Illinois banker group proposes exit fee for credit union-bank deals

The Community Bankers Association of Illinois submitted legislation at the start of the Illinois General Assembly session that would create an exit fee when credit unions buy banks.

The Illinois bankers' bill has not yet been assigned to a committee. The next step will be for the association and the Illinois Credit Union League to sit down and decide if an agreeable solution can be negotiated, according to Jerry Peck, senior vice president of governmental relations for the group.

The proposed exit fee is intended to serve two purposes, Peck said. First, when a credit union buys the assets of a bank, those assets are no longer taxable, so it creates a loss of tax revenue for the state. The exit fee would help to mitigate a portion of that loss, he said.

The other purpose is to discourage such deals altogether.

“We believe that an exit fee payable at the time of sale would help to level the playing field when bidding on banks,” Peck said. “It would partially prevent credit unions from weaponizing their tax advantage to outbid interested community banks.”

Tom Kane, president and CEO of the Illinois Credit Union League, said the organization and its members are troubled by the new approach to tax credit unions.

Nonetheless, Kane called the bill "very flawed" in its attempt to impose a state tax on federal credit unions.

“While the intent is to put restrictions on credit unions, it’s an anti-competition bill that would harm banks by removing legitimate buyers in the marketplace,” Kane said. “Banks are not being forced to sell to a credit union, so we believe this bill to impose additional costs on credit unions would have unintended negative consequences for all Illinois financial institutions and consumers.”

The idea of an exit fee was floated last year by the Independent Community Bankers of America, who said the fee could essentially be a tax collected by the Department of Treasury or the Internal Revenue Service.

Six Illinois community banks have been sold to credit unions since 2019.

Illinois ranks only behind Texas in the total number of bank charters, Peck said, but increased regulatory pressure and administrative burdens have made operating a small community bank more difficult in Illinois during the past decade.

“That makes them ripe targets for mergers and acquisitions,” he said. “Credit unions enjoy significant regulatory and tax advantages that they are able to weaponize to take over community banks.”

The CBAI’s role as a trade association is to work to protect the competitive environment for all community banks in Illinois, according to Peck.

“We advocate for policies that grow the community banking profession. We oppose policies that force community bankers to consider exiting the markets they serve,” he said.

Michael Bell, an attorney at the law firm Honigman in Detroit who has advised credit unions in more than 90% of bank-credit union deals since 2010, predicted that more than 25 deals involving credit unions buying banks could be announced in 2022. The previous record was 16 announced in 2019.

“There are always new regulatory pressures and administrative burdens that threaten the existence of independent community banks,” he said. "Our goal is to turn the tide from an environment where banks have to merge or grow to remain competitive to a market that encourages new community banks to enter the profession. Consolidation destroys communities and leads to less competition, which ultimately hurts the consumer.”