Congress Should Investigate Accelerating Credit Union Bank Acquisitions

The growing trend of tax-exempt credit unions acquiring taxpaying community banks has surged in recent months with a new rash of acquisitions crossing state lines. With taxpayer dollars subsidizing the consolidation of locally based community banks, pressure is mounting for Congress to investigate.

Tax-subsidized acquisitions

According to S&P Global data, the nearly 100 acquisitions of the past 19 years amount to a loss of nearly $300 million annually in federal income taxes alone—not counting lost revenue to states and municipalities.

While acquisitions peaked at 21 in 2019, the trend has resumed in earnest as the pandemic has ebbed—facilitated by a tax exemption that allows credit unions to make inflated purchase offers well above the book value of the acquired banks.

The latest acquisitions include:

• Lake Michigan Credit Union—a “low income”-designated credit union in Grand Rapids, Mich., with $10.4 billion in assets—buying Tampa, Fla.-based Pilot Bancorp, a $656 million-asset institution that specializes in financing private airplanes.
• GreenState Credit Union in North Liberty, Iowa—another “low-income” credit union with $7.5 billion in assets—acquiring community banks in Illinois and Nebraska worth $730 million and $345 million in assets, respectively.

Consumer impact

While each transaction increases the cost of the credit union tax exemption, which the Joint Committee on Taxation tallies at $2 billion per year and rising, the negative impact is far greater. Because credit unions are also exempt from the Community Reinvestment Act, which assesses whether institutions are meeting the needs of low- and moderate-income communities, these acquisitions also cut access to vital financial services in these areas.

Meanwhile, the credit union industry’s regulator—the National Credit Union Administration—is working to further expand the powers of the growth-oriented credit unions it is charged with regulating.

For instance, the NCUA has issued rules allowing outside investors to profit from the credit union tax subsidy, repeatedly delayed stricter capital requirements more than a decade after the financial crisis, and permitted credit unions to handpick wealthy suburbs of metropolitan areas while leaving out their urban cores for their membership.

Industry consolidation

Ultimately, consolidation in the financial services industry reduces the availability of locally based financial institutions. With community banks outnumbering credit unions by a 2-1 margin in low-income or distressed communities, this has a particularly detrimental impact on communities most in need of access to financial services.

And traditional credit unions themselves are declining as larger credit unions expand. Credit unions in every asset category under $500 million lost members and loans in 2020. Meanwhile, credit unions with over $1 billion in assets comprise 6 percent of the industry but garner 75 percent of its tax exemption.

How to respond

Community banks last year accounted for roughly 60 percent of loans under the federal Paycheck Protection Program for small businesses, including a majority of loans to minority-owned (72.6 percent), women-owned (71.5 percent), and veteran-owned small businesses (63.4 percent).

With community banks leading the financial response to the pandemic, some policymakers have expressed concerns about credit union-community bank acquisitions, including the House subcommittee on housing’s ranking Republican, Rep. French Hill (Ark.), and Federal Deposit Insurance Corp. Chairman Jelena McWilliams.

To fully understand the impact of this trend, ICBA is calling on Congress to:

• Hold hearings to review the role of the credit union tax exemption in fueling these transactions.
• Request a Government Accountability Office study on the evolution of the credit union industry and NCUA supervision.

There is precedent should Congress reconsider the credit union tax exemption. In 1951, Congress revoked the tax exemption for building and loan associations, cooperative banks, and mutual savings banks, finding these institutions operated much like commercial banks and should likewise be taxed.

Taking action

Congress granted credit unions a tax exemption to serve people of modest means—not to buy taxpaying community banks and finance private airplanes. It is long past time for lawmakers to consider the full impact of this tax subsidy and respond accordingly.

As I’ve traveled the country, I have heard bankers share their own credit union stories. So below, please share your stories or comments to add even more color to this issue.

Meanwhile, more information and resources on the risky practices, costly tax subsidies, and irresponsibly lax oversight of the nation’s credit unions are available at www.icba.org/wakeup.