Feature Stories - May 2005

Industry Focus: Credit Unions

CEOs Speak Out

by Kathleen Foley

Wayne Tew:  I’ve been the CEO at Clark County Credit Union for 19 years. We service mostly county, medical and governmental employees in the Las Vegas Valley. Our greatest challenge right now is to keep within our controlled growth limits so we can continue to do what we feel is our differentiating factor, which is to give out multimillion dollar bonus dividends at the end of every year. 

Anthony Mook: Cumorah Credit Union is an organization chartered 40 years ago to serve members of the LDS religious community, and we continue to do so. I have been the CEO for 15 years. Our major concerns are dealing with growth, while maintaining an exceptional level of member service. We have grown fairly quickly over the last several years, and it’s tough to maintain service levels when you are expanding.

Dan Paulson:  WestStar Credit Union was formed in 1975 to serve the gaming employees in the state of Nevada, and I’ve been with the organization for about eight years. Our most difficult challenge is serving members who are credit-challenged. We help those members meet their loan needs, but we also need to maintain a good financial profile. We are also challenged to improve the finances in a larger percentage of households through consumer information classes and financial counseling. A lot of our members and potential members use payday lending and check-cashing services and so forth, so we need to reach more people with financial education. Our competition for deposit dollars and specialty loans is always a challenge. Our members are receiving advertising through the mail and on TV promoting various lenders, and there are many more sources of lending in the marketplace today in addition to banks and credit unions, such as insurance companies and finance companies. How to be creative and compete is always a challenge and has required us to do more advertising.

Alan Pughes: I’ve been with Community One Federal Credit Union for about six years, and have 31 years of experience in the industry. Our credit union originally was organized to serve the employees of EG&G at the Nevada Test Site. In the ’80s, the credit union expanded to serve about 200 different select employee groups, and then in 1999, we received a community-based charter allowing us to serve anyone who lives, works, worships or attends school in Clark County. Being a community-based credit union has created its own challenges. The biggest challenge we’ll face in the future is being able to grow capital as fast or faster than we grow assets. As we all know, credit unions only grow capital by retained earnings. We don’t sell stock, and we’re not a stock-type corporation. We’re a mutual organization, so we can only increase our capital by retained earnings.

Bill Ferrence:  For 65 years, Boulder Dam Credit Union in Boulder City has served people who live, work, or own property in Boulder City, as well as government workers headquartered there. I have served as its manager for 31 years. Nine out of every 10 people in Boulder City are members of the credit union. There are four bank branches in Boulder City, and we are around four times as big as the four of them put together. This isn’t meant to be critical, but, although the American Bankers Association would like to attribute our successes to tax-exempt status, nothing could be further from the truth. We provide better services than the banks do. Our members respond to that, and that’s why we’re successful. We don’t have many challenges in Boulder City. It’s a very close-knit town and we play a big part in the community. Our biggest challenge is from the technological side, trying to keep up with member requests for services, and also dealing with vendors’ reluctance to continue supporting existing programs, which forces us to make conversions to their newest software. We’ll be doing major conversions this year on several technology areas we’ve had in place for years.

Brad Beal: I’m the president of the Nevada Federal Credit Union, and have been with the credit union a little over 17 years. Our organization is 55 years old, and was started to serve the civilian and military personnel at Nellis Air Force Base in 1950. Over the years we’ve grown and evolved and changed, and now we too are a community-chartered credit union serving anybody who lives, works or worships in Clark County. We also serve a couple of federally designated underserved areas outside of Clark County. That would be the Pahrump community and certain census tracts in downtown Reno. Our biggest challenge is that our members expect more and more locational convenience. They’d like to have branches and ATMs close to where they live and sometimes close to where they work, and as the community spreads out, this becomes difficult. 

Gino Del Carlo:  Great Basin Federal Credit Union is a 53-year-old credit union in Reno. Originally Great Basin was NevTel – Nevada Bell Credit Union – and in 1999 we converted to a community credit union serving the residents of Washoe County. I was in commercial banking for 22 years before coming to Great Basin, where I’ve served for 11 years as president. We have two major challenges: first is shrinking margins, which is primary right now; and the second is getting the word out about how good we really are and the member services we provide. 

