Community banks in Congress: tax fund-bank mergers | Journal of Credit Unions

The Independent Community Bankers of America wants credit unions to pay a price for their purchases from community banks.

The trade group called on policymakers to implement “exit fees” on acquisitions of banks by credit unions in order to “capture the value of tax revenues that are lost once the bank’s business activity is acquired. becomes tax exempt ”.

The question is whether credit unions have an unfair advantage in buying banks. Because credit unions aren’t taxed, bank lobbyists say they’re able to pay a premium in mergers and acquisitions that bank buyers can’t match. The ICBA claims that a tax on credit union-bank mergers would level the playing field.

In recent years, the Independent Community Bankers of America have railed against these transactions while calling on Congress to hold hearings and asking the Government Accountability Office to study the long-term impact of bank purchases by credit unions.

The proposed fee would essentially be a tax collected by the Treasury Department or the Internal Revenue Service, ICBA spokeswoman Nicole Swann said. Revenues would flow into the general treasury fund to reduce the deficit and would not be earmarked for specific purposes.

The tax would equal 10% of the gross value of the acquired bank’s assets or liabilities as shown on its most recent balance sheet, whichever is greater, the ICBA has proposed.

The proposal follows the lead of the excise tax imposed on investment income from private colleges and universities, said Alan Keller, senior vice president of legislative policy at ICBA.

“There is precedent and our proposal is not unconventional,” he said. “We see a correlation between our proposal and these excise duties on tax-exempt organizations that exceed their tax exemption.”

The Federal Credit Union Act states that credit unions are established to “promote savings among members and create a source of credit for provident or productive purposes.” Buying banks deviates from that goal, Keller said.

“We believe that purchasing taxable banks that serve non-members using tax-exempt funds is beyond this public mission,” Keller said.

The American Bankers Association has not proposed a tax on credit unions on their bank purchases, but it also wants to see those deals reduced, according to group spokesman Ian McKendry. Because credit unions are not subject to the Community Reinvestment Act, the new institution is no longer required to invest and serve low and moderate income members of the community, McKendry said.

“This is a losing proposition for the communities where these transactions take place, and we will work with Congress on any approach that addresses this bad public policy,” McKendry said. “If credit unions want to buy a bank, they should pay taxes like a bank and should demonstrate that they are serving their local communities. “

Alabama Credit Union, a $ 1.3 billion asset organization based in Tuscaloosa, recently reached an agreement to to acquire Federal Security Savings Bank in Jasper, Alabama. An excise tax would not have derailed this deal, nor would it have benefited the local community if it had been paid, said Steve Swofford, president and CEO of the credit union.

“We are exempt from federal taxes only” and pay taxes to our local communities, Swofford said. to pay and what the shareholders of the bank would receive.

Most of the banks offered for sale, including Security Federal Savings with $ 40 million in assets, are subchapter S banks and do not pay corporate-level federal taxes, according to Swofford, who dismissed the ICBA proposal as “a relationship gimmick in the bankers’ 100-year war on credit unions and their well-deserved tax exemption.”

Alabama Credit Union’s agreement to purchase Security Federal is one of 10 transactions announced this year in which a credit union bought a bank, including five in August. Seven such agreements were announced last year and a record 16 in 2019.

Five Star Credit Union in Dothan, Alabama, is one of the few credit unions to have bought out more than one bank.

Laurie Stewart, president and CEO of Sound Financial Bancorp, a $ 923 million asset in Seattle, has amplified the banking industry’s opposition to bank buyouts by credit unions. She noted that the mission of nonprofit, tax-exempt credit unions is to work with underserved populations, instead of mirroring for-profit banks. When credit unions tap into banks, they essentially become indistinguishable from commercial banks by expanding into real estate lending to businesses and businesses – but they retain a special tax status that gives them a competitive advantage funded by taxpayers. , she said.

“It’s just terrible public policy,” Stewart said in an interview. “If buying from a bank fits your business model, then you have a bank business model and the taxes should go with it.”

The ICBA is making a good attempt to project the purchase of banks by credit unions as a loss of income for taxpayers, but the strategy ignores the roots of the problem, said Michael Fryzel, lawyer and former president of National Credit. Union Administration.

“ICBA needs to talk to its member banks and find out why they are selling,” he said. “Could it be that they are just enjoying a good deal?” Admittedly, the directors of many community banks have become multimillionaires overnight. “

According to Swofford of the Alabama Credit Union, many small community banks are no longer viable, mainly due to competition from state and regional banks, and are looking for an exit strategy that will pay shareholders in cash. “Credit unions are the only option to do it,” he said.

Another Alabama-based institution, the Five Star Credit Union with $ 631 million in Dothan assets, is one of a handful of credit unions that have acquired more than one bank. Bob Steensma, chairman and CEO of Five Star, said his deals have helped him deliver services in markets banks have shied away from, especially in rural areas. “In some of the communities we serve, Five Star is the only banking institution within 10 miles or more,” he said.

Over the past decade, banks have strongly opposed the expansion and diversification of credit unions, with little success, according to Chris Marinac, director of research at Janney Montgomery Scott. He doesn’t see any noticeable change on the horizon.

The trend could even expand to involve larger institutions such as the Navy Federal Credit Union, Marinac said. To date, transactions have mainly involved small credit unions buying from small banks. The current ICBA proposal is unlikely to curb this activity, he said.

“It all comes down to politics,” Marinac said. “Credit unions have a powerful lobby, and there are a lot of lawmakers who prefer not to oppose this lobby. I will therefore be skeptical until proven guilty. I just don’t see ICBA doing this, based on the story. “

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