Minnesota Credit Union Network President, CU President Debate MBA President, Bank President

ST. PAUL, Minn. – At the invitation of The Business Journal, a Twin Cities newspaper, Minnesota Credit Union Network President/CEO Kevin Chandler and City & County CU President/CEO Patrick Pierce participated in a financial institutions roundtable on June 4 with Minnesota Bankers Association EVP and CEO Joe Witt and University Bank President David Reiling. Questions and discussion covered a variety of topics such as the Community Reinvestment Act, market share, tax exemption, small business lending, and the credit union difference. The debate was published in the June 18 edition of the newspaper. The moderator from The Business Journal began the roundtable discussion by inquiring about what are some of the fundamental differences between credit unions and banks. Pierce answered in one word – “ownership” – and proceeded to explain that credit unions are owned by their members and exist only to serve their members. CUs are not-for-profit, he said, which are different than non-profit because the only way a credit union can raise capital is by taking a portion of its earnings and using it for future growth. When Witt took the microphone he stated that: “Credit unions started out serving people of what they called `small means’. They started out having a single common bond that defined them. Based on that structure, they received their tax and regulatory advantages.The nontraditional ones have rapid growth, they offer all the same products and services as banks. They have community-based charters rather than a common bond.They’ve basically become tax-exempt banks.” MCUN’s Chandler jumped in emphasizing that, “There’s nothing anywhere in the Credit Union Act of 1934.that says that credit unions shall be small; credit unions shall not offer checking.And it doesn’t say they should only serve people of small means.” Noting there is no Community Reinvestment Act requirement for credit unions, Reiling remarked that, “It’s one thing to say that you serve members of all kinds, but what do you do to focus on the low- and moderate-income communities?” He added that University Bank is located in a very low- and moderate income neighborhood and all of its officers sit on the board of at least one local nonprofit. The credit union representation is just nonexistent, he said. Pierce responded, stating that, “Credit unions have no beef with small banks. Nor do we have any objection to banks trying to get rid of CRA. If you think it’s a bad law, go have at it. Credit unions won’t stop you.” Reiling made it clear he doesn’t think CRA requirements are “a bad law. It’s a good law.” The moderator than asked if credit unions and banks serve the same markets. Witt was the first to respond saying “yes, especially for the geographic-based credit unions.” Then he read from the annual report of Think FCU, Rochester, Minn. which he pulled from the CU’s Web site: “Yesterday our challenge was to provide financial services to members who could not get services elsewhere. Today our challenge is to provide financial services to members who can get services anywhere. “Have they come so far from their original niche [that it's] time to reconsider what they are?” Witt asked. Pierce responded: “It’s not the 1930s. Have banks changed at all since the 1930s?” and he defended CUs’ advancement stating that, “We’ve changed and grown up, and banks have changed and grown up, as well. But the same fundamental purpose of a credit union is to serve its members.” When Witt asked Pierce what his point was, the MCUN president explained that, “The point is, we’ve changed and grown up, and banks have changed and grown up as well. But the same fundamental purpose of a credit union is to serve its members.” Witt charged back, asking Pierce how is a credit union going to a community-base charter serving its members. “Rather than giving your money back to your owners, you are using that money to grow.” Chandler entered the discussion on this point and addressed his comment to Witt and Reiling. “You’ve continued to march forward and exert your efforts to get increase power up to the point where, in 1999, Gramm-Leach-Bliley basically broke down the walls of Glass-Stegal, enabling you to get into stocks and securities, underwriting, insurance, real estate development, real estate investment, municipal underwriting, a whole host of services. God bless you.You’re not going to get any complaints from credit unions. What we don’t understand is, what is so interesting about credit unions that you can’t just let go and focus on the real enemy which is Wal-Mart and State Farm.” On this point at least, Reiling recognized that CUs and banks “are on the same page in terms of non-bank competition, non-regulated competition. They are big threats, no question about it,” he said. But the threads of commonality ended when the discussion turned to the subject of taxation and Reiling explained why banks perceive CUs’ tax-exempt status as a threat. “It’s basically an advantage in terms of the ability to raise capital and retain earnings for the health of the financial institution.,” he said. “It’s not an advantage, and the proof is in the pudding,” said Chandler. “As of March of this year, you’re going to have pretax net operating income of around $600,000. How much corporate income tax are you going to pay on that this year?” Reiling responded that the bank is going to pay federal and state income tax of 42% because “as an S corporation, it flows to the individual shareholders, and it goes to federal and state income taxes.” Chandler accused Reiling of not answering the question. “You would pay zero in corporate income tax. Your shareholders would pay individual income tax,” the MCUN president said. Reiling conceded Chandler was right. “Credit unions would pay zero in corporate income tax. Our members.pay taxes on their dividends.There is no competitive advantage,” stated Chandler. When Pierce asked how CUs “with our whopping 8% of the assets in the state of Minnesota” could threaten banks, Reiling said, “It is because of the rate of growth.” When Reiling continued to state that the main purpose of a financial institution organization was to serve its members or customers, Pierce commented that he thought banks’ purpose was to maximize profit for shareholders. To which Reiling asked him whether growth is credit unions’ primary objective or is it to service members. “Is it true return on member shares, or is it (to build) a bigger building?” “We have nine directors that tell me exactly the direction we’re going. If they want a new building, then I have to get in a new building and figure out how we’re going to pay for it,” said Chandler. Reiling pointed out that’s no different that a bank board telling the bank what to do. The last question posed by the moderator was whether credit unions are competitive in small business lending. Reiling stated that they are in his marketplace because the bank is starting to lose deals to the CUs “because they can charge low interest rates. We can’t go down that far and maintain it.” When question why by Pierce, Reiling explained that it’s because the bank has to pay 42% in federal and state taxes. “We do business loans at City & County. Our members asked for it. We looked at a million-dollar real estate deal, and lo and behold, our rate got beat by a bank.You never heard me say that we always have the lowest rate in town,” said Pierce. Chandler added that a lot of the small-business lending credit unions are involved in is to people who want loans that are so small banks aren’t interested in doing them. “Also the vast majority of business lending in the credit union world is ag lending. A lot of credit unions were founded for that purpose,” Chandler said. Witt may have got the last question in – “What is the public policy purpose for you to give tax-advantaged services to a corporation?” – but Chandler got in the last word: “They are getting a better rate, and we are helping to foster the development of small businesses at a time when we extremely need more small businesses,” Chandler said. -