Sue Longson:  Sonepco is an acronym for Southern Nevada Power Company, which was organized 50 years ago to serve the employees of Nevada Power Company. I’ve been with Sonepco almost 10 years. We’re the smallest credit union in the room, and we are pleased to have reached $50 million in 50 years. Our biggest challenge, unlike Wayne’s and Tony’s, is membership growth. It’s a very difficult thing for a financial institution of our size to attract new members within a limited group. Automated debits and credits have their hooks in consumers, and it’s very difficult and time-consuming for consumers to move their accounts to another financial institution. Also, as Bill mentioned, technological changes can be a challenge. We’re putting a lot of our emphasis this year into upgrading some of our systems and ATMs so we can provide better services to our members. One of the things that really is helpful is our cooperative ATM network. Sonepco can only afford to have three ATMs, but with all of us sharing our resources, we have thousands throughout the country and several hundred in Nevada that my members can access at no cost as if they were our own. I’m able through the credit union network to afford automation and Web sites and access to online transactions at a reasonable cost, so even though Sonepco is a small financial institution, we can provide all the services of a larger financial institution.

Bruce Rodela: I have been involved with credit unions in Nevada for over 28 years, and I have been the president/CEO of Washoe Credit Union for over 17 years. The credit union was organized in 1958 to serve Washoe County government and hospital employees. We now serve approximately 130 select employee groups, and have recently been approved to serve anyone working in healthcare and government who lives or works in the counties of Washoe, Storey, Pershing, Douglas, Lyon, Churchill and Humboldt. We are also authorized to serve the same general groups in Carson City. Our greatest challenge is to ensure the credit union does not take a cookie-cutter approach to service as we continue to grow.

History and Structure Play a Part

Connie Brennan:  One of the agenda items is "responding to attacks by bankers," so let’s start right out with that. Bankers tell me that anyone in Southern Nevada can now be a member of a credit union, and because credit unions are not subject to the same taxes banks are, it’s unfair and the playing field is not level. If you’re serving the same market as banks, why are you not subject to the same taxes?

Paulson:  For one thing, our structure is different. We’re not permitted to sell stock. If a bank wants to open more branches, it can go out and issue a big stock offering and open up 10 or 20 branches, whereas we have to build our retained earnings in order to get enough net income to grow. It’s like apples and oranges in terms of how we’re set up and structured. We’re just a cooperative, and the banks have all kinds of ways to leverage so they can start, build and grow.

Mook:  Maybe I can give you some perspective on that as well. Obviously as an organization serving the religious community, we’re driven by a mission and a purpose, not by a search for profits. If you look at nonprofit hospitals, for example, obviously there are some issues where they’re competing head-on with for-profit hospitals, but there’s a difference in the level of care, and certainly in mission in terms of taking care of those folks who need help. Nonprofit rural electrical cooperatives also do a similar thing, when they compete head-on with for-profit electrical power companies. The members of that cooperative have a mission to help each other out to provide services. The roots of credit unions go back to Europe hundreds of years ago, when people got together for a specific purpose, helped each other out, and provided financial services to each other at a much more reasonable cost in order to avoid significantly higher costs through banks.

Pughes:  When credit unions originated back in Europe, it was a group of farmers who got together. They couldn’t get financing through banks, so they pooled their funds and borrowed from each other to buy the materials they needed to support their farms. That concept traveled across the world. It came to Canada and then down to the United States, where credit unions began organizing early in the 1900s. In 1934, Congress passed the Federal Credit Union Act to establish a national system of cooperative credit. So they specifically created a totally separate system in the United States, and three years later Congress decided their cooperative structure dictated credit unions not be taxed. It was the cooperative structure that was the determining factor. It had nothing to do with the products or services or with the membership. That’s the reason credit unions are not taxed today, because our cooperative structure has not changed. We may have improved services and we may serve additional people, but the structure has not changed, so the reason we were tax-exempt to begin with is still the same today, and there’s no reason to change that. Bankers seem to think this is an uneven playing field, that we have an advantage, but Nevada bank profits in 2003 were $11 billion. Credit union assets were under $4 billion.

Longson:  All of us together.

Pughes:  I don’t know where they come up with this "threat."

Brennan: Tony said he serves people within a defined community, but it seems like a defined community could be anybody who walks and breathes.

Pughes:  Could be.

Ferrence:  But that doesn’t matter. That’s not the key.

Pughes: That is not the reason we are tax exempt. T

ew:  Now that banks have the Subchapter S exclusion, many of them can avoid the tax issue through their Subchapter S charter.

 Pughes:  And they’re lobbying to be able to structure banks as LLCs. They’re very focused on finding ways to prevent banks from being taxed. At the same time, they’re complaining about credit unions having an advantage because we’re not taxed. If they really felt that was an advantage, they could convert to credit unions.

