Credit union advantages, disadvantages in bank acquisitions
Credit unions face a number of puts and takes when it comes to acquiring banks.
U.S. bank M&A is surging back after historically low levels last year, but credit union acquisitions of banks are still dragging from a record number in 2019. This year has seen two credit union-bank deals so far, compared to six in 2020 and 14 in 2019.
The complexity of these deals and the need to pay a premium to compensate the selling bank for a "double taxation" issue could be contributing to the decline, industry observers said. Ensuring the credit union can acquire the bank's customers into its field of membership and juggling various regulatory approvals from the National Credit Union Administration and the bank's primary regulators can also prove to be a challenge. But credit unions also enjoy several advantages when it comes to M&A. They tend to have extra cash on hand given their tax-exempt status, and there are no shareholders or analysts scrutinizing the financial metrics of a deal, allowing them to focus on strategy.
"These transactions are relatively complex," Douglas Winn, president of Wilary Winn LLC, said in an interview. "I don't think that the credit union industry always understood just how complex these transactions can be from a tax and regulatory approvals standpoint. So we've actually seen a slowdown in these transactions."
'Double taxation' issue
Credit unions typically have to pay up to acquire a bank because the deals are structured as a purchase and assumption of assets and liabilities. If the selling bank is legally structured as a C-corporation, the deal will be taxed twice — once at the corporate level and again at the shareholder level. Traditional bank M&A deals are typically structured as a sale of stock, avoiding the double taxation.
"The double taxation can be a hindrance for a C-corporation to sell to a credit union," said Paul Sirek, a partner with Eide Bailly LLP who works with banks that sell to credit unions, said in an interview. "But if the price is right and the after-tax return on the deal for the shareholders makes sense, I mean, a lot of the times, you just have to look out for your shareholders and get the best deal that is available for that. So it may be a credit union, may be a bank."
Banking industry groups gripe that community banks cannot compete with credit unions' bids in M&A given the high prices they pay, pointing to their tax-exempt status. But the high prices are mostly driven by double taxation, Rick Childs, partner in advisory services at Crowe LLP, said in an interview.
Source: S&P Global Market Intelligence