Giving Credit Where Credit Is Due

Hawaii has more credit unions than most other states. Are they turning up the heat for financial institutions?

February, 2004

If Archie C. Jackson, founder of the Big Island Teachers’ Federal Credit Union (Hawaii’s first credit union), wasn’t one of the Islands’ first personal bankers, he certainly qualifies as one of the most dedicated. In 1936, Jackson, a teacher by training, would hand deliver loan or withdrawal checks, making the long drive from his office in Hilo to Kau, Kohala and Kona. When he could, he brought his family with him on his deliveries, having a picnic along the way.

Jackson’s checks weren’t big. In 1936, he reported that his credit union had 65 members, with $2,149.54 on deposit and 12 loans totaling $1,260. However, the country was in the middle of the Great Depression, when money was hard to come by and harder to keep.

“Mail to Kona and Puna was especially slow and the wolf was howling at the door now,” wrote Jackson in a brief account of the founding of his credit union. “We took many a trip to Kona and Puna that first year to succor some needful teacher.”

Hawaii has a long and warm relationship with credit unions. The nonprofit, cooperative financial institutions, which vaguely resembled the Japanese tradition of the tanomoshi (pooled income fund), quickly spread throughout the Islands. But credit union success wasn’t limited to the plantations and their surrounding communities. Because of the Islands’ high concentrations of unionized and/or government workers, and its heavy military presence (traditional credit union strongholds), credit unions grew at a dizzying rate, reaching a high of 172 institutions in 1968.

However, as successful as credit unions have been in the past, the past five years have been the most lucrative yet. According to the Hawaii Credit Union League, credit union membership and assets in the state have soared from 578,000 members and $3.8 billion in assets in 1998 to 696,000 and $5.9 billion in 2002, a 46 percent increase. Nationwide, credit union assets increased 31 percent, from $389.8 billion to $574.2 billion. Bank assets, on the other hand, grew 23 percent, from $5.4 trillion, in 1998 to $7 trillion in 2002.

Stocks and Common Bonds

The single biggest reason for this sudden success was the liberalization of credit union membership rules in 1998, with the signing of the Credit Union Membership Access Act by President Bill Clinton. The law, the climax of an intense turf battle between credit unions and banks, enabled the nonprofit, tax-exempt financial institutions to accept members from multiple groups as long as those groups shared a “common bond.” The multiple-group policy was first instituted in 1982, when the National Credit Union Administration (NCUA) ruled the practice acceptable. However, succeeding lawsuits, including one that worked its way up to the U.S. Supreme Court, narrowly defined what constituted a common bond. The law once and for all cleared the financial waters, which had been murky for decades.

Today, federally chartered credit unions regulated by the NCUA have three options: They can serve a single sponsor-one company or group, they can serve one geographic area, or they can serve multiple groups, with each employer being a common-bond group within itself.

“In the past, occupational credit unions weren’t only subject to the vagaries of the economy, like all financial institutions, but they were also closely tied to the fate of their particular sponsors. As that company grew or faltered, so did that credit union,” says Dennis Tanimoto, president of the Hawaii Credit Union League. “Today, credit unions don’t have to put all their eggs in one basket. The option helps the credit union, for sure, but, in the end, it is the consumer who is getting more choice.”

To a lesser extent, credit unions have also benefited from consumers’ loss of confidence in a flamed-out stock market and an increasing distrust of large, powerful companies, as a result of the rash of high-profile corporate scandals. The effect has been especially noticeable in Hawaii, well known for its conservative-minded investors.

“Financial institutions across the board have seen this flight for safety, people taking their money out of the stock market and putting it back in a bank or credit union,” says Tanimoto. “We seem to be a good choice, credit unions enable members to earn that much more interest while they decide whether or not to jump back into the market.”

Additionally, according to a 2003 American Bank/Gallup consumer survey, public faith in the U.S. banking and financial system is at a seven-year low of only 36 percent, down from 40 percent in 2002. It is the lowest confidence level measured since 1996. Corporate scandals played a big role in this loss of faith. Almost half (45 percent) of consumers whose confidence in the banking and financial system fell in the past year said corporate scandals were the reason.

Today, Hawaii is home to 97 credit unions. While the number of institutions is down significantly from the nearly 200 in the late ’60s, the steep drop is likely due to the state’s shift from an agribusiness-based economy to a tourism-based one, and the resulting closure and/or consolidation of credit unions with overlapping constituencies. The financial institutions are now more popular today than ever. As of December 2002, the ratio of credit union memberships-to-population in Hawaii was 55.3 percent, nearly twice the national average and fifth only to Washington, D.C., Virginia, Alaska and Utah.

Joining the Club

In 2001, the Big Island Educational Federal Credit Union (the same one founded by Jackson) changed its name and its charter, becoming a community-based institution, serving those who live and/or work on the island. Since the conversion, the 9,400-member credit union, now known as the Big Island Federal Credit Union, has grown its assets by nearly $10 million, a more than 20 percent increase. Meanwhile, the average age of members has dropped from the high- to mid-forties.

“We offer a lot of products and services that younger people need,” says Travis Uchino, director of marketing and communications at the Big Island Federal Credit Union. “We’ve cast a wider net, but we also don’t forget about our core members, the Big Island’s teachers, students and educational workers.”

