is "eeded on Who Credit Unions Serve and on Senior Executive Compensation Arrangements” expresses these concerns more directly.9 Credit unions - even those whose common bond is serving a geographic area(s) - are not subject to the federal Community Reinvestment Act (CRA), which requires banking regulators to examine and rate banks on lending and service to low- and moderate-income neighborhoods in their assessment area. In 1977, the U.S. Government enacted the Community Reinvestment Act (CRA), which requires banks and other financial institutions (but not credit unions) to provide deposit and loan services to low income areas. The CRA requires banks to target the same markets that credit unions originally were granted tax-exempt status to serve. Thus banks, especially community banks, serve the same markets and provide the same services as credit unions, without the tax subsidy credit unions receive for serving low income individuals, while credit unions receive the subsidy without ever having to demonstrate they actually serve low income individuals.

The GAO study as well as studies by the Credit Union National Association and the Woodstock Institute10 show that members of credit unions have higher average incomes, have achieved higher education levels, and have higher rates of home ownership than nonmembers.

Understanding the degree to which credit unions serve less wealthy communities and individuals is important because credit unions contend that their exemption from corporate income taxes allows them to serve the underserved populations that are often overlooked by other financial institutions. Credit unions are not subject to CRA regulations and many policymakers simply accept that credit unions serve lower income regions and individuals without requiring documentation of that service.

Examining data from the Federal Reserve Board’s “Survey of Consumer Finances”, the GAO concluded that “credit unions overall served a lower percentage of households of modest means (low- and moderate-income households combined) than banks.” More specifically, while credit unions served a slightly higher percentage of moderate-income households than banks, they served a much lower percentage of low-income households. As Figure 7 shows, 16 percent of households that primarily and only used credit unions had low incomes, compared to 26 percent of households that used banks. In addition, the percentage of middle and upper households that primarily and only used credit unions is higher than the percentage of middle and upper income households used banks (64% to 58%).

8

U.S. Government Accountability Office, “Issues Regarding the Tax Exempt Status of Credit Unions,” GAO-06220T. 9 Government Accountability Office, “Credit Unions. Greater Transparency is "eeded on Who Credit Unions Serve and on Senior Executive Compensation Arrangements,” November, 2006.

10 Credit Union National Association “2002 "ational Member Survey” and Woodstock Institute, “Rhetoric and Reality: An Analysis of Mainstream Credit Unions’ Record of Serving Low Income People,” February, 2002.

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B.

H Banks Serve More Lower Income Regions Than Do H Credit Unions

There are 20 community banks headquartered in New Hampshire. These banks have a total of 154 branches located throughout the state, of which 68 (or 44.2%) are located in the four least wealthy counties of the state. In contrast, the 20 credit unions headquartered in the state

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have 93 branches of which 14 (or 15.1%) were located in NH’s four least wealthy counties (Figure 8). Fully, 83 percent of NH headquartered banks and credit unions branches that are located in NH’s least wealthy counties are branches of NH community banks. Despite having about 40 percent of the combined total of branches of NH community banks and credit unions, credit union branches comprise just 17 percent of the branches serving NH’s least wealthy counties. The largest NH credit unions are even less likely to serve NH’s least wealthy regions.

The 10 largest NH credit unions hold 98 percent of all credit union deposits and own 87 percent of all the credit union branches in NH, but only 9.8 percent of the branches of NH’s largest credit unions are located in NH’s least wealthy regions. The numbers in Figure 8 actually understate the degree to which banks serve less wealthy regions of New Hampshire. Three Vermont community banks (Passumpsic, Connecticut River, and Union Bank) also have branches in NH’s less wealthy counties and Citizens Bank has branches in both Berlin and Colebrook as well.

