I get it. Banks are annoyed that credit unions are exempt from federal taxes by virtue of their not-for-profit, member-owned, cooperative structure and mission granted by Congress in the Federal Credit Union Act. I have read many articles penned by bank representatives that bemoan the exemption while ignoring what for banks are some inconvenient truths:
- Credit unions pay nearly $25 billion annually in local, state, and federal taxes.
- Credit unions provide $18.9 billion annually in financial benefits to consumers through higher savings and returns, lower loan rates, and fewer fees.
- Credit unions generate $4.9 billion in annual benefits to all consumers due to the competitive presence of credit unions in local banking markets.
All of these billions in taxes and consumer savings promote financial wellbeing for all—a credit union industry tenet.
Indisputable Fact: Credit unions pay local, state, and federal taxes.
When you read “credit union acquisition of community banks,” don’t be fooled into thinking credit unions are monstrous cooperative entities gobbling up poor, defenseless community banks against their will. On the contrary, community banks are very open to and often seek credit union purchasers, especially when their big brother banks show no interest.
In September 2020, Tinker Federal Credit Union (TFCU) acquired Prime Bank, a community bank that served approximately 2,000 in Edmond, Okla. TFCU President/COO Dave Willis said the transaction opened many doors for both entities.
“We were not a commercial or business lender,” said Willis. “By acquiring the bank, we now offer commercial loans, mostly real-estate backed development loans.”
According to a 2019 CUNA Bank Purchase Study, bank owners have various reasons for selling to a credit union, which include better cultural fit, likelihood of employee retention, and preservation of a community service legacy.
A bank selling to a credit union is an efficient way to enhance brick-and-mortar access or add commercial lending expertise. Each entity stands to also gain immediate proficiency in areas outside their core expertise, such as community outreach.
A community bank’s original purpose is to channel loans back into the communities it serves. If a bank closes its doors with no buyers, that community is left unserved and unbanked, creating a financial desert. A credit union acquisition is an outstanding solution for that entire community.
The fact is, what’s good for business is good for the community and employees.
“We retained all staff and, in some cases, the benefits were better at the credit union, providing an instant win for the staff,” Willis said.
More than half a year after the acquisition, TFCU continues to provide employment opportunities. TFCU is now actively adding treasury services staff and additional lenders.
“We acquired great commercial talent, a well-developed commercial portfolio of loans, and an independent location to run operations for our business services,” said Willis. “And we have had four employees apply for and move to HR, accounting, and IT within the organization.”
Indisputable Fact: Staff and incoming talent can benefit from a bank sale to a credit union.
But what about bank owners?
Bank sales to credit unions provide significant benefits to bank owners because they provide cash proceeds rather than stock ownership. That’s because a credit union cannot legally purchase bank stock; it must purchase the bank’s assets and assume the bank’s liabilities by paying cash to the selling shareholders.
In fact, former NCUA Chairman Dennis Dollar says it is a misnomer to say credit unions acquire banks at all. In a 2020 Credit Union Times article, Dollar calls the transaction a “purchase and assumption,” not an acquisition or a merger as banks and credit unions have traditionally known.
He explains that a bank exists through its charter, and no credit union has ever purchased a bank’s charter, which is not allowed by law. The charter is never sold, nor is it transferred to a credit union. A credit union cannot buy a bank, but a bank can choose to sell some or all of its assets and/or deposits to another bank or to a credit union. He said it’s an important distinction because the initiating party in the sale of such assets is always the bank, not the credit union.
Willis added that since TFCU purchased Prime Bank, other banks have reached out looking for a buyer. “At this point, we may consider it if there are branches and staff in locations we don’t currently serve or another service we could include in our portfolio of offerings,” he said. “At the moment, though, there are no plans or banks in the works.”
Indisputable Fact: Many community banks actively seek buyers including credit unions.
And what about the credit union?
Obviously, the process of a credit union purchasing a bank is relatively complex. As with any major purchase, the buyer and seller need to ensure they are making informed decisions. Minnesota-based financial consultant Wilary Winn says, “a transaction in which a credit union purchases a bank could result in beneficial outcomes provided the credit union has compelling, strategic reasons to do so.”
Winn explains that a credit union may be driven by two strategies: “going on offense” or “playing defense.”
Going on offense could be fueled by a desire to expand into new geographical areas, add expertise the credit union does not possess, grow membership, drive economies of scale, or diversify its balance sheet. A defensive strategy would cause a credit union to purchase a bank within its footprint to prevent a competitor from entering or expanding in the marketplace.
From the NCUA’s 2020 request for comment on its proposed rule: “The NCUA has historically seen a relatively small but consistent number of applications from FICUs seeking to engage in merger or purchase and assumption transactions with banks or other types of financial institutions. … [T]he number of these transactions the NCUA approved each year1 was small and fairly constant from 2013 to 2017 with a modest uptick in 2018 and 2019.”
Indisputable Fact: Credit unions are legally allowed to “acquire” a bank.
Now, about that tax exemption…
Once again, because credit unions are not owned by stakeholders, they pass earnings on to their members in the form of lower loan interest rates, higher savings yields, and lower fees, while they focus on providing quality member service and maintaining an adequate regulatory capital base.
Banks may argue that a charter conversion would siphon off tax revenue, but the benefits credit unions deliver are worth about nine times the “cost” of our tax exemption. Cornerstone League Executive Vice President and Chief Advocacy Officer Jim Phelps says the credit union tax status is worth about $16 billion per year, and that’s across more than 5,000 institutions. (Source: CUNA)
Also, according to CUNA, the three largest U.S. banks are each larger than the entire credit union movement, and the largest 100 banks control 75 percent of total depository institution assets. Still, despite the record $243 billion in fines for bad behavior since the 2008–2009 financial crisis, big banks keep getting bigger. Meanwhile, the credit union market share has stayed in single digits.
It seems like congressional lawmakers would better spend their time on the urgent problems of the financial system, rather than the dispute banks have with credit unions. We think it’s far more important for Congress to prevent illegitimate lenders using the OCC “rent-a-bank” loophole to offer predatory loans without conforming to a traditional bank or credit union charter. Or perhaps Congress could delve into the phenomenon that non-bank and fintech loans are growing too big too fast with little regulatory oversight.
Or, we could trudge back here again in six months to wash, rinse, and repeat this tired bank argument that “credit unions have an unfair advantage,” when the facts show just the opposite.
Willis added: “Keep in mind, this is a very labor-intensive, long process. However, under the CUSO umbrella, we have considered insurance agencies, title companies, and in Oklahoma, tax agencies. These are all on the table if we feel we can provide better service to our member.”
So rather than question the tax-exempt status of credit unions, I would suggest that Congress focus on the many benefits that credit unions bring to the communities they serve and on the threats to those benefits posed by certain dangerous dynamics in the financial services marketplace. Some items to explore include:
- Preventing illegitimate lenders using the OCC “rent-a-bank” loophole from offering predatory loans without conforming to a traditional bank or CU charter.
- Questioning how the big banks keep getting bigger, while credit union market share has stayed in single digits.
- Exploring the need to strengthen oversight for non-banks and fintechs, whose market share of loans is growing rapidly with little regulation.