Ferrence:  When you talk about the level playing field, that’s simply their mantra for taxing credit unions, because a level playing field is ridiculous when you realize we don’t take profits and give them to stockholders. We don’t pay our boards of directors large honorariums for serving. Whether it’s Nevada Federal serving all of Nevada or whether it’s some credit union in California serving seven counties, it doesn’t matter, because we’re still doing what Congress chartered us to do, which is to serve members in a cooperative nature. The chairman-elect of the National Bankers Association is Harris Simmons from Zions Bank, and Zions Bank was quoted in Credit Union News Watch as saying its net income increased 20 percent, to a record $406 million for 2004. But the point I thought was really interesting is this passage: "Zions said its deposit costs began to rise late in the quarter after pressure from other banks and, specifically, credit unions in Utah, prompted it to raise rates on money market accounts by 20 basis points." That’s one of the reasons Congress put us in the game – to keep the banks in check, because bankers will charge whatever the market will bear. We’re the counterbalance to that, because customers will come to us if we’re providing better services and better rates on both savings and loans. Because we were in the field, as Simmons himself said, his bank had to raise the rates it paid customers. Whether it was credit union members benefiting or bank customers benefiting, it was because we existed.

Legislative Tax Policies Questioned

Brennan:  What about the other complaint from the bankers’ perspective that you’re not contributing to the tax base, supporting schools and so on?

Ferrence:  Our members pay taxes on the dividends we pay them.

Mook:  We have to pay property taxes.

Longson: And payroll taxes.

Brennan:  How do you feel about the $7,000 per branch fee that was placed on the banks? Do you think that’s fair?

Mook:  I don’t know that an industry-specific tax is fair in any tax structure. The fact that the banks somehow got involved in that whole tax situation at the state house two years ago and ended up on the short end of the stick still amazes me. I don’t know how they got stuck with that. But no, I don’t think it’s fair.

Longson:  They asked for the new taxes.

 Brennan:  How did they ask for them? 

Longson:  The Assembly wanted to do a franchise tax. The bankers didn’t want to have to deal with the franchise tax in Nevada, so they negotiated with the legislators to pay the increased tax on their employees, the 2 percent rather than the 6.5 percent. When that figure wasn’t enough to come up with the funds they needed, they said, "We’ll pay a $7,000 per branch fee," and that brought it up to the figure that was needed. Now, of course, there’s a budget surplus, and to the smaller banks in Nevada – some of them are the size of Sonepco – the $7,000 per branch fee is indeed onerous; to a bank the size of Wells Fargo, it’s a drop in the bucket. So I can see why they would want to have it repealed.

Brennan:  Do you think it’s fair for them to single one industry out?

Longson:  No, I don’t think it is, but they negotiated for it, so they got what they asked for.

Ferrence:  If it isn’t fair, as you’re kind of suggesting, why would it be fair to do the same thing to us? And why were we exempted? Because time and time again legislatures have determined that we’re in a different situation. It’s not like they haven’t been singing this "tax credit unions" song for as long as I’ve been involved in credit unions, and yet even with them singing that song as loud as they can, legislatures across the country and in Washington D.C. continue to say credit unions are doing what we chartered them to do, no matter what their size is, no matter what their field of membership is.

Beal:  I don’t think any of us have an objection to the branch tax being repealed.

Mook: Not at all. We don’t have a dog in that fight.

Brennan:  Well, we all have a dog in that fight, because they could hit publishers next, or any other industry, so I think it’s something that concerns all of us.

Pughes: Credit unions have never taken a position in opposition to things that benefit banks. We’ve never gone to Congress, we’ve never gone to the state Legislature to try to lobby to impose things on banks, yet anytime there’s a bill that provides any kind of a benefit for a credit union, the bankers lobby against it. Even with the Credit Union Regulatory Relief Bill last year, it had a few provisions that would have benefited credit unions. The majority of the provisions would have benefited banks. Banks lobbied against it – only because there were a few provisions for credit unions.

Beal: When they get some legislation that’s counter to their best interest, not only do they fight against it, but they want it imposed on us too. Which is kind of a double standard. On the one hand, they say it’s bad, and the other hand they say credit unions should have to deal with it also. That’s kind of a difficult concept to comprehend.

The Business of Business Loans

Brennan:  In our discussions today, you’ve been saying that credit unions continue to do what you were chartered for, but now you’ve expanded into making business loans, so isn’t that different?