C. Credit Unions Provide More Favorable Rates on Some Deposits and Loans The credit union tax subsidy is thought to enable credit unions to offer higher rates on deposits and lower rates on loans and to do so for lower income households. Credit union’s service to lower income households has been questioned by several researchers as well as the Government Accountability Office, so it is reasonable to ask whether credit unions actually provide more favorable rates as a benefit of their tax subsidy. Moreover, if credit unions do offer more favorable rates, is this benefit worthy of a tax subsidy, especially if it primarily benefits the middle and upper income households that credit unions serve.

Table 3 National Avg. Rates on Deposits and Loans - June 2013 Deposits

Loans

Product Interest Bearing Checking Regular Savings Account 5 YR CD-10K 3 YR CD-10K 1 YR CD-10K 6 MO CD-10K 3 MO CD-10K Money Market-2.5K 30 Yr. Fixed Rate Mortgage 15 Yr. Fixed Rate Mortgage 5/1 Yr. Adjustable Rate Mortgage 3/1 Yr. Adjustable Rate Mortgage 1 Yr. Adj. Rate Mortgage Home Equity Loan Credit Card Unsecured Personal Loan Used Car 48 Month New Car 60 Month New Car 48 Month

CUs 0.11% 0.14% 1.28% 0.85% 0.41% 0.28% 0.19% 0.17%

Banks 0.10% 0.13% 1.11% 0.74% 0.36% 0.23% 0.15% 0.13%

4.11% 3.31% 3.21% 3.30% 3.31% 4.21% 11.56% 9.75% 2.96% 2.87% 2.77%

3.64% 2.96% 3.33% 3.42% 3.57% 4.54% 12.85% 10.72% 5.64% 5.19% 5.08%

Source: NCUA reporting of data provided by SNL

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Nationally, there is some evidence that some types of deposits earn higher interest rates, on average, at credit unions and that some types of loans have lower interest rates, on average, at credit unions. Table 3 presents national average deposit and loan rate data for June 2013, available on the National Credit Union Administration website (www.NCUA.gov). The table shows national average rates on different deposit and loan products and indicates that the national average interest rate paid on deposits at credit unions appears to be slightly higher than interest rates at banks, but not nearly high enough to absorb the entire benefit of credit union tax exemption (approximately one-third of credit union income). Table 3 shows that fixed rate mortgages are generally lower at banks, while adjustable rate mortgages appear slightly lower at credit unions. Credit card and personal loans have somewhat lower rates (on average) at credit unions. The clear advantage for credit unions is in vehicle loans where new and used vehicle loans at credit unions are between 200 and 300 basis points lower at credit unions than at banks.11 These are among the least profitable of all loans and as such, their high concentration in the loan portfolios of credit unions, along with credit unions higher levels of profitability, suggest that vehicle loans function somewhat like “loss leaders” for credit unions. That is, while not especially profitable, they serve to attract customers (members) to credit unions where more profitable products can be sold to members.

D. Loan Yields are Similar at H Credit Unions and Community Banks Although credit unions offer lower interest rates for some types of loans, the yield on loan portfolios at New Hampshire credit unions is similar to the yield on loans at community banks headquartered in the state. However, because the mix of loans differs between credit unions and community banks, with banks making more business loans (which typically carry higher interest rates because of their risk) and credit unions making more auto loans, direct comparison of loan

11

One “basis point” equals 1/100th of one percent. Thus 100 basis points equals 1 percent.

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yields of credit unions and banks is problematic. The community banks most similar to credit unions (mutual savings banks), however, have somewhat lower overall yields on their loan portfolios than do credit unions (Figure 9).

E.

et Interest Margins are Lower at Credit Unions

Net interest margin is the spread between interest income and interest expense to average assets and is the result of the bank or credit union’s lending and investing strategies. A smaller net interest margin typically means that a bank or credit union is paying more for deposits and getting paid less for loans. Although loan yields at NH credit unions and community banks appear similar, the net interest margin of NH credit unions is lower than at community banks headquartered in New Hampshire (Figure 10). The lower net interest margins of New Hampshire credit unions suggests that some of the benefits of NH credit union’s tax subsidy is allocated to paying higher rates on deposits and charging lower interest rates on loans.

