Over the last few years, there has been a rise in the number of credit unions acquiring community banks. Several additional complexities exist when a credit union acquires a community bank in comparison to acquiring a credit union. The largest difference is that cash is changing hands because the credit union is purchasing the assets (known as a purchase of assets and assumption of liabilities, or P&A) of the community bank, with those proceeds flowing to the shareholders. Credit unions must understand the differences when acquiring an S-corp versus a C-corp tax-paying entity because the financial implications on the combined balance sheet could be significant. S-corps are only taxed at the shareholder level, whereas C-corps are taxed at both the corporate and shareholder level. ALM First cannot stress this enough—a buyer must fully understand the tax implications before making any offers, especially if the community bank is classified as a C-corp tax-paying entity.
The majority of deals that ALM First has analyzed involving a credit union with a community bank have not made sense financially for the credit union. Specifically, a credit union cannot report equity acquired from a community bank acquisition because there is no equity to be reported. The credit union is purchasing the bank’s assets and then paying those proceeds to the shareholders, whereas, in a credit union merger, the book value of retained earnings is carried over to the combined balance sheet. The removal of the community bank’s equity can have a significant impact on the credit union’s GAAP capital and Regulatory Net Worth (in our analyses, we have seen a minimum of 100 bps decrease in the credit unions net worth ratio). Furthermore, most transactions involving a credit union acquiring a bank result in goodwill.