Credit Union Acquisition of Community Banks Rising, But Still “Small Proportion of Overall Consolidation”

Credit Union Acquisition of Community Banks Rising, But Still “Small Proportion of Overall Consolidation”

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Conservative taxpayer organizations and banking trade groups say they have new ammunition in their argument that the credit union tax exemption is outdated. They are arguing that credit unions are leveraging their tax exemption to gobble up community banks.

“Credit unions are ideal buyers, say experts, because they tend to be all-cash buyers, whereas commercial buyers prefer to use stock or equity for the deal,” Scott Hodge, president emeritus and senior policy advisor at the Tax Foundation, wrote in a recent report. “Since many community banks are family-owned or have a modest number of shareholders, they prefer the cash deal. And credit unions tend to offer a higher price for the purchase because they don’t have to worry about the tax implications.”

However, statistics released by the National Credit Union Administration show that credit union-bank purchases are a mere drop in the bucket when compared to the number of banks purchasing other banks. “Bank transactions with credit unions are a small proportion of the overall consolidation occurring in the financial services marketplace,” Kelly Lay, the NCUA’s director of the Office of Examination and Insurance, wrote in a December 14 memo to agency Chairman Todd Harper.

Still, the Tax Foundation is trying to elevate the issue, using the bank purchases as evidence that the credit union tax exemption is outdated and should be repealed. “Fairness and equity demand that credit unions be put on the same tax footing as the banks they compete with,” Hodge wrote in his recent report.

The National Taxpayer Union also cited bank purchases in its argument that the tax-exempt status of credit unions should be eliminated.

“The credit unions of today so closely resemble other, taxed financial institutions that their tax-exempt status seems a product of a bygone era,” Joe Bishop-Henchman, the group’s executive vice president and Matthew Putman, an NTU external associate, wrote in a blog post on the group’s website.

The group cited a 2022 report from the congressional Joint Committee on Taxation that showed the tax exemption will reduce federal revenue by $14.4 billion between 2022 and 2026.

The NTU also said that credit unions have purchased a record number of banks in recent years, including 16 in 2022 and several purchases already announced this year.

The NCUA’s Lay takes a broader perspective. Lay reported that from 2011 to Sept. 30, 2023, the NCUA had approved 64 purchases of banks by credit unions. Of the 64 bank purchases by credit unions, 54 were made by federally insured, state-chartered credit unions, which have broader authority and flexibility in their field of membership rules. The NCUA and/or a state regulatory agency have denied four credit union purchases of banks since 1984 and in nine other cases, the credit union involved withdrew its application.

Lay noted that just during the first nine months of 2023 there had been 90 bank-to-bank purchases and 108 credit union-to-credit union mergers.

As might be expected, America’s Credit Unions, the new trade group that resulted in the merger of the two national trade groups, fired back at the accusations leveled by the two groups.

“While Mr. Bishop-Henchman and Mr. Putnam may be knowledgeable about tax policy, they clearly do not understand credit unions, the purpose they serve in the financial services industry, nor the role they serve in helping Main Street America,” Carrie Hunt, the group’s chief advocacy officer wrote, in a letter to NTU President Pete Sepp, earlier this month.

She continued, “The authors assume that because consumers choose credit unions over banks that there is now no difference between banks and credit unions.” She called that a “baseless assumption,” arguing that the growth of credit unions is evidence that people are seeing the benefits of credit unions and are choosing to leave big banks.

In a letter to the tax-writing Senate Finance Committee, America’s Credit Unions President/CEO Jim Nussle wrote that according to his organization’s analysis of NCUA and DataTrac date, credit unions provide $21.5 billion in total financial benefits annually to consumers and communities across the country.

In a separate move, the trade group and state credit union leagues sent a letter to leaders of the House and Senate tax-writing committees, citing statistics they said show that banks, not credit unions, are failing to serve their communities.

“If banks are so concerned about credit unions causing unfair competition, why are they closing branches by the thousands?” they wrote. “From 2012-2023, banks closed 19,301 net branches while credit unions opened 1,373 net branches during the same timeframe. It is deeply cynical of banks to write a letter to Congress complaining about credit unions stepping up to serve the consumers they have abandoned. A thank you might be more appropriate.”

The reports from both taxpayer groups mirror the positions of banking trade groups, such as the American Bankers Association and the Independent Community Bankers of America.

