Community Bankers in Particular Should be Careful What They Wish For

Four Utah community banks, Bank of Utah ($600 million in assets), Bank of American Fork ($638 million), Far West Bank ($404 million) and the State Bank of Southern Utah ($505 million) are plaintiffs, along with the Utah Bankers Association (UBA) and the American Bankers Association, in the latest suit filed in Salt Lake City to prohibit NCUA from allowing America First Credit Union to serve people of modest means. They have bought into the rhetoric that if they are able to tax credit unions, like America First, there will be a level playing field. All would be well for the bankers as we would have to raise fees and offer the same rates they do on deposits and loans. They believe that since they are good bankers they can compete with anyone. I agree that they are excellent bankers, but I wonder if they have thought of the consequences if America First was taxed. If taxation were mandated, we would probably end up as a mutual savings bank and offer stock, raising about $200 million in new capital. That would raise our capital level from 10.4% to more than 15.6%. Since minimum capital requirements of a bank are less than a credit union, it will be many years before we see any impact of pricing differences as the result of taxation. We could even raise additional capital through the issuing of stock should new business opportunities present themselves, which we can’t do at the present time. The initial capital would be deployed in building new branches and moving into business, commercial and agricultural lending. Currently we are restricted to a maximum member business loan percentage of 12.25%. A commercial bank’s limit is 70%. Taxation will force us into bank markets to create the necessary profitability to offset the additional tax expense. In order to be effective in this expanded area we would have to hire the existing knowledge and expertise in the marketplace. With the benefit of size, larger employee payrolls, and stock options we could hire the best of the current community banking commercial lending officers. Should the banks think that would not happen, I would cite a recent example. We needed a trust officer to meet our member needs and hired an individual from one of the community banks named above. Our mortgage leadership comes from thrifts and banks, and our supervisor of member business lending came from a Salt Lake bank. With this structure, a $3.5 billion organization will be a formidable competitor to these community banks. We would not be limited to serving Salt Lake County, which is our current field of membership – we could serve anyone in the state of Utah. America First doesn’t have a strong branch presence in the areas of three of the four banks listed above, but with a unrestricted charter and large amounts of capital we could economically build branches anywhere in the state. This would allow us to leverage our already strong technology, products and services, and marketing to an expanded marketplace. If we ended up being taxed I am sure that the UBA and ABA would have a party. However, the community bankers might not want to celebrate just yet. The largest banks, like the $42 billion Zion’s National Bank, would applaud credit union taxation since they have the ability to compete, but why would the community banks want to unleash a strong competitor in their backyard? I wonder how they will feel about taxing credit unions when their bank stock value erodes. Perhaps they should feel lucky we desire to remain a credit union. Sometimes you should be careful of what you want – you may get it.