Following the methodology of a 2005 study by the Tax Foundation,12 and calculating the effective corporate tax rate for mutual and all community banks in NH, suggests that the tax exemption provides credit unions with a 40 to 50 basis point subsidy (depending of the effective tax rate on NH banks in any year and the return on assets at credit unions). For 2012, we estimate that the subsidy was 44 basis points13 in NH and depositors and borrowers at NH credit unions received the benefit of about one-quarter or 11 basis points of that subsidy in the form of higher

12

Tatom, J. A., “Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions,” The Tax Foundation, 2005.

13 The after tax-rate of return is (1-t) times the before-tax rate, where t is the tax rate. When the tax rate is .342 (the effective tax rate on NH savings banks in 2012) and the rate of return is .85 then .85/(1-.342) =. 1.29% and credit unions would have to earn a pre-tax rate of return of 1.29% in order to have an after tax return on assets of .85. Thus the subsidy = 1.29% - .85% or 44 basis points.

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deposit and lower loan rates.

IV. The Profitability of Credit Unions and Community Banks Return on average assets (ROA) is considered the best measure of a financial institution's profitability. Our analysis shows that from 2001 through 2012, credit unions were more profitable than banks (Figure 11). Prior to 2008, the major reason for higher credit union profitability was that credit unions do not pay corporate income taxes, as the before-tax ROA was higher for NH’s community banks than it was for NH credit unions. Since 2008, however, the ROA of credit unions has been higher than the before-tax ROA of NH community banks. Thus the corporate income tax has been applied to less profitable community banks while more profitable credit unions have maintained their corporate tax exemption.

A. The Effect of Removing Credit Unions’ Tax Exemption The tax subsidy provided to credit unions allows them to have a higher ROA than if they were subject to the corporate income tax, and as a result, it increases retained earnings of credit unions that provide the capital that fuels their growth. If credit unions were subject to corporate taxes, they could simply earn a lower ROA, in which case they would have fewer retained earnings and less ability to grow and capture market share. Credit unions could also adjust their business model to earn a pre-tax ROA that would be equivalent to their current untaxed ROA. This would imply charging higher loan rates, cutting expense, deposit rates, or some combination of these. If maintaining current ROAs results in higher costs for depositors and borrowers, then the market share and growth of credit unions would slow or possibly reverse. A final possibility is that credit unions would find business and accounting practices to lower their net income for tax purposes. In this final case, the impact on depositors and borrowers would be minimized

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despite removing the corporate tax subsidy credit unions receive. The most probable outcome is some combination of these impacts.

Our estimate is that of the 44 basis point tax subsidy NH credit unions received in 2012, approximately one-half (22 basis points) was allocated to increased retained earnings of the industry.

B. Fee Income Has early Doubled as a Percent of Credit Union Assets New Hampshire credit unions are increasingly relying on fees for member services to generate earnings for growth. As Figure 12 shows, fees charged to members as a percentage of their gross income (before operating expenses) contributes between 14 and 17 percent of the gross income of credit unions in NH and has been rising.

As a percentage of either deposits or assets at NH credit unions, fee income has nearly doubled over the past decade (Figure 13). In part, increasing fees or charges for new or different services are substituting for interest earnings and allowing credit unions to continue to have their “brand� identified with lower loan and higher deposit rates.

There is no directly comparable fee measure for banks that allows comparison with credit unions. The measure of fee income reported by credit unions includes a number of charges for different services while banks report fee income that reflects charges related to servicing deposit accounts. Fee income (on deposit accounts) also increased substantially at NH community banks but the 69 percent increase between 2001 and 2012 is well below the 88 percent increase in fee income as a percent of assets at NH credit unions over the same time period.

