Mistrust in Iowa

Northwestern Financial Review, Mar 1-Mar 14, 2003 by Bengtson, Tom

straight talk

The mistrust between the bankers and the credit union industry in Iowa is palpable. The University of Iowa Community Credit Union announces Jan. 23 that it would buy the Hawkeye State Bank in Iowa City. The Iowa Bankers Association announces Feb. 5 that it is working with a state representative to introduce legislation that would tax the state's largest credit unions. Feb. 11, the state's superintendent of credit unions announces he would not approve the credit union's acquisition of the bank. He reportedly said the credit union does not have sufficient capital to handle the acquisition.

Did the credit union really not know its capital would drop below regulatory minimums with this transaction? Why would it announce the deal before understanding the implications of such a deal to its capital? It's either bad management, or the capital concern is not genuine. The Iowa bankers had built momentum at the legislature for their bill that would tax some credit unions. Interest in credit union issues was high with the specter of the first credit union-buys-bank transaction.in the nation right in Iowa. But take the deal off the table and the intensity level falls way off, and the likelihood of the legislature taking action falls off as well.

Conspiracy theorists would say the credit union industry and the superintendent were in cahoots and jointly agreed to put things on hold. From the credit union industry perspective, it would make a lot more sense for the credit union to pursue the purchase after the legislature adjourns. Then when the deal goes through, the lawmakers are nowhere around to respond, and by the time they meet again next year, all is forgotten. Sound farfetched? Maybe, but let's watch closely to see what happens.

When I talked to credit union President Jeff Disterhoft in late January about the proposed transaction, he told me that Hawkeye State Bank didn't pay any income taxes because it is a sub S corporation. He said his credit union and the bank are the same with respect to income taxes. I couldn't believe what I was hearing. I pressed him on the point, and eventually he acknowledged that they are not the same and that tax is paid on the retained earnings of a sub S bank but not at a credit union. "Technically, I guess you are right," he said.

Other credit union industry leaders have tried to feed me this same line of bogus reasoning. I assume it is some coordinated effort on the part of the credit union industry trade associations to misinform the media. You can see why I am tempted to believe in the Iowa conspiracy theory.

Tom Bengtson, Publisher