By Ray Birch
ARLINGTON, Va.—What’s going on with the recent wave of attacks by banks on credit unions? It’s likely the bankers are seeking to prompt NCUA to more closely scrutinize CUs, but it’s also likely the effort will fall short of that goal, several people are saying.
As CUToday.info has reported here and here, banking trade groups are asking both Congress and NCUA to look closely at credit union acquisitions of banks and whether CUs continue to fulfill their “mission,” arguing the former is reducing U.S. tax revenue and the latter is evidence the tax exemption is no longer deserved. None of the issues are new, just the examples being used by the bankers to support their arguments. As some have observed in the past, the bank trade group messages are aimed at pleasing their own members as much as they are targeted at credit unions.
“I think the goal, overall from all of their attacks over the years, is to try to regulate credit unions out of existence,” said NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt. “I think it’s about spreading a lot of mistruths to hurt the reputation of credit unions, and we will be pushing back and fighting back every step of the way.”
With the latest volley, Hunt contends bankers are hoping to prompt some members of Congress to start asking questions.
“They are putting pressure on Congress to put pressure on NCUA to look at these transactions more closely,” said Hunt. “In theory, NCUA doesn't necessarily have the authority to disallow these deals.”
Death by a Thousand Cuts
But what Hunt believes banking groups ultimately hope will happen is that by raising attention around multiple issues, Congress will increase its attention on NCUA.
“If the banks had their way, credit unions would have long exams, increased capital requirements and extremely restrictive fields of memberships,” said Hunt. “It's death by a thousand cuts, and this latest attack is just part of that strategy.”
As CUToday.info has reported, the Independent Community Bankers of America (ICBA) has called CU purchases of banks a “runaway freight train.” It has launched an alert to Congress on its Be Heard grassroots action center and released a customizable op-ed and talking points to “spread the word in local news media” about the purchases of banks by credit unions.
The issue, according to ICBA President Rebecca Romero Rainey, is that taxpayers should be “concerned” because the deals diminish “tax revenues and further solidifies a publicly subsidized sector of the financial services industry.”
Romero Rainey stated on the ICBA website that credit unions with some $24 billion in combined assets have acquired community banks worth less than a tenth as much in assets over the past year.
According to the ICBA, the acquisition of banks by credit unions results in the loss of “roughly $3.9 million annually in income taxes, adding to the nearly $2 billion annual cost to taxpayers of the federal credit union tax exemption.”
Lots of Blues, Nothing New
But the arguments aren’t anything new.
“The credit union tax exemption has been targeted by banks constantly and I doubt these attacks will ever go away,” said Michael Bell, attorney and counselor with Royal Oak, Mich.-based Howard & Howard, and an architect of the first-ever CU/bank acquisition in 2011.
Bell has represented credit unions in more than 95% of these deals. “How are these transactions linked to tax? The tax impact of these transactions is not material. We can do these deals at the current pace for 100 years and it won’t be close to the tax cut received by banks in the latest tax legislation. These banker attacks are simply the latest tool in their never-ending argument that credit unions need to be taxed. I believe banks and credit unions should work together to fight the real issues, like overregulation.”
Days of Cooperation Are Over
Hunt pointed out that following the financial crisis of a decade ago, banks and credit unions worked together to address overregulation, such as that stemming from the CFPB.
“But three years ago they began again fighting against credit unions in a public forum, so their latest action does not surprise me at all,” she said. “This is just another tired argument the bankers are shoving out there.”
Hunt acknowledged the recent increase in the number of credit unions buying banks likely sparked the bankers’ new focus. CUs have now completed more than 35 acquisitions of banks since 2011, when Michigan's United FCU pioneered such purchases by acquiring $81-million Griffith Savings Bank in Indiana.
“One of the biggest challenges for small institutions or medium institutions is succession planning,” said Hunt. “It used to be community banks were handed down from the bank president to that individual’s children. But now it’s a much more complicated world we live in. There are increased fiduciary duties, mounting regulatory burden, BSA requirements, cyber-attacks... It's more complicated to run a bank than ever, and I think that’s why we're starting to see the changes in the marketplace. They're just more banks that are available to buy now.”
A Different View
Bell argued that credit unions becoming a potential bank buyer has been good for both industries.
“We created the pathway for this option for CUs and selling banks over 10 years ago,” said Bell. “We have a long history of successful deals that prove these transactions are good for the buyer and the seller. These transactions are a win for the seller’s owners, seller’s employees, seller’s community and seller’s customers. Today, as a selling bank, your list of possible bank purchasers has dramatically decreased and one of two things will happen by allowing a credit union to participate—the CU will be the winning acquirer or the credit union—by being in the mix—will raise the selling price. I can’t see how either of these things is harmful in any way.”
Bell noted this marketplace is “cyclical,” and at the moment pricing is good for buyers and sellers.
“Based on this fact alone you will see more deals this year than ever,” he said. “Additionally, selling banks have seen and embraced the advantage of including credit unions on their bid list.”
Transactions to Date
Bell said he’s not certain if the increasing size of the deals—as credit unions buy larger asset-size banks—also sparked the attacks.
“Virtually all of the transactions to date have involved sellers under $300 million in size,” said Bell. “You certainly will see larger deals, including sellers over $1 billion. But I don’t see any relevance in bankers pointing to the growing size of these sales. I know the larger sales are being highlighted for the tax argument because they will elicit an emotional reaction.”
Good for Bank Customers
Greg Michlig, CUNA’s chief engagement officer, said banking group efforts to block or stall such sales work against the interests of their own members and the communities in which they operate.
“These banks are making the choice to sell their branches and businesses to credit unions, and they’re doing it because it makes sense for everyone,” Michlig said. “It’s good for the banks’ customers, which gain access to strong, responsible, member-centric financial services rather than facing a profit-hungry big bank—or, worse, no financial partner at all. It’s great for the communities that the banks are writing off, because more credit unions will be able to help people achieve their financial security and growth. And, frankly, the sales are good for the banks’ investors, who get cash for their bank rather than a stock-for-stock trade.”
A Different Motivation?
Michlig acknowledged banks have yet to say the sales are a bad business practice.
“Banks are the ones who are making the decision to sell to not-for-profit, member-owned credit unions,” he said. “It seems the bank associations are using this as a way to rally their membership in an attempt to bolster their value proposition. They may want this to be a policy matter, but at the end of the day it’s about blaming credit unions for their own member banks’ decisions.”