An industry group is implementing a new strategy in its effort to curb the trend of credit unions buying banks.
The Independent Community Bankers Association of America recently sent a proposal to the U.S. Treasury Department requesting that a 10% exit fee be imposed on banks that sell to credit unions.
Though the ICBA has long attempted to check what it perceives to be unfair advantages held by credit unions, "this is the first time in its history that we have seen such a specific proposal," according to Michael Bell, partner and co-leader of the financial institutions practice group at Honigman LLP.
In its proposal to Treasury Secretary Janet Yellen, the ICBA argued that deals with tax-exempt credit unions remove banks from the tax base and result in fewer options for consumers and small businesses, leading to less favorable rates and pricing. The ICBA submitted its proposal in the wake of four notable credit union-bank deals this year.
But as ICBA pressure increases, the credit union industry is hitting back.
The National Association of Federally Insured Credit Unions immediately sent its own letter to Yellen, saying the ICBA's criticisms are "nothing more than a Trojan horse, distracting from their real aim — eliminating competition for community banks."
NAFCU accused its rival group of "falsehoods and inaccuracies" and pointed out that bank sales to credit unions are voluntary.
"The merger process is transparent and already supervised by the National Credit Union Administration and the Federal Deposit Insurance Corporation," NAFCU said. "The bank makes the ultimate decision to sell to, and merge with, a credit union.
"These transactions are a far cry from 'hostile takeovers,'" the group told Yellen.
The ICBA's proposed exit fee, which would be equal to 10% of the gross value of the acquired bank's assets or liabilities (whichever is greater) as shown on its latest balance sheet, would create "massive, intended or unintended, consequences detrimental to their own constituents" by limiting the ability of banks to sell to credit unions, Bell said.
Conversely, Bert Ely, a principal at Ely & Co. Inc., said the ICBA is addressing "an increasingly serious problem for the banking industry" as credit unions bring banks into their tax-exempt operations — taking away revenues not only for the federal government, but for state and local municipalities as well.
Purchases are on the rise, he said, "because of [credit unions'] complete tax exemption. A credit union can justify paying more to acquire a bank than another commercial bank can justify paying because the credit union can justify its higher price based on the bank’s pre-tax profits."
A potential bank acquirer must base its offering price on the to-be-acquired bank’s after-tax profits, he noted.
On Capitol Hill
The ICBA said that with bank sales on the rise, lawmakers and government officials need to step in.
"All indications are that the credit union-bank acquisition trajectory will continue — unless Treasury and Congress exercise needed oversight," the letter said.
With industry pushback building, action by lawmakers and officials remains uncertain.
Alan Keller, ICBA’s vice president of legislative policy, said the measure is in the mix on Capitol Hill.
Without identifying specific lawmakers, he said the group is "shopping it on the Hill and have picked up indications of interest."
"This is something different, something that will change the financial landscape," Keller said. "We’re hopeful that we’ll find someone to introduce it."
Four noteworthy credit union-bank deals
In April, Jacksonville, Fla.-based VyStar CU announced the largest-ever bank purchase by a credit union, buying Heritage Southeast Bancorporation Inc., with its nearly $1.6 billion in assets.
Less than two months later, North Liberty, Iowa-based GreenState CU said it was acquiring Oxford Bank & Trust, based in Oakbrook, Ill., and Omaha, Neb.-based Premier Bank . This marked the first time a credit union struck two deals at once.
And in a transaction highlighted by the ICBA, Grand Rapids, Mich.-based Lake Michigan CU recently announced its acquisition of Tampa, Fla.-based Pilot Bancshares Inc., which specializes in financing private aircraft, for twice its book value.
The ICBA said these deals show that some credit unions are departing from the mission they were given when the tax-free financial institutions were created more 80 years ago to help people of modest means during the Great Depression.
"[W]e believe that today’s industry — particularly the largest, rapid-growth credit unions as well as those that have ventured into more exotic investments — stands in jarring contrast to the original vision," the group said.
But Bell said he believes the ICBA is "taking advantage of the political headwinds." He noted that hundreds of banks buy other banks yearly, adding that the CU acquisitions are "just an absolute minority."
"We just need context before we scream and shout and demand law changes," Bell said.
He noted that many banks are Subchapter S corporations under the tax code, which means they are already not paying tax.