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Washington: End to credit union tax advantage?

"Death and taxes" are certain, but not death from taxes for CUs

Washington: End to credit union tax advantage?

Credit union tax panel featured lobbyist Ken Kies, left, ABA Chairman-Elect Jeff Plagge, and bankers Chris Bergstrom and Laurie Stewart, the self-dubbed "Queen of Conversions."
    Laurie Stewart says there is life after taxation. Her company evolved from a tax-free credit union into a tax-paying bank.

Seattle-area banker Laurie Stewart, discussing the membership qualifications at Boeing Employees Credit Union, said they were so liberal that having seen a Boeing plane in flight appeared to allow joining it. Stewart knows quite a bit about credit union practices: She's headed a credit union herself.

At the ABA 2013 Government Relations Summit, she participated in a panel discussion entitled, "Credit Union Taxation: Now Is The Time."

Too many members of the public and Congress harbor a misconception about credit unions, said moderator Jeff Plagge, ABA Chairman-Elect and president and CEO of Northwest Financial Corp., $1.5 billion-assets, Arnolds Park, Iowa: "They think a credit union is two people at a desk keeping track of things on a piece of paper."

Virginia banker Chris Bergstrom regaled listeners with stories of aggressive competitors like Navy Federal Credit Union and Penn Fed, a credit union that will even facilitate the public's joining area organizations for a nominal fee. Once aboard those groups, they can join the credit union.

"You can't make this stuff up," said Bergstrom, president and chief credit officer at $3 billion-assets Cardinal Bank, McLean.

History of change

The credit union industry naturally fights the taxation that would level the playing field it competes on with banks. Yet taxation isn't oblivion.

In fact, the bank that Laurie Stewart now serves as president and CEO, $381.8 million-assets Sound Community Bank, once was that credit union she worked for, A.G.E. Federal. About 23 years ago, the small organization was serving members of a commercial association as well as some local customers. Then a series of transactions began that Stewart says earned her the title "Queen of Conversions."

First she turned the federal credit union into a state credit union, in 1996, to expand its membership scope under then-current interpretations and rules. Then in 2003 the credit union became a mutual savings bank, in order to gain additional product lines and to make capital somewhat easier to obtain.

"We were probably the last credit union to slide under the radar screen," said Stewart, before credit union regulators made it harder to leave the fold. In late 2012, the organization became a state-chartered commercial bank. Along the way, the bank tapped capital sources, doing two offerings, and growing from $38 million to its present size, just under $400 million.

Paying taxes didn't hurt the organization's efforts to expand its base, its business, and its size. And Stewart, a member of a panel discussion on the issue, noted that the concept of being taxed is a source of continuous discussion among the credit union fraternity. Her organization is living proof that there is life after taxes.

Sea change may mean tax change

Panel member Ken Kies, managing director of the Federal Policy Group lobbying consultancy, spent years in Washington tax-writing roles, and believes banks could pursue a change.

"Frankly," said Kies, who's working with ABA, "I'm not sure that the environment has ever been better than it is today."

Kies indicated that no one should think that "not taxed" means "never to be taxed." History has not only seen many attempts to subject tax-exempt organizations to federal tax, but success in those attempts. Today's congressional urge towards tax reform, even on a revenue-neutral basis, could be the factor that pushes credit union taxation into reality.

In 1986, tax legislation pulled Blue Cross and Blue Shield organizations under the tax umbrella, reflected Kies. And a year later, the TIAA/CREF benefits organization likewise got shifted. And savings institutions lost their tax-favored status decades ago, and remain a viable part of the financial services business.

Kies recounted past efforts to tax credit unions within the last few decades. They've been beaten back, but times have changed for this industry, he said.

"This one cries out for it," he said.

"If now is not the right time for change," said Bergstrom, "when is the right time? We already have a trillion-dollar deficit."

Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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