Recently, the Independent Community Bankers Association, or ICBA, set up a new task force to establish a game plan to somehow paint credit unions’ acquisition of bank accounts as a disservice to taxpayers. In the ICBA template grassroots advocacy letter, it urges member banks to ask members of Congress and state lawmakers to re-examine the credit union industry’s tax and regulatory subsidies.
Of course, this is nothing new. In June of 2004, Michele Heler wrote an excellent opinion piece in the American Banker publication titled, “A Battle Banks Can’t Win But Keep Fighting” in which she called it the “dirty little secret” of bank lobbying. That is, that their credit union bashing is a waste of time and that fighting the credit union tax exemption is a battle that bankers know they can’t win but know they must fight.
And so, what is different this time? ICBA is asking member banks to take the position that the small number of bank acquisitions by credit unions is creating a hardship for taxpayers. In fact, the advocacy letter template references a miniscule $3.9 million of lost tax revenue from the nine deals that took place in the past year. Keep in mind that according to S&P Global Market Intelligence, recent tax reform legislation padded community bank earnings by over $1.7 billion. Those were dollars actually taken away from the U.S. Treasury to increase banks’ profits by over five percent each year.
I hesitated to even address this latest misrepresentation by bankers associations, but as credit unions consider growth strategies in their refreshed strategic plans, I wanted to clarify some of the banker rhetoric. It will be important for individual credit unions and their associations to do the same as bankers initiate this spirited letter-writing campaign with Congress and state legislatures. And as credit unions do their planning, they should make legislative advocacy and public relations an important dimension of their plans. Safeguarding and enhancing credit union charters and powers is the foundation for growth and success.
Here are some important points of clarification for lawmakers on the latest ICBA attacks:
1. Credit unions are not actually acquiring banks. That is, they cannot legally own stock in banks and other corporations. These latest acquisitions are referred to as forward mergers for cash, but once the acquisition documents are inked, the bank charter goes away and the surviving credit union own the loans, deposits, account relationships, branches and other assets. The depositors and borrowers now become members of a not-for-profit credit union, no longer customers of a for-profit bank.
For decades, credit unions have been able to purchase and acquire bank loans, deposits and branches. This is a good thing. It is good for the selling banks to have more options. It is good for the safety and soundness of the banking system and it is a good option for credit unions and their members. These latest forward mergers for cash are just creative, cost-effective transactions for both the selling banks and for the customers who benefit downstream.
2. The number of acquisitions is quite small and not growing dramatically. Keep in mind that there were 5,600 credit unions and 4,600 banks in the U.S. at the end of 2018. So, with over 10,000 banks and credit unions, the ICBA cites knowledge of nine credit union acquisitions of banks in the last year, up from five or six in prior years. This hardly represents a “run-away freight train” referenced by the ICBA.
3. In Michigan since 2012, when United Federal Credit Union became the first credit union to use the forward merger for cash methodology of buying assets, deposits and branches of Griffith Bank in Indiana, there have been three or four small bank mergers or acquisitions by credit unions each year. In Michigan, United Federal Credit Union, Advia Credit Union, Lake Michigan Credit Union and Credit Union One are among the small group of credit unions completing these deals nationally.
4. The ICBA is working against its own member banks by opposing these additional opportunities for small privately held banks to sell their business. For years, community banks and credit unions have been impacted by the negative effects of higher regulatory burden and competitive pressures coming from larger scale financial institutions. The option for credit unions to participate in these transactions is good for the small banks looking to find a cost-effective exit from their struggling business as opposed to relying solely on stock transactions with larger banks.
5. The reason that credit unions are attractive buyers for these small banks is that they cannot do stock-for-stock deals. Credit unions pay cash for the merging accounts and assets as the bank charter goes away and customers become members of the surviving credit union. This has tax advantages to the sellers and reduces the cost of the transaction. And owners of the selling bank realize that their customers will benefit from the great service, better rates and lower fees offered by the acquiring credit union, more so than becoming just a number at a large competing bank.
6. Arguing against having a larger pool of acquiring financial institutions creates a potential systemic challenge for the banking system in the U.S. These bank association leaders are forgetting the effect of major recessions and financial crises in the U.S. such as the Savings & Loan crisis in the 1980s and 1990s when 1,043 of the then 3,234 S&Ls failed, leading to new regulations, the merger of the Federal Savings & Loan Insurance Corporation, or FSLIC, with FDIC and the creation of the Resolution Trust Corporation, or RTC. By 1995, the RTC had closed these 747 failed banks, resulting in a cost of $160 billion dollars, including $132 billion taken from taxpayers in the form of bailout funds.
