What gets lost in the din of a bank-credit union row

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The trend of credit unions buying up banks in recent years has generated strong and highly critical responses from all corners of the banking industry, including the American Bankers Association, the Independent Community Bankers of America, every association of state bankers and many other interested entities alike. . We regularly see different variations of the same arguments in national and regional banking publications.

Not surprisingly, the credit union industry has developed its own stock market responses to criticism from the banking industry. But are both sides so involved in debating the details of this issue that they miss the obvious and perhaps more practical questions?

Billy HC Kwok/Bloomberg

I was hired by a community bank to help develop an updated strategic plan. As we began discussing potential growth-by-acquisition scenarios, one of the executives launched into a tirade about credit unions buying banks. His rant followed major industry talking points on lost tax revenue, credit union executive compensation, nonprofits buying up for-profit businesses, and credit unions not subject to the Community Reinvestment Act.

The executive referenced a local transaction from the previous year where a large credit union purchased a small bank. He threw haphazard information about the bank to argue that state regulators should not have approved the deal. I was aware of the transaction and had already spoken to an officer of the credit union in question. Of course, this credit union executive had the exact opposite on the deal.

I knew a little about the bank in question. It wasn’t officially “troubled” because it wasn’t subject to a published regulatory enforcement order, but it did have a sobering array of challenges that many smaller banks face. These included limited post-pandemic growth prospects, the rising cost of maintaining technological relevance, and enormous difficulty in attracting Millennials and Gen Z as customers and employees.

So the bank retained the services of an investment banking firm to explore a sale. It was no secret as this company contacted several institutions in the region whose balance sheets and strategic appetite could facilitate an adjustment. It was far from a backroom deal. The bank openly put itself up for sale, many banks were invited to consider acquiring it, and a credit union made the best offer.

Leaders and directors of community banks should ask themselves how, if their bank were for sale, they would react to interest from a credit union. Boards of banks for sale always strive to achieve the best outcome for their shareholders. If a credit union’s offer included the highest multiple of price over tangible book value, limited credit ratings, no earn-out, and was all cash (as all buyout offers are of a credit union), wouldn’t the bank’s board of directors have an obligation to give it serious consideration? In the absence of a nearly equivalent offer from another bank, wouldn’t the board of directors have a fiduciary duty to accept the credit union’s offer?

For credit unions, boards and executives should consider whether this lawsuit by the banks is worth the risk. It’s more philosophical than the question of the bankers, but it’s just as important.

The banking industry’s arguments and lobbying efforts against the tax status of credit unions have been going on for decades, if not generations. Despite the size of the cottage industry built around this ongoing campaign, no significant changes have occurred, and none seemed likely, perhaps until now.

Efforts to persuade Congress to reduce or eliminate the credit union tax advantage had remained on the back burner. There simply haven’t been new developments significant enough to overcome this longstanding political inertia, at least until this issue provided the banking lobby with compelling new avenues of attack that recently produced small victories. in some states from regulators and legislatures. It’s a long way from convincing the U.S. Congress to eliminate the credit union tax advantage, but it’s a move — for banks and against credit unions.

No one knows where these initial moves might lead, but any sustained momentum will almost certainly hurt credit unions.

The credit union industry accurately notes that of approximately 2,000 entire banks bought or merged (excluding FDIC receivership) over the past decade, only 50 were bought by credit unions. Is the risk of even the slightest shift in Congressional thinking regarding the tax status of credit unions—something that credit unions see as critical to the economic viability of their model and therefore their mission—worth making a such a small ripple in a large pond?

The leaders and administrators of community banks who are so vocal critics of these transactions should ask themselves if their attitude might change when the time comes to sell their bank.

The credit union executives and directors who so passionately defend their tax status should ask themselves whether continued bank purchases could lead to a crack in the political shield that has protected that tax status so well for so long.

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