The Utah Legislature was bent on taxing and reining in the growth of the big, member-owned cooperatives after bankers complained that the credit unions were taking way too much advantage of their nonprofit status and competing unfairly for business.

Faced with what they viewed as overt hostility, the three credit unions made a tactical decision.

They asked the federal government to regulate them instead of being regulated by the state. Today, those credit unions are prospering as never before - a financial situation they attribute in part to their decision to remove the Utah Legislature from their regulatory lives.

"Converting [to federal regulation] was really something we didn't want to do," said Shelley Clarke, president of Goldenwest Credit Union. "We saw it, though, as the only way we could continue to grow and provide our members with the services they wanted."

Goldenwest has found a lot of success as a federal credit union.

Last month, it was named the Federal Credit Union of the Year by the National Association of Federal Credit Unions. The award recognized Goldenwest's asset and membership growth and its improving return on assets as the best among a field of 814 federal credit unions across the country.

"We've had to work for it, but we've experienced some significant growth," Clarke said. "Our conversion [to federal oversight] has been a wonderful experience for us."

In early 2003, around the time Goldenwest made the decision to abandon its state charter in favor of federal regulation, it was reporting assets of $292 million. That figure has grown to $501 million, which represents a four-year annual growth rate of about 18 percent. Its membership has grown by about 14,000, to around 63,000 today.

America First and Mountain America experienced strong growth during that time frame, as well.

Once Utah's largest state chartered credit union, America First now boasts assets of $4 billion, well above the $2.6 billion it reported just before it left the state's regulatory oversight in early 2003.

"There was a time when we probably could have grown faster under the state but the [state] charter was changed to make it more difficult," said John Lund, executive vice president at America First. "We never set out to convert to a federal charter, we were just left with no choice."

America First's membership base has grown by nearly 83,000 since 2003.

At Mountain America Credit Union, assets have grown by about $1 billion and membership has increased by about 90,000.

"We already were seeing that kind of growth" prior to converting to a federal credit union, said Sterling Nielsen, executive vice president at Mountain America. "And if you look at some of Utah's banks, such as Zions, they've been experiencing exceptional growth, as well."

Mountain America had just reached the point in 2003 where it it had to ask itself how it was going to continue to best serve its members, a growing number of whom were approaching the credit union asking for small-business loans.

Converting to a federal charter was the answer. And after Utah's big-three credit unions converted, dozens of other smaller credit unions followed suit.

Prior to the mass exodus of state-chartered credit unions to the federal regulatory system, Utah had oversight over 89 credit unions with combined assets of $6.4 billion.

Today it regulates 58 credit unions with assets of $1.9 billion, said Orla Beth Peck, supervisor of credit unions at the Utah Department of Financial Institutions. And the conversions continue. Last year, three more credit unions with combined assets of more than $105 million went to the federal fold. "We still have one that is pending this year."

Yet not all state-chartered credit unions see benefits in converting.

"We like dealing with regulators who are more local," said Clare Collard, a vice president at Salt Lake City Credit Union. "And we've done very well, adding about $136 million to our assets over the past three years."

Also, the state is a little more liberal in regulating who can become a credit union member, which can be of particular benefit to smaller credit unions that are interested in increasing their membership bases, she said.

Under state law, credit unions can recruit members from both approved geographical areas - for example, single or multiple counties - and from businesses. Under a federal charter, the credit union must choose between either a geographical field of membership or business affiliations.

Salt Lake City Credit Union was recently ranked by a national credit union research and consulting firm as the No. 8 credit union in the country among its peer group in the amount of return it earned for its members for the first quarter of 2007. The Salt Lake credit union was measured against the performance of 656 other state and federal credit unions nationally that had assets of $100 million to $250 million.

Credit unions that operate under federal charters are subject to slightly different regulations than those enforced by the state. For most members, though, there is no difference in the products or services offered by state or federally chartered credit unions.

It is in the area of business loans, however, where federal credit unions have a distinct advantage over their state-regulated cousins.

At the urging of Utah bankers, legislators in 2003 placed a $250,000 limit on the size of individual business loans that state-chartered credit unions could offer. They also restricted, to a small percentage of assets, the total amount of business loans that any one credit union could issue.

In contrast, federal credit unions are required to count only business loans of more than $50,000 as part of their business loan portfolios. They also can hold up to 12.5 percent of the assets in the form of business loans.

Those business loan restrictions continue to rankle some credit unions operating under state charters.

Moroni Feed Credit Unions President Ilene Rollo said those restrictions are particularly burdensome for small credit unions operating in rural areas that want to help their members by providing agricultural loans.

She said Moroni is in the process of converting to a federal charter for that very reason.

"If we were a federally chartered credit union we would have only 10 business loans on our books and have over $1 million more that we could lend," she said. "As a state-charted credit union we're maxed out."

Former Utah Rep. Jeff Alexander, R-Provo, who sponsored the banker-backed legislation to rein in their competition, contends that it was never about credit union expansion but rather the tax structure that gave the big, nonprofit credit unions an unfair advantage.

"As for Goldenwest, they've done extremely well under the federal system and have found a home there," Alexander said. "While I still think there are problems with the way credit unions are taxed, the [federal] law is what it is."

Credit unions, as nonprofit entities, typically are exempt from state corporate income taxes because they earn no real profits but return their earnings to their members in the form of higher interest rates on deposits and lower rates on loans. Both state and federal credit unions pay property taxes, however, and although state-chartered credit unions pay state sales taxes, federally chartered credit unions do not.

Yet in 2003, the banker-backed legislation proposed to subject Utah's largest state-chartered credit unions to the corporate income tax on the theory that they had grown to the point where they more like banks than nonprofit entities deserving of special consideration.

By converting to federal charters, Utah credit unions were able to remove that threat, because federal credit unions aren't subject to state jurisdiction.

steve@sltrib.com