Pughes:  No. As I explained earlier, farmers in Germany formed a credit union to provide business loans to themselves. Business loans have been a part of the credit union since the beginning. There were not limitations on business loans for credit unions until 1998, when the bankers’ lobby was successful in getting a limitation of 12.25 percent of our assets in business loans. Prior to that, there were no limitations on how many business loans a credit union could make.

Longson:  Everybody here knows I’m a third generation credit union person. My grandfather started organizing credit unions in 1934. He organized over 400 credit unions and two credit union leagues throughout the West. They were organized to serve everybody, including businesses – always have been and always will.

Tew:  The concern bankers have seems to be, because we stayed in existence, we grew. We’ve been here forever, but now all of a sudden we’re bigger.

Del Carlo:  Ninety percent of the business loans we do at Great Basin have been turned down by a commercial bank. They won’t even look at them. So I feel we’re filling a niche. All of a sudden, there seems to be a cry of foul play because credit unions are funding business loans, and banks constantly point to the tax situation. They don’t ever point out the services we provide and the niche we fill in these communities.

Ferrence:  Even if we were to pay the tax, we’d still knock the banks’ socks off, because profit doesn’t go to stockholders, it goes back to our members. We can pay an interest refund on loans. The bank wouldn’t pay that interest refund, they’d pass it on to stockholders. If they didn’t, the CEO wouldn’t be the CEO of that bank anymore, because he is being judged based on return to stockholders, not based on service to customers.

Rodela:  If the banks were really interested in our tax-exempt status, many of them would be converting to credit unions. I’ve written down a number of things they’d have to do: first, they’d have to forego any paid-in capital and not be able to offer any IPOs, (Initial Public Offerings). They would have to build their reserves over time from accumulated retained earnings. I can’t go out and raise capital; they have that luxury. Board members would have to start volunteering their time instead of being paid. They would have to deposit 1 percent of their insured deposits in a deposit insurance fund to add safety and soundness to their entire industry. They would have to seek approval for defined markets they serve, either by region or industry, and that process is controlled by regulations. Even though we have overlapped our fields of membership as institutions, we still can’t go out nationwide as an individual institution and serve anybody we want. We have to seek regulatory approval. And those are the main differences I can think of from the standpoint of structure, and why we’re tax-exempt.

Brennan:  If you can serve residents of Clark County, then next year maybe you can serve all residents of Nevada, and before you know it, you can serve all Americans.

Ferrence:  And wouldn’t those people be happy if we were providing them better services? We try to provide the best service possible and improve our members’ financial condition, and if anybody here has a better service than what we offer, I’m not doing my job properly if I don’t send my members to them. If a member walks into my office and says, "Here’s what I want," and I know Sue has a program he’s eligible for, I’ll even drive him over there if he doesn’t have transportation. There isn’t a banker who will ever tell you that, because they compete to make money, not to provide the best service to their customers.

Longson:  A couple decades ago, the American taxpayers bailed out savings and loan banks to the tune of billions of dollars. Credit unions pool our resources ourselves. We are self-insured, and no taxpayer has ever paid a single dime for a federal credit union, ever. 

Paulson:  They’re still paying for the savings and loan failure.

Longson: Taxpayers are going to be paying that debt for decades.

Ferrence:  I believe that was $400 billion. They were bailed out, but they won’t talk about that.

Brennan:  Yes, but that could happen to any industry, even you. Nobody expected that to happen.

Ferrence:  We’re self-insured. If that did happen, we’d have to come up with additional monies to bail those financial institutions out, not the federal government.

Tew:  It’s true, the insurance structure is different.

Ferrence:  The FDIC reported net income of banks was $123 billion in 2004, surpassing their previous record of $120 billion in 2003. They ended 2004 with $10 trillion in assets, which dwarfed U.S. credit unions’ $665 billion in assets. We’re only 6 percent the size of banks.

Longson:  We have less than $4 billion in assets in Nevada, versus $866 billion for banks. Pughes:  Banks are going to have a tough time beating their record profits from last year. In 13 out of the last 14 years they’ve had record profits.

 Brennan:  If they’re that successful, why do you think they even bother fighting you?

(Several voices):  That’s what we asked.

Ferrence:  It probably goes back to that 20 basis points talked about earlier. They weren’t able to take that profit and give it to their stockholders. They actually had to give it to their customers in order to compete with those rotten credit unions.

Longson:  What amazed me is that he even said it.