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C. Credit Unions Rely More on on-Loan Sources of Income Than Do Banks Although the definition of fee income for regulatory reporting purposes is different for banks and credit unions, making direct comparison difficult, a broader measure, “non-interest income,” includes all non-interest sources of income (fees and others) of both credit unions and banks thus can be used to compare credit unions and banks.

In a low interest rate environment, it is more difficult for both credit unions and bank to maintain profitability by just making loans and profiting from the difference between the cost of loanable funds (deposits) and the interest earned on loans. For some time, banks have looked to expand their range of products and services to generate revenue and income in ways beyond the “spread” between what they pay for deposits and what the income they receive from loan interest is. Credit unions, especially larger credit unions, have been aggressive over the past decade in seeking more and varied sources of revenue. Because they appear to earn less income from their lending, the current low interest rate environment can be even more challenging to the profitability of credit unions. Credit unions are responding to this environment by seeking more and varied sources of income to maintain or increase profits. Figure 14 shows, as a percentage of the income they generate, how much more important non-interest sources of income are to NH credit unions than to NH community banks. But even in a higher interest rate environment, aggressive credit unions have strong incentives to increase non-interest income.

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D. The Importance of Maintaining the Credit Union “Brand” An important component of the credit union ”brand” (or the industry’s identity) is the perception that they pay higher interest on deposits and charge lower interest rates on loans.

Table 2 suggested that the perception of differences in rates between credit unions and banks is somewhat greater than the reality. Still, the credit union brand is an important justification for the tax subsidy provided to credit unions and lending rates must be sufficiently lower (even in an overall low interest rate environment) in order to maintain that brand. In a low interest rate environment, differences in rates are smaller and can be less significant to members and potential members. Offering new products and services and generating more non-interest revenue from fees and charges for services is important for two reasons: it maintains profitability (which is the source of credit union capital and thus the source of their growth), and it contributes earnings that allow credit unions to maintain as large a difference as possible in deposit and lending rates between credit unions and banks. Thus non-interest income is especially critical for maintaining the credit union brand that supports the justification for their tax exemption. In effect, credit unions use non-interest income to “cross-subsidize” their deposit and loan rates. Figure 15 shows how much more non-interest income has grown as a percentage of assets at NH credit unions compared to NH community banks over the past decade.

In combination, Figures 14 and 15 highlight how the profitability of credit unions has benefited from reduced restrictions on products that were not a part of the traditional credit union business model or the basis for their tax exemption. It appears that simply offering lower cost deposit and lending services (even if they are to higher income households), is not sufficient to grow or sustain the credit union industry. One result is that credit unions are increasingly adopting business models that resemble those of a bank, while using their tax subsidy to maintain some aspects (marginally lower lending rates on some products and slightly higher rates on deposits) of the original rationale for their tax exempt status.

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E. Banks With Similar Ownership ( ot Owned by Stockholders) Receive o Tax Subsidy Mutual and cooperative community banks in New Hampshire (and throughout the country) have a similar ownership structure as credit unions (they are owned by depositors or “members” rather than stockholders) while providing the same services to the same customers as credit unions. In addition, as the data for NH show, these “mutual” savings banks are also serving more low and moderate income households and regions than are credit unions and doing so without a tax subsidy. A fundamental principal of sound tax policy is “horizontal equity,” or treating similar organizations or individuals equally in the tax code. As credit unions offer the same services and continue to branch-out and cross state lines, and as they lose requirements to serve only members with a “common bond,” the distinction between banks and credit unions disappears. The remaining difference between credit unions and banks (especially community banks) is the corporate income tax subsidy granted to credit unions.

V.

The Tax Exemption May Increase Expenses Ratios at Credit Unions

New Hampshire credit unions are more profitable than are New Hampshire community banks despite having higher expense ratios, largely because their tax exemption allows them to keep one-third more than banks on the income they earn from their services. Non-interest expenses (“overhead”) as a percentage of assets is the best overall measure of the efficiency of banks and credit unions. Credit unions had higher overhead expenses to average assets than did NH community banks for every year studied with the exception of 2009 (Figure 16).

