By Ray Birch
KALAMAZOO, Mich.—The logic behind the arguments being made by the banking industry that bashes the purchases of banks by credit unions is flawed for numerous reasons, according to the pioneer of such agreements, who says data on the deals back him up.
But data or not, the argument the credit union tax exemption is both making such purchases possible and hurting local communities continues to be aggressively carried to more state legislatures by the banking trade groups, noted Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP, who told CUToday.info there is another threat to these agreements.
As CUToday.info has extensively reported, banking trade groups have been lobbying state legislatures and Congress claiming credit unions have an unfair advantage over banks when bidding for a bank that’s for sale.
One of the main claims the groups are advancing is that as a result of the federal tax exemption, credit unions have additional capital with which to bid on banks. Moreover, the banks argue with each credit union acquisition of a bank a tax-paying organization is lost, reducing revenues in local communities.
Unsound Arguments
Neither argument is sound, said Bell, who is a pioneer of credit union purchases of banks.
“The (Independent Community Bankers of America—ICBA) and other bank groups continue to attack CU purchases of banks,” stated Bell, who has been involved in more than 38 whole-bank agreements, plus additional bank branch purchases. “One of the main thrusts of their arguments involves the lack of taxation of CUs and an idea that CUs have an unfair pricing advantage when buying a bank. Credit unions cannot and do not bid higher in these transactions because they pay less tax than a bank. CUs evaluate and price these opportunities virtually identically to banks. CUs have only one form of currency—cash—while banks have two—cash and stock. Some sellers prefer 100% cash, making a CU a preference, and that has nothing to do with tax.”
Bell noted some sellers prefer to receive stock, making credit unions ineligible to participate.
“The market is free and it cuts both ways,” said Bell. “Anecdotally, and based on my experience, CUs lose far more bids than they win. I looked back over the past 10 years and the facts indicate that credit unions are successful, at the most, one time for every eight or so attempts. Said another way, CUs lose to competing banks, at a minimum, 87.5% of the time.”
Michael Bell
The banking industry is simply wrong on how the deals really work, said Bell. But that hasn’t stopped state chapters of the ICBA from actively approaching state legislators and regulators across the nation encouraging them to look into the deals, he added.
Colorado Victory Is Inspiration
“It is interesting that these groups are approaching state regulators and asking to limit their members’ rights, but it is happening. They're approaching state regulators because a few years ago they got their first victory in Colorado, when the Colorado regulator determined that state chartered banks don't have the power to sell to a credit union,” said Bell. “They were successful in Colorado because Colorado has a very unique and odd statue they were able to leverage. I haven't seen a statute like this in any other state.
“Pragmatic state regulators across the country have been lobbied, have looked at this and have properly declined to intervene,” continued Bell. “First, this is a trade association battle at most and, second, this is a legislative issue in the end. We have successfully done these transactions in 16 states so far, so any state deciding to say no, intervene or stop these will be in the very small minority.”
Bell recently testified in before a Senate subcommittee in Iowa as a financial institutions expert, addressing legislation that if signed into law would prevent Iowa’s state-chartered credit unions from buying banks.
Fight in One State
Currently, however, there is a fight in one state, outside of Iowa, that Bell declined to identify but in which he said bankers are very aggressively attempting to persuade regulators that state-charted banks should have their power to sell to a credit union taken away.
“I say taken away because bank-to-CU transactions have been approved in this state in the past. We found out about it,” said Bell, who said the bankers are once again claiming the playing field is not level and is tilted toward credit unions when it comes to the ability to buy smaller banks. “We are working now to try bring clarity to the situation and provide the facts.”
Those facts, Bell repeated, do not support the bankers’ claims.
“The playing field is not unlevel, and the banks that are selling are typically not big taxpayers,” said Bell. “I’d say eight out of 10 banks credit unions buy were either paying no taxes as an S-Corp, or were paying minimal taxes due to being marginally profitable. The argument that a lot of tax money is being lost is not valid. Taxation is an emotional and hot-button issue.”
‘Bad Math’
Bell believes Congress and state legislatures need to see the facts behind the bank buys credit unions have made as well as the facts behind the bidding that goes on within all bank sales.
“Just on my data, based on 10-plus years and 150 credit union clients across the country, we lose eight or nine times out of ten when we bid on a bank,” Bell said. “I can't speak to other deals, and I can only speak for the deals I've done, but I have been involved in the great majority of the credit union bank buys.”
Bell said bankers’ arguments are littered with “bad math.”
“If you are counting only the credit union purchases of banks that are announced, well, we win 100% of the time,” said Bell. “And I think that is leading some people to think that when a credit union bids it wins. If we announced every time we bid on a bank deal this year and lost, you’d see more than 25 announcements. But you have only seen about three, and those being the ones in which credit unions were the winning bidder. In some ways credit unions are victims of how these deal are publicized.”
Willing to Testify
Bell said he is offering to testify in front of state legislatures and Congress.
“As an industry expert I can say here are the facts,” Bell explained. “I hope that once the facts get out that calmer heads will prevail, and I know the banking trade groups are just doing what they are supposed to do, support their members. But the missing piece in all of this is the information, and it is too bad that so many of these deal are confidential—you can’t lift the hood and look into the pricing of these deals. Because if you did you would not only see that credit unions lose most of the time, you would also see that when they win, they don’t win by a huge margin, it’s neck and neck. It’s not like credit unions have this big bag of money they waltz in with and overpay. That is not the truth.”
And the argument that credit unions pay in cash is an advantage, is not sound, as well, he said.
“That is all credit unions can pay with, cash,” Bell noted. “But I know of many deals they have been excluded from because the selling bank wanted stock.”