The credit union that has aggressively cast arguably the largest net in the state has been the HawaiiUSA Federal Credit Union, which changed its name and charter in 2000. Once known as the Oahu Educational Employees Federal Credit Union, the financial institution’s membership was once limited to teachers, students and staff of Oahu schools outside of Honolulu proper. In 2000, credit unions officials chose the multiple-group option and are now servicing small-business owners and their employees on Oahu and Maui. In three years, the credit union has signed up more than 1,600 member businesses.

In 1998, the credit union had about 48,000 members and assets of $300 million. By 2003, it had nearly doubled membership to 86,000 and more than doubled assets to $650 million. It is now Hawaii’s largest credit union by membership and second largest by assets.

“If you look at the way business in Hawaii works, it’s all about small business,” says Karl Yoneshige, executive vice-president, HawaiiUSA Federal Credit Union. “In some respects we may have the most all-inclusive charter, but, because we work with each company individually, it isn’t as broad as, say, a community charter.”

To scare up business, HawaiiUSA relies on its three-person development team and its nine branch managers. The development-team members, who hit the road, cold calling and servicing existing clients, average between 800- to 1,000 new members a month. Yoneshige expects 2004 asset growth to be between 8 percent and 10 percent.

“A lot of people understand that there are certain advantages to doing business at a credit union. But they just can’t get down here,” says Scott Kaulukukui, senior vice president, communications group, HawaiiUSA Federal Credit Union. “So we adopted the policy that if they won’t come to us, we’ll come to them. We’ve done our share of advertising on radio and television, but we’ve found that one-on-one marketing is the best.”

Bank Shots

According to Kaulukukui, HawaiiUSA’s $650 million in assets are only a blip on the radar screens of the state’s financial titans, Bank of Hawaii and First Hawaiian Bank, which both boast assets of $6.3 billion. However, collectively Hawaii credit unions’ nearly $6 billion make up more than 20 percent of total deposits in the state. Does this increased credit-union activity put pressure on banks to continue to hold their bottom lines?

“I have never worked in a market like Hawaii, which has such a large number of credit unions and a large number of very big and competitive ones,” says Dave Thomas, vice chairman, retail banking, Bank of Hawaii. “We have a market that has lots and lots of choices. That’s good for the consumer, but, in the banking business, in a state that grows 1 percent to 2 percent, it is difficult for any one financial institution to grow. The consumers’ dollar is diluted across all these institutions.”

Thomas also points out that three of the top five mortgage lending companies have prominent positions in Hawaii, which puts further pressure on the market. However, he stops short of claiming that this dilution has contributed to the flurry of merger activity among banks during the last decade. Between the first quarter of 1992 and the first quarter of 2003, Hawaii-based insured institutions decreased by nearly two-thirds, from 25 to 9.

“I think we’ll continue to grow, and I don’t believe that will have any effects on the banks,” says Tanimoto. “People won’t close their bank accounts. It’s like shopping at Costco and your neighborhood grocery store, you continue to go to both.”

However, with larger credit unions like HawaiiUSA offering a full complement of services, including Internet banking and a financial management center, which institution is Costco and which one is Foodland? Five years ago, bank officials vociferously argued against the liberalization of membership, for fear that the tax-exempt institutions would have an unfair advantage in the marketplace. But even though there is less and less elbow room in Hawaii’s financial landscape, banks and credit unions seemed to have reached a sort of détente.

“Credit Unions offer a very important service, and we have developed strong partner relationships with many of them,” says Thomas. “We have the largest ATM network in the state, and we have allowed a few of them to access it. We also do a lot of investment management and other banking services for many credit unions in the state. Credit unions aren’t going to go away. We look at their growth as an opportunity.”

“Their success hasn’t changed the way we do business. We’ve been focusing in on niche marketing, particularly small business,” says Wayne Miyao, senior vice president, corporate communications, for City Bank. “For years, banks have been saying that we should have a level playing field with credit unions: what’s fair for them should be fair for us. But I think we should just focus in on our business. We have too many other things to worry about.”

With banks and credit unions offering similar products and services (checking, credit cards, mortgages, etc.), it is sometimes hard to tell them apart. Here are a few of their major differences.
Credit Unions

• A credit union is a “not-for-profit” corporation owned by its member depositors and established solely for the benefit of its members. Deposits in a credit union are insured for up to $100,000 by the National Credit Union Administration (NCUA).

• Generally, credit unions may only offer memberships to individuals who are members of a select employee group or community that share a common bond. A credit union can include, subject to regulatory review, any number of these groups.

• Credit unions have member-elected boards of directors. Each member is a shareholder with one vote.

• Car loans, credit card and personal-service loans account for more than half of all total loans.

• Like other not-for-profit institutions, credit unions are exempt from paying federal income tax.


• A bank is a “for-profit” corporation owned by its stockholders and established to provide financial services to the general public. Bank deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).

• Banks serve customers from the general public. Anyone can use a bank.

• Members of a bank’s board of directors are paid and work to increase shareholder value. Income is returned to the shareholders in the form of higher dividends on their shares of stocks

• Business and large real estate loans tend to dominate bank lending.

• Like other for-profit businesses, banks must pay taxes to the government.

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David K. Choo