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Some of the increasing expenses may be explained by economies of scale - the average credit union in this study is smaller in asset size than the average bank, but even among NH credit unions sized similarly to the majority of NH community banks ($100 million to $1 billion in assets), expense ratios were higher for credit unions than for banks, and expense ratios are even higher at credit unions than they are at the banks most similar to credit unions - mutual savings banks. A comprehensive analysis of expenses is beyond the scope of this report but comparing personnel expenses (the largest non-interest expense item of credit unions and banks) provides additional insights. Credit union regulatory filings report both part-time and full-time employment numbers, while banks report employment on a full-time equivalent basis (converting part-time employment to a number of full-time employees) while both report employees compensation (wages and salaries and benefits) as a total for both full and part-time employees, complicating some analyses. In general, it appears that NH banks pay higher wages and salaries than do credit unions but credit unions employ more people than equivalent sized banks. In combination, the result is that since 2001, the employee compensation expenses, as a percentage of assets, have been higher at NH credit unions than they have been at NH’s community banks in all but two years (2010 and 2011). Comparing credit unions with NH’s mutual savings banks (those with similar ownership structures to credit unions – not owned by stockholders) shows that personnel expenses are much higher at credit unions than they are at mutual savings banks (Figure 17).

Our estimate is that of the 44 basis point tax subsidy received by NH credit unions in 2012, about four basis points results in higher personnel expenses than at NH community banks, but as much as 10 or 11 basis points when comparing credit unions to mutual savings banks. In total, we estimate that of the 44 basis point subsidy in 2012, about 12 basis points of the incidence of the subsidy went to higher total expenses at NH credit unions.

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VI. Implications For State Revenue The Revenue Act of 1913 exempted domestic building and loan associations (now called “savings and loans”), and mutual savings banks (those not owned by stockholders) from federal corporate income taxes. The Revenue Act of 1916 also exempted from taxation cooperative banks without capital stock organized and operated for mutual purposes and without profit. Credit unions were not specifically exempted in either of these acts. Their tax-exempt status was granted for the first time in 1917, when the U.S. Attorney General determined that credit unions closely resembled cooperative (mutual savings) banks and similar institutions that Congress had expressly exempted from taxation in 1913 and 1916. The Federal Credit Union Act of 1934 authorized the chartering of federal credit unions. The stated purpose of the Act was to : “Establish a further market for securities of the United States and to make more available to people of small means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States.”

In 1937, the Act was amended to exempt federal credit unions from federal corporate income tax and limit state taxation to taxes on real and tangible personal property. Two reasons were given for the exemption: (1) that credit unions are mutual or cooperative organizations operated entirely by and for their members; and (2) that taxing credit unions on their shares, much as banks are taxed on their capital shares, places a disproportionate and excessive burden on the credit unions because credit union shares function as deposits. The Revenue Act of 1951

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amended section 101(4) of the 1939 Internal Revenue Code to repeal the tax-exempt status for cooperative banks, savings and loan societies, and mutual savings banks, but it specifically provided for the tax exemption of state-chartered credit unions. More recently (in 1998), the Federal Credit Union Act was amended to allow multiple-bond federal credit unions despite concerns that allowing multiple-bond credit unions would permit credit unions to become more like banks. The data from this and other studies suggest that is, in fact, what has occurred.

The State of New Hampshire provides a subsidy to credit unions that are exempt from corporate income taxes just as the federal government does. One implication of the increasing market share of credit unions and the expansion of their products and services into insurance, brokerage and other services as well as their increased penetration into more profitable business lending, is that a larger portion of the profits of the financial services industry in NH will be exempt from the state’s Business Profits Tax. Higher income at NH credit unions comes at the expense of NH banks, means lower tax revenues for the state, as an increasing share of taxable activity is absorbed by the tax-exempt credit union industry.

