By Ray Birch
KALAMAZOO, Mich.—A demand that Congress implement an “exit fee” on credit unions that buy banks is unlikely to gain traction in Washington or do much to slow the ongoing trend, according to the pioneer of the deals.
But should such a fee somehow gain support, then Congress should also back a new fee or tax on some banks, according to Michael Bell.
As CUToday.info reported, the Independent Community Bankers of America (ICBA) is calling for an “exit fee” to be paid any time a credit union buys a bank, claiming it would offset lost tax revenue. In a letter to the Treasury Department, the ICBA said it wants an examination conducted of what it called “abuses of the tax code causing increased acquisitions of community banks by tax-exempt credit unions.”
The bankers’ trade group is also proposing legislation to offset the tax losses it argues is lost as a result of the transactions.
“I'm really not surprised they're trying to get some momentum on this this idea of some sort of fee or tax, which was academically created to try to highlight the difference between a taxed entity and a non-taxed entity,” stated Bell, who has been at the forefront of credit union purchases of banks and who is a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP. “I give them credit for this new approach, but I don't think this goes anywhere.”
The Proposal
In its letter to Treasury Secretary Janet Yellen, the ICBA said its proposed “exit fee” would:
- Tax credit union acquisitions of taxpaying community banks to “capture the value of the tax revenue that is lost once the business activity of the acquired bank becomes tax-exempt.”
- Be equal to 10% of the gross value of the acquired bank’s assets or liabilities as shown on its most recent balance sheet, whichever are greater.
‘Scream and Yell, But…’
Michael Bell
Bell, who has been involved in more than 40 whole-bank agreements, plus additional bank branch purchases, told CUToday.info he believes the request will not gain attention from Congress for several reasons, including that at its heart the call for the exit fee is really the same claim bankers have been asserting to Washington in recent years, which is that credit union purchases of banks reduce tax revenue.
“This is just a different way of saying the same thing,” said Bell. “The bankers scream and yell about credit unions not paying taxes, but banks really are not taxed to any great extent. These banks we are buying, for the most part, don't pay much or any tax at all. Second, if they're an S corporation, they don't pay any tax. I would ask the bankers that if this credit union exit fee makes sense, shouldn't there also be some sort of penalty or exit fee for banks when they go from being a C corp and convert to an S corp?”
ICBA, in its letter to Treasury, also contends there is precedent for imposing an exit fee on entities that remove tax-paying organizations from the tax base.
“I don’t know what their argument actually is here,” said Bell. “But I am certain there is precedent for not doing the exit fee as well.”
No Benefit to ICBA Members
Bell said the attempts by the banking trade groups to slow down or prevent credit unions from buying banks is not in the best interests of their association’s members.
“If a community bank has voluntarily made a choice to enter into a transaction with a credit union, why on Earth does it make sense then to impose some sort of tax on the credit union, which would essentially harm the selling bank by making it more difficult to be purchased by a credit union?” asked Bell. “There are unintended consequences to everything. They want to impose some 10% tax; then the effect on community banks is they are going to lose potential credit union buyers.”
Nevertheless, all the “hubbub” could have an effect on some agreements, said Bell.
“Could this possibly chill some deals, stop a bank seller from possibly considering a credit union? Perhaps,” said Bell. “Even if this just chills one deal a year, then that's a problem, in my opinion. Now, once two parties have made a decision to do something, I think this does not stop or slow things down, because the law allows the deal. But I certainly think, to the detriment of the free marketplace, it could prevent some bank sellers from doing what they actually want to do. And, again, that is a problem.”
NAFCU Responds
Following the ICBA’s letter, NAFCU responded with a letter of its own to the Treasury that it said sought to “dispel falsehoods and inaccuracies” made by the ICBA.
“Bank and credit union mergers are voluntary, market-based transactions that require a community bank’s board of directors to vote to sell to a credit union. To be clear, the bank makes the ultimate decision to sell to, and merge with, a credit union. These transactions are a far cry from ‘hostile takeovers’,” NAFCFU President and CEO Dan Berger stated in the letter to Treasury Secretary Janet Yellen. “ICBA’s complaints about the ‘weaponization’ of the credit union tax exemption are nothing more than a Trojan horse, distracting from their real aim—eliminating competition for community banks.”