The ICBA is attacking the issue from another angle. The trade group representing the nation’s community banks last month challenged the purchase of a bank by a credit union. The ICBA filed a protest under the Community Reinvestment Act against the purchase of First Financial Northwest Bank of Reston, Washington, by Global Credit Union of Anchorage, Alaska.

“We urge you to act swiftly and decisively to reject this proposed merger which will not benefit the small businesses or [low- and moderate-income] customers of First Financial Northwest Bank’s assessment area,” Mickey Marshall, the ICBA’s assistant vice president and general counsel, wrote in a letter to Paul Worthing, regional director at the FDIC’s San Francisco office. The purchase requires the approval of the Federal Deposit Insurance Corporation and the National Credit Union Administration.

Marshall argued that credit unions are less accountable to the communities they serve, since they are not subject to the Community Reinvestment Act. Banks are required to report their lending and other activities and bank regulators evaluate their activity and make their reports public.

“We have long objected to the acquisition of taxpaying community banks that are subject to the CRA by tax-exempt credit unions, which are exempt from the CRA,” he wrote in his letter to the FDIC. “We believe that such acquisitions reduce the combined institutions’ commitment and accountability to making loans in Low- and Moderate- Income communities, reduce the level of qualifying community development lending and investment, and harm consumers.”

Marshall noted that this deal is particularly troubling since First Financial has a record of receiving “outstanding” CRA ratings, adding that the merged institution is very unlikely to maintain that level of service once it becomes exempt from the CRA.

He argued that while the FDIC reviews thousands of banks for compliance with fair lending laws each year, the NCUA only conducts about 50 annual fair lending exams. “FDIC should review Global’s latest fair lending exam findings,” he wrote. “If a fair lending review has not been conducted within the last 5 years, then Global Credit Union should be reviewed for compliance with fair lending laws.”

On the other side, in announcing the proposed merger in January, Joseph Kiley III, president/CEO of First Financial Bank said the merger will benefit the banks’ customers. “In today’s competitive environment, we believe this strategic transaction provides numerous benefits for our customers, our communities, and our employees,” he said, when the purchase was first announced. “In addition, this transaction delivers substantial value to our shareholders who have supported us over the years.”

It is unclear whether the bank purchase issue is gaining much traction on Capitol Hill.

Lay wrote her memo in response to a request from House Financial Services Committee Vice Chairman Rep. French Hill, R-Ark. Hill had asked Harper about the issue during a hearing in November. “I mean are these tax-paying companies that are converted to non-tax-paying companies,” he told Harper during a committee hearing that featured all the federal banking regulators. Hill said there was bipartisan concern about the issue among committee members, although no other member raised the issue.

Even if the issue is not raised this year, (Congress does not like to tackle contentious issues in an election year,) Hill might be in a position to address it next year. He is one of a few Financial Services Committee Republicans vying for the top Republican slot on the Financial Services Committee. Depending on which party controls the House, Hill could become either the chairman or ranking GOP member on the panel. If he became chairman, he would have a large influence on the committee’s agenda and could address the bank purchase issue after that.

On the other side of the Capitol, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, is running for reelection and has made it clear that he is not fond of the lobbying efforts of the big banks.

“Wall Street pours money into high-priced lobbyists to fight any effort to put the most basic guardrails on your ability to do whatever you want,” he told CEOs during a Banking Committee hearing in December. Instead, Brown told them, “You should be cutting prices for consumers, increasing opportunity for your employees, increasing diversity within your executive ranks, and supporting your workers’ efforts to unionize.”

What is clear from this increasing rhetoric on mergers is that the issue is unlikely to go away soon. As the financial community continues to consolidate, credit union purchases of banks will be scrutinized for ammunition to end the credit union tax exemption.

Author

  • David Baumann

    David Baumann established and edited the Washington Credit Union Daily website before it was put on hiatus while he served as the editor of the regulatory and legislative blog at CUCollaborate. Before starting Washington Credit Union Daily, David was the Washington correspondent for the Credit Union Times. A veteran Washington reporter, he has spent his career writing and editing for many of the capital’s leading publications, including CongressDaily, National Journal magazine and Congressional Quarterly Weekly. He was part of a team that won a 2005 National Headliner Award for a special issue of National Journal on “The State of Congress.” He holds a B.A. in political science from The George Washington University and an M.A. in journalism from Indiana University.

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