Mook:  He said, "We had record profits, but we would have made even more money if it weren’t for the credit unions forcing us to be competitive."

Pughes:  The more of the pie they can get, the better they feel. If they can take our 3 or 4 percent of the marketplace, they’ll feel good about it. Personally, I don’t think that’s worth stealing, but they apparently do.

 Beal: They want to eliminate the competitive pressure.

Ferrence:  Which will allow their profits to go even higher.

Beal: Exactly.

Paulson:  I think it’s all about eliminating competition.

Rodela:  We’re about a $70 million credit union. Last year alone Nevada State Bank grew about that much, maybe a little less. It’s taken Washoe Credit Union 48 years to reach $70 million in assets, and they’re complaining about us. We’re helping people become more socially responsible, educating them about thrift and prudent borrowing, and we are a better deal because our focus is the service element. I am not against any bank that wants to make a profit. When they were organized they chose a for-profit structure. When our volunteers organized credit unions, they chose a not-for-profit structure, so there are huge restrictions on our ability to grow. We have to carefully manage what we set aside as a surplus, reserving for statutory regulation and giving money back to the members in the form of higher rates on savings, lower rates on loans, and lower fees on services.

Mook:  Another thing banks complain about is the Community Reinvestment Act and why credit unions don’t have to follow its provisions. Banks have to be forced to reinvest in the community because it’s not profitable or in their stockholders’ interest to do community-related type of things. Whereas, the credit union is all about the community and its members.

Rodela:  Credit unions are community reinvestment in action.

Ferrence:  I would love to be compared to the banks when it comes to community reinvestment. If they had to do it at our level, it would become their number one priority to reduce that expense, because it would cost them millions.

Common Grounds?

Brennan:  There has to be some common ground on legislative issues that would benefit both the banking industry and the credit union industry. Do you ever work together on that?

 Several Voices: Yes, absolutely.

Tew:  The bankruptcy reform laws recently passed were sponsored and supported by banks and credit unions.

Brennan: What about payday lenders?

Ferrence:  They’re usurious and use very unethical practices, especially with poor people, because that’s their market.

Mook:  I think Barbara Buckley’s the one looking to introduce legislation to tighten up payday lending laws and eliminate some of the loopholes. There are now no limits on the amount of interest that can be charged. Basically, it is up to the buyer to beware, and if you are in a bind, you might go to a payday lender to get a loan to repair a vehicle to go to work, and they charge you 250 percent annual interest. They’re charging you a little bite at time, so unless you’re educated and understand what that is, they can just chew you up. There’s a serious problem there. The credit unions in Nevada work with the Commissioner of Financial Institutions, and we’ve discussed ways we can assist in providing financial education or perhaps even providing those lifeline banking services to people who need them, because there are a lot of folks in Nevada who are un-banked who can certainly utilize those services and are getting ripped off right and left.

Brennan:  So that’s something you’re going to support when it’s introduced?

Mook:  Once we see what the legislation looks like, we’ll be happy to support it if it helps the consumers with their financial condition.

Future Cooperation in Sight?

Brennan:  Do you think the pressure from banks is going to go away? 

Ferrence:  No, it’s not going to go away.

Brennan:  Do you think it will get worse?

Pughes:  Yes. Their whole focus is to generate profits to increase their stock price. Consequently, they will do everything they can to focus on that bottom line, and if they can eliminate or reduce competition to increase that, they’re going to do it. As long as we exist, they are going to continue to try and eliminate us as competition.

Rodela:  Another key issue is, when the economics are right, bankers shake themselves up and buy each other out and purchase stock and merge in order to gain more economies of scale. And then you’ll see a new plethora of small community banks rise again. Credit unions can take advantage of those shakeouts or mergers to gain new members.

Beal:  None of us have anything against a good old American profit motive. It’s what this economy is built on. Good for them. But if you look at their earnings and their growth and their market share, there just is no evidence we’re hurting them. All this rhetoric about "uneven playing field" is not borne out by reality. They want to deny the consuming public the opportunity to be part of a nonprofit cooperative, and I’m baffled as to why they want to do that, unless it’s just out of sheer greed. And that’s really hard to understand, when they’ve had year after year after year of record profits and record growth and record prosperity. We’re happy for them. We just want them to leave us alone. Let us do our thing – we’re not hurting you. Leave us alone.

Brennan:  But you don’t think that’s going to happen.

Several Voices: No.

Kathleen Foley
Kathleen Foley is a freelance writer based in Southern Nevada.