Will the purchase of First American Bank’s branches by GreenState Credit Union benefit account holders and the state, or be detrimental? The leaders of the Iowa Bankers Association and the Iowa Credit Union League have sharply different views, to say the least. 

Murray Williams, president and CEO of the Iowa Credit Union League, says that First American Bank’s recent decision to sell seven of its branches to GreenState will actually result in more earnings staying in account holders’ pockets, and therefore more income tax revenue paid to the state, than if the branches continued to operate as part of a state-chartered bank.  

In the July 12 issue, I wrote about the stance taken by Iowa Bankers President and CEO John Sorensen. He said the proposed acquisition, if approved by bank and credit union regulators, is “bad for the Iowa taxpayers who are subsidizing the purchase,” referring to Iowa credit unions’ tax-exempt status as nonprofits. Sorensen argued that any profits earned under GreenState ownership wouldn’t be subject to state income tax as they are under bank ownership.  

The Iowa Credit Union League sees the situation much differently. Williams said one of the primary reasons that state tax revenues would be higher under credit union ownership is that credit unions pay higher interest to members, and thus their members would pay more tax. Additionally, he said moving deposits from First American Bank, which is organized as a Subchapter S corporation, to a credit union will also result in a higher amount of interest income paid to members. 

To make its case, the credit union league prepared a pro-forma analysis comparing what First American Bank and its shareholders pay in state taxes compared with what would be paid in taxes by GreenState and its members. Mike Powers, chief financial officer for Affiliates Management Corp., the parent organization of ICUL, conducted the analysis. 

According to Powers’ analysis, First American Bank paid $323,000 in bank franchise tax in 2018. As a Subchapter S bank, the taxable income of the bank flows through to the shareholders of the bank, who pay federal and state income tax based on the amount of the taxable income earned by the bank. The bank franchise tax that was paid — $323,000 — is also credited to reduce the taxable amount. 

According to that analysis, the bank shareholders would pay somewhere between $42,000 and $64,000 in state taxes based on average marginal tax rates. When combined with the bank franchise tax, the state would receive about $387,000 on the high end in taxes under bank ownership.

Under credit union ownership, Powers figured that GreenState would pay no bank franchise tax, but would pay an estimated $150,000 in the moneys and credits tax that credit unions are assessed, based on an estimated $500 million in acquired deposits. Furthermore, the state would collect an estimated $500,000 in individual state income tax based on an incremental $8.4 million in interest that customers would have earned on their deposits, according to his analysis. 

By comparison, First American Bank reported total state income tax accrued of $323,000 in 2018. First American is structured as a Subchapter S bank, which means it is exempt from federal corporate income tax and its shareholders receive a state tax credit available only to those banks. 

Keri Jacobs, an associate professor of economics and the Iowa Institute for Cooperatives Endowed Economics Professor at Iowa State University, reviewed ICUL’s analysis and found it to be a conservative assessment. 

 “The fact that the credit union is paying higher average interest on deposits than the bank is an important factor,” she said. “Bank customers, as credit union members, will experience higher interest income on deposits than before the sale, and potentially even greater than the pass-through income allocated to owners of First American Bank. Further, those members will pay tax on the additional interest earned. 

“The credit union must pay additional state tax on its increased legal reserves, which works to offset the lost franchise tax from the bank,” Jacobs added. “On net, the state should receive a net increase in tax revenue and more depositors will benefit from increased interest income if the transaction is approved by regulators.”

To access the Iowa Credit Union League’s tax comparison worksheet, click here.