I remember those days in the early years of my career when I worked as an internal auditor for a large, conserved S&L in Salt Lake City in the early ‘80s. I know how important it was then, and still is today, that healthy financial institutions of all types are able to bid on the sale of assets and deposits of those who either want to sell or feel compelled to do so for competitive or safety and soundness reasons.
And more recently, the subprime mortgage crisis of 2007, which ushered in the Great Recession that ended in June of 2009 and led to the Dodd/Frank Wall Street reform legislation, led to scores of bank failures and a collapse of the shadow banking system of investment companies and mortgage companies. A total of $626 billion dollars was invested, loaned or granted to struggling banks due to various bailout measures at a huge initial cost to taxpayers. And often the only resolution for smaller banks was to find attractive merger partners. This is a critically important facet of the U.S. financial system.
So, it is incredibly inaccurate and disingenuous for the ICBA to characterize the $3.9 million of lost tax revenue due to these mergers as a “runaway freight train.” The societal benefits of allowing these transactions are far greater that the small tax dollars referenced.
7. Free-market buying and selling of businesses, especially relatively small ones in the case of these bank sales, should not be over-regulated by Congress or state legislatures purely for tax policy reasons. The free markets in the U.S. create an efficient market for buyers and sellers, and credit unions should be able to participate in that process on equal footing with their for-profit competitors. These transactions clearly benefit both the selling and buying institutions and, more importantly, the customers and members who enjoy the higher levels of service, greater value and more responsible lending offered by credit unions, especially during the toughest economic times.
8. While bankers’ associations like ICBA try to paint the picture that smaller credit unions object to the growth and expansion of larger ones, they fail to realize that the credit union community is going through the same disruptive consolidation that is occurring in the banking sector. And credit union leaders from institutions of all sizes largely realize that creative approaches will be needed for growth, scale and competitive service offerings in the years ahead.
Most, if not all of these bank deals, are being done by credit unions that have less than $5 billion in assets. And the selling banks have assets typically under $100 million. These are small transactions relative to the mega-mergers in the banking sector. They are likely the small deals that larger banks don’t even want to bid on. The alternative is to restrict the pool of buyers and then risk creating losses to the FDIC or to taxpayers as happened both in the early ‘80s and again during the great recession.
As credit unions seek to grow organically or through mergers, the consumer almost always benefits because these credit unions can offer the deposit rates, low loan rates, and a breadth of consumer and small business services that impact peoples’ lives in a positive way.
More broadly, the over 110 million consumers who benefit from credit union services, delivered by 5,600 credit unions of all sizes, also benefit. This is because a strong, well-perceived credit union industry benefits all credit unions and their members. Brand perception is a powerful thing. And right now, credit union members love their credit union a lot more than bank customers like their bank.
This most recent lobbying ploy by the ICBA to seek the taxation of credit unions and to drive subsequent conversions to bank charters is a continuation of bankers’ self-serving and anti-consumer attitude. But this time, in lobbying against merger options for their member banks, they also do a huge disservice to their own members’ banks.
Michele Heler was right in 2004 in characterizing this “dirty little secret” of bank lobbying that their credit union bashing is a waste of time and that fighting the credit union tax exemption is a battle that bankers know they can’t win but know they must fight. For the bankers associations, this is about their relevance to dues-paying banks. It certainly cannot be about what is right for the consumer or for our nation’s banking system.
But an important corollary truth for credit union leaders is that fighting to preserve both the tax status and policies that enable growth, including the ability to acquire bank assets from selling banks, is a battle that credit unions must fight and win. Because in doing so, the selling banks, the acquiring credit unions and, most important, the consumers and small businesses served all benefit from a vibrant and strong financial services industry.
CU Solutions Group offers credit unions technology, marketing, performance and advisory solutions to help them compete and grow. We partner with CUNA and state leagues to advance the well-being of the credit union industry so that together we can make an impact on the lives of members. We look forward to sharing this objective of setting the record straight with lawmakers so that good policies continue to benefit the members and communities served by credit unions.