CU CEO, ABA Chairman Square Off In Debate At GAC
A raucous debate between one of the most outspoken characters in credit unions and the chief of the American Bankers Association was among the most entertaining exchanges at CUNA's GAC.
Yet one of the most memorable observations was made by a member of the audience (see box).
Jim Blaine, CEO of the country's second largest credit union, State Employees in North Carolina, and Ken Fergeson, chairman of the ABA and president of NbanC Bank in Altus, Okla., squared off for 45 minutes, with Blaine getting in most of the zingers before an obviously biased audience. The session was moderated by Dean Anason, Washington Bureau Chief for The American Banker, an affiliate of The Credit Union Journal.
Below is a the exchange between the two opponents:
Anason: From your perspective as head of a small bank and head of ABA, why consider credit unions such a threat when you face competition from so many other competitors?
Fergeson: I don't know how many of you are $270 million or less (a smattering of applause from the audience indicated most were larger), but that's the size of my bank. Every morning those credit unions have a 30% advantage, and we have to compete with that. A good friend of mine is with Tinker Credit Union, and they are four times our size. They are moving into lots of new communities and bringing that financial muscle and taking our customers as their members. I pay taxes, Tinker doesn't.
Blaine: My wife keeps assuring me Ken that size doesn't matter. I think the difference in size comes from better service. Tax is not an operating expense, and credit unions do pay their fair share of taxes. Every dollar is taxed. We just don't feel it has to be laundered through a bank. A dollar coming into a credit union goes to one of three places: it goes out as interest or dividends, it goes out as operating expense, and the rest goes to reserves. Credit unions are non-profit. We have zero profit. If our tax rate is zero, what tax rate would credit unions pay. The ABA has run that dog a lot, but taxation is not the reason for the credit union advantage. It's due to better service, listening to members, and treating them like human beings.
Fergeson: We do the same thing. Every dollar goes to either interest, operating expense or to reserves. It's the same thing.
Blaine: In your case your retained earnings are profit and it goes to a group of people. In your case, it goes to your family, which owns the bank. Your money is not recycled into the community. You've got a tax preference. You are sipping at the public trough, just like credit unions.
Fergeson: Every penny the bank makes is taxed.
Blaine: Let's talk about that. If you don't pay it out, you don't pay the tax. We pay every tax we should pay. But we don't keep a certain portion of the earnings for ourselves. Your not taxed on your loan loss reserves, right. Neither are we. So you're not taxed on the reserves you're required to pay. So if we are tax dodgers since we don't pay the corporate income tax, what about the 20% of banks that are S corps. Right?
Fergeson: They are taxed at the partnership levels.
Blaine: So those 20% are rascals just like we are? We don't pay tax until our reserves are distributed. And we've never gone to the government and asked for a bailout with our share insurance fund.
Fergeson: Let's go back to S corps for a second. That's probably growing...
Blaine: You're trying to increase the number. ABA is trying to do that.
Fergeson: If it's good for the bank. But most cooperatives, like a little co-op (crop) elevator in Texas that I belong to. Every penny that is not distributed back to their members is not taxed.
Blaine: We're the same way. We're not making up the rules, the country is.
Fergeson: I think we can disagree on what Congress intended. I don't think what Congress intended was for this new breed of financial institution to go out and be all things to all people and go out and serve people of high incomes.
Blaine: You're insulted that we may serve the rich, but not the poor, right?
Fergeson: I think you should serve the ones you're intended to serve, not just the wealthy.
Blaine: The only reason I know of for why the wealthy folks are coming to credit unions is that they are getting such a raw deal at the banks.
Fergeson: I don't t think the customers at my bank are getting a raw deal. I get up every morning trying to figure out how to serve my customers better. When I go out and talk I try to talk about banking as a ministry. And if you think about that it means to help others, and that's what community banks do.
Blaine: We think credit unions are self-help organizations, but we think you've helped yourself.
Anason: Does the pursuit of the Subchapter S undermine the argument you make as it seeks a tax advantage?
Fergeson: I don't think so at all. Sub S has been around a long, long time. Banks only used it the last couple of years, and you see the conversions. But every penny of the profit of the bank is taxed. The credit unions don't do that. And if Jim is willing to to do that, then we can both go home.
Blaine: Let's make sure we agree on something, Ken. It is alright to have different tax laws for different corporations, right? There are reasons why these things are done. You may disagree with the reasons, but it's OK. In a non-profit, it's OK not to tax the profits, right?
Fergeson: All other cooperatives under a sub-T pay tax.
Blaine: But we're a non profit, like the ABA. What's the reason for your non-profit status? Wait a minute, have you ever considered converting to a credit union?
Fergeson: I appreciate it. I'm meeting with community banks all over the country. I met with a bunch of mutuals that belong to the ABA, including a credit union that just converted to a mutual. They pay tax.
Blaine: But if the tax is hurting your business the way you say, why not convert to a credit union and save that 30%. Why not give your customers a 30% advantage and convert?
Anason: What advantage does a bank have over a credit union?
Blaine: None. I think we're a little more humble than they are.
Fergeson: I'm just glad the room is big enough for Jim's ego.
Anason: Jim, you mentioned customer satisfaction. In the American Banker/Gallup survey, the number of consumers expressing high satisfaction with their financial institution has dropped. Satisfaction with credit unions has dropped, and speculation is that as credit unions have become large, their members are becoming disaffected as the customers of banks are. What's your response?
Blaine: Malarkey. I think we've had so many new members join credit unions coming from the banks that we haven't had time to educate and rehab them.
Anason: So it's residual cynicism?
Blaine: The numbers prove we do a better job than they do every year.
Fergeson: I think community banks throughout the country are getting up every morning trying to decide how to serve their customers. Jim is 44 times larger than our bank. That large credit union at $11 billion cannot give the kind of service it gave 30 years ago. Expectations by customers are great. They want a lot from us. And being able to deliver that is hard for a small institution like ours, but we try all the time. And I think it makes us better bankers.
Blaine: Let me say I'm not anti-bank, I think you do a good job. I'm pro credit union. We don't whine about you. We were created with a purpose. We were created as an alternative to make you wake up every morning and think about us. What is the difference between a bank a credit union? Do you know what the similarity is between a bank and a brothel? You know it's going to cost a lot of money and you're sure as hell going to get screwed. We think credit unions have a higher calling.
Fergeson: I don't want to answer that. I'm not anti-credit union totally. I am anti-this new breed that want to take in geographic areas that are bigger than the state of Maryland, that want to be all things to all people and have the tax subsidy.
Blaine: Let me ask who loses when the consumer wins?
Fergeson: The consumer always wins. I think competition is good and we want to have competition. But we want a level playing field.
Blaine: There are two ways to level a playing field. You can bring the low side up or the high side down. We don't want to be dragged down to the low side.
And those big banks are a systemic risk. Bank of America now controls 10% of (U.S. retail) deposits. It's not getting too big to fail, it's getting too big to jail. Why don't you clean up your own house first.
Fergeson: I think people who are doing wrong should answer for that. ABA represents all banks. We have mutual banks. We have Bank of America. We have a little bank like mine.
But I don't know a banker anywhere in the nation who doesn't believe that those who are doing wrong should not be able to get away with it.