Table 4 presents our estimate of the reductions in NH revenue that result from the credit union exemption from the Business Profits Tax since 2001. The table includes the net income generated by the credit union industry for each year between 2001 and 2012. In addition, it presents the effective corporate income tax rates paid in each year by NH community banks as calculated from regulatory filings. Applying the effective tax rate paid by NH community banks results in a total combined (federal and state) corporate income tax subsidy provided to NH credit unions. Bank regulatory filings do not break-out corporate income taxes paid according to the amount paid in federal and state tax so the final two rows of the table include two different estimates. One row assumes 20 percent of the corporate income tax paid by NH community banks is in the form of state corporate income taxes and another assumes 25 percent.

Table 4 Corporate Tax Subsidy Provided to NH Credit Unions ($ Millions) 2001

2002

2003

2004

2005

2009

2010

2012

Totals

Credit Union et Income

$24.86

$28.11

$29.34

$29.11

$25.34

$21.83

$17.52

$1.93

$24.65

$39.06

$47.36

$47.70

$336.80

Effective Tax Rate

33.2%

34.5%

37.0%

32.5%

30.4%

27.0%

27.6%

13.0%

30.6%

31.8%

26.2%

30.4%

Total Corp. Tax Subsidy

2006

2007

2008

2011

$8.26

$9.70

$10.84

$9.45

$7.71

$5.89

$4.83

$0.25

$7.55

$12.43

$12.42

$14.52

$103.85

H Share@ 20%

$1.65

$1.94

$2.17

$1.89

$1.54

$1.18

$0.97

$0.05

$1.51

$2.49

$2.48

$2.90

$20.77

H Share@ 25%

$2.06

$2.42

$2.71

$2.36

$1.93

$1.47

$1.21

$0.06

$1.89

$3.11

$3.10

$3.63

$25.96

Table 4 shows that between 2001 and 2012, NH credit unions had net income that totaled about $337 million, resulting in a total federal and state corporate tax subsidy during that time of about $103.8 million. Allocating either 25 percent or 20 percent (low estimate) of that subsidy to NH’s Business Profits Tax payments, results in a state corporate tax subsidy provided to credit unions of between $20 and $26 million between 2001 and 2012, or $2 million to $3 million annually on average (Figure 18).

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The estimates in Table 4 and in Figure 18 do not take into account the income earned overseas (in Germany) by Service Federal Credit Union which would likely reduce their corporate tax payments to NH and the U.S. To some degree, that is offset by the more recent branch openings in four NH locations by Massachusetts’ largest credit union (Digital Federal) which would increase credit union income in the state.

VII. Conclusions This report documents changes in the banking market in New Hampshire that include a larger share of the market for deposit, loan, and other financial services being captured by credit unions. For policymakers, the allocation of market share among competing businesses or industries is of limited concern unless factors beyond consumer choice are contributing to changes in the market and in market shares. Lawmakers are especially interested if regulatory or tax policies serve to unintentionally alter or distort choices and the functioning of a competitive market. When policies have the potential to impact existing sources of government revenue, policymakers become even more interested.

This report examined characteristics and trends in the credit union and community banking industries in New Hampshire to assess the degree to which differences in regulation and tax policy may be contributing to changes in the market for financial services in the state. In addition, the study examined key aspects of the performance of credit unions in New Hampshire that are most often offered as a justification for maintaining the tax exempt status.

The report concludes that the historical justifications for providing tax exempt status to credit unions are much less applicable today than when first enacted. Many credit unions no longer appear to focus on serving less well-served and lower-income households and evidence

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suggests that they are less likely to serve those populations. A portion of the benefits of tax exemption for credit unions accrues to credit union members in the form of higher deposit and lower loan rates on some products, but these benefits absorb only about one-quarter of the tax subsidy given to credit unions. The remainder of the subsidy appears to be absorbed by the higher expenses and personnel costs of credit unions (about one-quarter of the subsidy) and via the ability to retain more earnings (about one-half of the subsidy) that provide capital for additional growth and capture of market share.

