It's fascinating to spend time with credit union people. I think they will turn out to be community banks' real competitors.

Sure, money-center banks and superregionals get the attention. But when it comes down to fighting for depositors' dollars and borrowers' business, it is the credit unions that community bankers should fear the most.

Credit unions have changed.

In days gone by their leaders used to say credit unions were a "movement" - like a great good-will mission to help out members.

That was all well and good, but the professional standards were often a little shaky.

I remember meeting the head of the Chicago Parks credit union. When asked how he came to be running it, he explained:

"I was tired of using the spear" - the spike-tipped pole that park workers use to pick up litter. "In the summer it was hot, and in the winter it was cold.

"So I decided to run the credit union instead."

Today credit unions call themselves part of an industry, not a movement, and such managers are a rare.

I attended a meeting of Eascorp, which serves as a correspondent bank and funds manager for credit unions in Massachusetts and several surrounding states.

Staff members were talking to credit union executives about image processing techniques being used to handle their share drafts; about how to get the most yield from today's safe investment vehicles; and about monetary policy.

I could have been at a meeting of top community bank executives, who discuss the same kinds of problems, choices, and policies.

However, there is one basic difference between credit unions and banks that bankers know all too well:

Credit unions do not pay income taxes - and don't want to be made to pay them.

I had heard all this before, some two decades ago, when the savings and loans were untaxed and had a deathly fear of being subject to the taxes banks paid.

That fear came true, but so did the adage "what you fear most never happens - something else does."

Taxes did not hurt the S&Ls. What laid them low was uncontrolled growth, a mismatch in the duration of assets and liabilities - and the opportunity that some outsiders saw to make a killing by entering the industry.

I think credit unions will eventually be taxed. I said as much in a speech at the Eascorp meeting, and as you'd expect, the remark wasn't a crowd-pleaser.

But some responses I got later, when I talked about taxation in informal sessions, told me that credit union leaders are less worried about being taxed than you might expect.

"Look," one told me, "they've been talking about taxing credit unions for 20 years. But many forget that we perform a special role in society - as nonprofit cooperatives with all-volunteer boards and a limited field of membership.

"Credit unions have always served people with limited means, and served them with favorable terms. Their advantage is not their tax exemption, but that they listen to their member consumers."

He also reminded me that credit unions could defuse any tax initiative with the biggest congressional letter-writing campaign in history.

Other executives said they have so many loan losses to write off that tax legislation wouldn't hurt them for a long time.

But ironically, one issue that did worry many of these leaders is that credit unions are making too much money today! As with banks, rate trends have been in their favor. And with no shareholders or tax collectors to worry about, the reserves pile up.

Some credit unions are paying out this surplus in higher savings rates. Others are holding onto the money, to protect themselves for when rates turn unfavorable again or to build up service staffs.

But here is the irony. Credit unions that have raised rates paid find they are attracting a new type of member.

These people don't consider the credit union as a friend, and they don't share the "common bond" that credit union members used to have. They just look at the credit union as a good place to put money when the price is right - and from which to take it out when someone else offers better rates.

This is the credit union dilemma. The "common bond" was what justified the favored tax treatment. If the credit unions want to retain their favored tax status, they should remain common-bond organizations. If instead they want to sign up everyone in the region who happens to breathe, they must face the consequences - that lawmakers won't look at them as special animals that deserve special preferences. Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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