WASHINGTON–With congressional offices being urged by one banking group to ask hard questions of credit unions, including around CU acquisitions of banks, CUNA has prepared a white paper aimed at providing some answers.
Quoting a statement made by St. Louis Federal Reserve Senior Economist Andrew Meyer that “if (acquiring credit unions) can retain enough of the employees and customers, these transactions have the potential to be a win for all the stakeholders involved,” the paper further states bank sales to credit unions provide significant benefits to bank owners because they provide cash proceeds rather than stock ownership in another institution as is very often the case when banks sell to other banks.
“These types of sales are also embraced (as Meyer notes) because credit unions have no outside stockholders demanding high investment returns, which means credit unions are more likely than stockholder-owned banks to focus on covering costs, providing superior member service and maintaining an adequate regulatory capital base,” the CUNA white paper states. “That emphasis clearly resonates with community bankers who care deeply about community service, about the treatment of employees and, more generally, about their stature in the community and their legacy.”
What CEOs Report
CUNA further cited a survey it did of the CEOs of credit unions to whom banks had been sold since 2007 that found 89% citing specific reasons other than price as factors that bank owners considered when deciding to sell to the credit union. Nearly all mentioned employee retention as a key factor and nearly two-thirds said cultural fit played an important role in the bank owners’ decision.
CUNA also argued communities also benefit from these transactions. “Since they are not-for-profit and are not owned by outside stockholders, credit unions pass earnings through to average consumers in the form of lower loan interest rates, higher savings yields and fewer/lower fees,” CUNA said.
Other Points Raised
Other points made in the CUNA paper:
- Credit unions are more likely to preserve access to financial services for bank customers who become credit union members, compared to bigger banks.
- CU acquisitions of banks help fight the prevalence of financial deserts in both urban and rural communities. “In the wake of the financial crisis between 2008 and 2016, banks went on a branch-closing spree that resulted in 86 new banking deserts with no banks within a 10-mile radius of populated areas,” CUNA wrote. “Against the backdrop of bank branch closings, data from the NCUA reveals that credit unions are expanding branch networks and access to affordable financial services.”
- Consumers — both credit union members and bank customers — routinely say that credit unions are more consumer-friendly, more trustworthy and an overall better value than banks. For example:
False Narratives
The CUNA paper argues bank trade associations have engaged in a number of false narratives, including that credit unions hold a disproportionate and unfair advantage over banks in banking entity sales transactions. “”However…banks completely dominate bank sales activity, accounting for 98.3% of all sales transactions over the past eight years.”
In addition, while the Independent Community Bankers Association has been among the strongest critics of CU acquisitions of banks, CUNA said Rebeca Rainey, president and CEO of the ICBA, has acknowledged banks have a fiduciary responsibility to their shareholders and are actually doing right by their shareholders by selling to credit unions.
Clarifying Questions Around Taxation
Finally, CUNA said the ongoing banker statements that credit unions that act like banks should be taxed misses the point. CUNA quoted Rainey as saying, “If credit unions want to operate as a bank, they should be taxed as a bank would be.”
But, said CUNA, CUs certainly do not want to “operate as a bank.”
Moreover, CUNA stated, a large percentage of the deals closed and pending since 2012 involve banks that appeared to pay no taxes in the year prior to their sale to a credit union.
“This is true in seven of the 14 completed or pending deals in 2019,” CUNA said. “Overall, half of banks that chose to sell to credit unions in 2019 appeared to pay no income taxes at all, according to regulatory call report filings. The median effective tax rate (including federal and state) on 2018 bank earnings is roughly 11% among all bank sales to credit unions that were announced in 2019.
Generating Capital Gains
“For the 35 bank sales to credit unions going back to 2012, a total of 16 banks sold reported no applicable income taxes in the calendar year previous to the deal. That's 46% of the total banks that reported no applicable income taxes,” CUNA continued. “Among all banks in the group going back to 2012, the median effective tax rate (federal and state) in the year prior to sale is 0%.
“It should be noted that even in cases where a decline in income tax payments arises from the shift of taxable bank earnings to not-for-profit, or untaxed, entities, those reductions are dwarfed by other taxes that are routinely paid as a result of the purchase transactions. That’s due to the fact that credit union purchases are cash deals that generate capital gains (whereas bank sales to other banks typically occur with stock payments rather than cash payments).”