Acquiring Banks: Bankers Respond to Credit Unions’ Proposed Rule

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The American Bankers Association (ABA) issued a terse response to the National Credit Union Administration’s (NCUA) proposal for new rules concerning credit unions acquiring banks.

The NCUA’s plan would expand an already swift expansion of credit unions, says a letter from the ABA’s senior director for banking policy, Justin Underwood, to the administration’s board secretary Gerard Poliquin.

Underwood explained that the ABA thought credit unions were “aggressively targeting banks” to expand their service provision outside of their collective mandates to serve low- and moderate-income individuals.

“NCUA’s proposed rulemaking for acquiring banks propels credit union expansion into an already competitive and crowded banking market due to unique federal benefits and a passive regulatory standard,” Underwood wrote.

“Expressed more simply,” he said that the NCUA would sanction any tax-exempt credit union to acquire a tax-paying bank—a trend that’s growing at a breakneck pace—absent any new restrictions.

“More than twice as many credit union acquisitions of banks occurred in 2019 than the previous year,” Underwood wrote.

“While many credit union advocates would like to dismiss this trend as ‘typical consolidation,’ the reality is that these credit unions are targeting wealthy communities, which is counter to their chartered mission and tax-favored status to serve people of modest means.”

Underwood added that with their tax advantage, credit unions are now executing an acquisition strategy that “outprices taxpaying banks for the same deals.”

Underwood contends that these transactions deals were “driven by the largest 5%” of credit unions for acquiring banks and were designed to create a beachhead in “new markets that are neither local nor share a common bond with their existing membership”.

Seventeen Deals in The Mix

The data from the NCUA show that there are 17 transactions pending approval that involve a credit union acquiring a non-credit union’s assets and liabilities—either in part or in full.

In 2019, there were 15 of these deals completed, with just eight finalized in 2018, and four in in the prior year.

The NCUA’s proposed new rules are designed to increase transparency around deal making, according to documents from the association that were filed in the Federal Register. The new rules are also said to simplify and streamline the approval process for mergers and acquisitions involving credit unions.

Credit unions are not allowed to engage in acquiring banks with share purchases in many states. Instead, they must go through a more complex process of asset purchases and liability absorption. But these deals are often preferred by bank owners because of the fact that they’re cash deals not stock transactions, according to a June 2019 paper from the Credit Union National Association.

Now the NCUA is mandated to approve any deal involving a federally-insured credit union absorbing assets, deposits or liabilities from an institution not covered by the National Credit Union Share Insurance Fund.

Acquiring Banks: Background

The NCUA states that it has historically seen a relatively small but consistent number of applications from federally insured credit unions (FICUs) seeking to enter into a merger or acquisition and assumption transactions with banks or other types of financial institutions.

The NCUA said that the number of these transactions it approved each year was “small and fairly constant from 2013 to 2017 with a modest uptick in 2018 and 2019.”

Because these transactions take place in relatively small numbers, the NCUA said that the Board has not previously promulgated a detailed rule addressing them, and despite the increase over the past two years, these transactions “still constitute only a small fraction of merger and acquisition transactions involving banks.”

The proposed rule would add new Subpart D to Part 708a which would specify the basic requirements applicable to these transactions between a FICU and another type of financial institution.

In addition, the proposed rule includes provisions making certain that the directors of a FICU proposing a combination transaction understand the nature and ramifications of the proposed transaction. Also, the proposed rule amends § 741.8 of the NCUA’s regulations to make the regulation’s provisions applicable to all asset purchases and list the other NCUA regulations that apply to each particular type of transaction.