Let’s start with a question: Do community-based financial institutions need more regulation or governmental intervention? My answer — and I suspect your answer — is a resounding no.
Community-based financial institutions are the backbone of America. Their real adversary is made up of two pillars: One is overregulation, and the second is large banks and large non-banks that act like banks (such as Apple, Starbucks and Walmart).
Community banks and credit unions should spend their time and energy coming together to bring change to these impediments and challenges. There is no logical reason for them to waste time, energy and political capital fighting about a voluntary market-based transaction.
It’s also important to think about this issue in the absence of emotion and sensational verbiage. When this topic is discussed you will see exciting words like “tax subsidized,” “takeover of community banks,” “swallowing up community banks” and “unfair competition.”
One hundred percent of the transactions between community banks and credit unions are voluntary. It is legally impossible for a credit union to acquire community bank stock. It is impossible for a credit union to engage in a hostile takeover of a community bank. Community bank shareholders must voluntarily and democratically elect to engage in a transaction with a credit union. I simply cannot see any merit in having Congress involved in a voluntary business decision of a community bank and a credit union.
Taxation and the emotions connected to it are muddying the waters in this conversation. It is inaccurate to describe credit unions using a tax subsidy to acquire a community bank. Just like S Corp banks, credit unions do not pay federal income tax at the entity level. Similarly, many C Corp community banks pay little to no federal income tax at the entity level due to a multitude of reasons including lack of profitability, tax avoidance strategies and tax credits. Suggesting that credit unions have some advantage in this regard or that credit unions should be penalized is inappropriate.
I also note that charter choice is alive and well in America. There are laws and regulations in place that allow institutions and their respective owners to choose their charter whether that’s a state or nationally-chartered bank, a state or federal credit union or a mutual bank. Each charter has its own advantages and disadvantages. In conjunction and in alignment with this is the fact that these chartered institutions can choose to do business with each other freely. Any proposal to change these facts is shortsighted, narrowly focused and will have extensive unintended consequences.
You can see the results of unintended consequences when examining the value of state-chartered community banks in certain states. The value of said banks in the states of Mississippi, Nebraska, Iowa and Tennessee have been materially reduced thanks to efforts by community bank lobbying groups taking power away from their own banks and preventing them from including credit unions in their strategic decisions. As the market continues to consolidate, the number of strategic partners is lowered naturally. Artificially lowering it further for political reasons is a bad idea. Community-based financial institutions need more options, more freedom and a clearer pathway to continue to serve our communities.
The process in which financial institutions buy and sell takes place largely behind the scenes and is confidential. This fact skews perspectives and the available information. This must be understood to have a balanced approach when thinking about these issues. Only successful transactions are announced publicly – you will never hear about parties that came in second or lost in a process. Anecdotally, I can tell you that my buyer clients lose far more often than they succeed. Over the past 14 years, my buyers have lost approximately 7 out of 10 processes they participate in. This must be kept in the forefront when throwing around statistics and making judgments.
There is a good story to tell in these transactions. Community-based financial institutions should be encouraged to do business together. You can look back over the approximate 14 years these transactions have occurred and you will see jobs being preserved, branches remaining open and communities being supported and banked.
You will see the backbone of America getting stronger and more resilient through these transactions. I encourage you to find and speak with executives and board members who have voluntarily chosen to engage in a transaction with a credit union. You will not hear a horror story. You will hear a story about all employees being offered a position, all customers being serviced, all branches remaining open and the community getting the same or more support. There is power in working together and that should not be prevented or hampered.
Free market should be allowed to thrive, and the real adversaries should be vanquished.
Forward together is far better!
Mike Bell is an attorney with the law firm Honigman in Michigan. He estimates he has advised on more than 90% of the credit union-buying-bank deals that have ever been struck.
