Credit Unions

Moderated by Scott Simpson, president of the Utah Credit Union Association

July 9, 2013

There are those in the retail financial sector that feel that credit unions have a distinct market advantage because of their tax exemption and that that should be revoked in order to keep the environment competitive. Why is that exemption important to your institution, if it is? And how does that affect your membership? How would it affect the market should the banks be successful in getting our exemption taken away?

HOFELING: Every time I sit down with my board and every product we look at in every series we go through, it always comes down to what’s best for the member. That’s why we were created. Our true advantage is that we are looking out for the member. I never have to tell them what my bottom line or profit’s going to be or how many more cents are going to increase their stock prices going up. Our bottom line is what’s better for the member and do we stay in the black. And nothing else.

If you’re going to be taxed, now you’ve got another item. You’re not going to say, “Bottom line, what’s best for the member.” You’re going to say, “What’s going to be my best tax advantage so I’m going to have an advantage on the revenue level.” And that’s something we never worry about. It makes a whole different picture in the way you look at something.

PAYNE: Credit unions operate under a unique set of restrictions. We can’t grow capital other than earning it from our members gradually and keeping it. We all operate under that. Part of that give-and-take relationship is the fact that we are exempt from federal income tax. If that carrot goes away, for lack of a better word, then the real question to be asked is, “Why am I putting up with all these restrictions if there’s no longer a way that I can benefit the members as a result of that? Maybe we should convert our charter and become some sort of a for-profit enterprise. Why don’t I become a subchapter S corp bank? Then I would be exempt from my federal income tax again and I can raise all this other capital and do all these other things.”

It brings the possibility of a pure profit motive back into it that, for me, is one of the reasons I liked coming into credit union land to begin with: I can focus on what’s best for the member. And, other than staying in the black and having the net income, the capital, to operate safely, I don’t have to worry about giving back as an EPS, earnings per share, so much.

So the advantage of the tax exemption, you’re saying, is as an offset to the organizational difficulty that comes from being organized as a cooperative financial institution. If the cooperative structure goes away, the fiduciary responsibility shifts from serving the membership to maximizing shareholder return.

PAYNE: No. It doesn’t go away. Because right now, our responsibility is to work for our owners. The beautiful thing is everybody that walks in the front door, unless they’re coming to join, is an owner. But that does shift. All of a sudden my owner’s changed. And it becomes a situation where those who have the biggest deposits get a bigger share of the ownership. Right now it’s purely democratic. You’ve got an account, you’ve got one vote. Twenty-five bucks, 25,000 bucks—one vote for both of you. But I can work for you as the owner. That’s liberating.

All of you combined have some single-digit percentage of the commercial lending pie in the state. Why do they care about that single-digit percentage of the pie?

ADAMSON: Because we’re also keeping rates down from a lending standpoint. And from the savings standpoint, we have higher rates. So ultimately, we’re able to provide that benefit back to our member, who benefits immediately by higher dividends. And they pay taxes on those. So it’s not like it’s never taxed. We’re also keeping other financial institutions in check on what they will charge for loan rates.

So you’re saying that bank customers benefit because credit unions are in the market?

PAYNE: Yes. Utah First benefits because America First is in the market. Because when I lost a loan to UCC the other day, it keeps me sharp. I’ve got to be good.

LUND: A recent study by the National Association of Federal Credit Unions, I believe, showed that consumers throughout the country benefit to the tune of some $10 billion annually from credit union membership.

NIELSEN: At the end of the day, a tax on the credit union is going to be a tax on the membership—and a tax on even bank customers.

LUND: We should also clarify that credit unions do pay property taxes. And as has been alluded to, our members pay taxes on their dividends that they receive. And payroll taxes. All those taxes are paid.

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