The original justifications for tax exempt status no longer appear appropriate and policymakers must decide whether the benefits of the credit union tax exemption, and their allocation among depositors, borrowers, employees, and owners, warrants a continuation of the exemption. In addition, policymakers must consider the impact that the tax exemption is having on the competitive landscape of the financial services market and the impact that an increasing share of financial services captured by credit unions will have on government revenues.

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Appendix A Membership Qualifications for Large H Credit Unions

Membership eligibility

Eligible members in the USA include: • • • •

Individuals who live or work in the State of New Hampshire, with the exception of Coos County Individuals who live or work in the towns of Falmouth, Mashpee, Bourne and Sandwich, Massachusetts Families of credit union members "wherever they may live or work" Select employer groups

Eligibility Please indicate how you are eligible for credit union membership.

I am eligible for credit union membership because of the following:

I am part of this Select Employee Group (SEG)

I have a family member who belongs to NECU. Please enter their member number: If you live, work or do business near one of our Branches (defined within 30 miles of a branch) you are eligible for membership.

I live, work or worship in one of the following County Next

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1. Who is eligible to join St. Mary's Bank?

Membership is open to anyone with the purchase of one share of capital stock for $5.

With membership open to anyone with the purchase of one share of capital stock for $5, we are committed to the credit union philosophy of "people helping people."

Become a Member for just $5 Access a world of great financial benefits and enjoy the many benefits the Credit Union offers to its membership:

Membership is available to anyone residing in the Hillsborough, Merrimack, Belknap, Rockingham and Cheshire Counties of New Hampshire, as well as the Franklin, Worcester, Middlesex and Essex Counties of Massachusetts.

Tell Us About Yourself Please select from the following options: * = required field I live or work in one of the following counties of the state of New Hampshire I live or work in one of the following counties of the state of Massachusetts I am currently a primary member of Triangle Credit Union I have a family member with an open membership at Triangle Credit Union

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Who Can Join Home Tools & Information

Why Bellwether

Who Can Join

You! With credit unions, membership eligibility is usually based on a common bond. At Bellwether Community Credit Union that common bond started within the telecommunications industry, but today we’re able to serve thousands of people and their families across the country based on the following criteria: Do you live or work in New Hampshire?

You qualify!

Are you an employee in the communications industry?

If you work in Maine, Massachusetts or Vermont you can also become a member.

Are you a relative of a current BCCU member?

If you are related to a current BCCU member (immediate or extended family), you can join regardless of your state of residence.

Meet any of the above criteria? What are you waiting for? Get started with a Bellwether membership today and enjoy the very best of banking options!

I'd like to join HRCU. How do I know if I'm eligible to join?

If you live or work in the State of New Hampshire, you are eligible to join. It's as easy as that.

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Who Can Join At GSCU, we are New Hampshire. It’s not just a slogan. Our members live or work in our New Hampshire communities. And that’s who we serve.

Membership is open to anyone who lives or works in New Hampshire and family members of existing Granite State Credit Union members. We offer an array of business services to local companies and organizations throughout New Hampshire, too. Employees and families of our Partners at Work Program are also eligible for membership.

Eligibility Anyone that lives or works within a 25-mile radius of a Members First location is eligible for membership. Relatives of Members First Credit Union members are invited to join as well as businesses located within the 25-mile radius.

How to Join Your Money. Youre Opportunity to Join NHFCU. We serve the employees, immediate family and household members of more than 140 employer groups throughout NH, including the State of NH, many cities, towns, counties, hospitals, health care organizations, and more. Check the list below, you may be eligible without even knowing it! Retirees from the employers listed are also eligible.

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