Why an Iowa credit union is venturing out of state to buy banks

If the number of credit union-bank mergers this year exceeds 2019's record of 16 deals, the milestone would be due in part to the activity of GreenState Credit Union.

The North Liberty, Iowa, credit union just announced its third bank deal of 2021 — for the $411 million asset Midwest Community Bank in Freeport, Illinois — bringing the industry-wide total to 12 instances of credit unions purchasing banks, well surpassing the seven deals inked last year. All of GreenState's deals this year are outside of Iowa, due to a declaration from the state's banking regulator that he would "quickly deny" any deals that echo a controversial bank acquisition the credit union completed in 2020.

If momentum is picking up, there's good reason for it: Differences in the processes required to purchase a bank versus a credit union have made it far easier for GreenState to add scale through bank purchases, according to Jeff Disterhoft, GreenState's president and CEO.

“The steps taken to purchase a credit union are part of a longer relationship-building process where you need to figure out if the board is supportive, you need to have a membership vote, you need to have discussions about the brand and our experience has been that deals to purchase a credit union are hard to come by,” Disterhoft said. “Whereas the bank acquisition side is more of an open bidding process, and the best bid wins.”

Credit union purchases of banks are a polarizing issue. Bank experts are vocal about the advantage credit unions have when negotiating a purchasing price because of their tax exemption, as well as the potential threat of branch closures.

GreenState, with more than $8 billion of assets, also agreed to purchase the $379-million asset Premier Bank in Omaha, Nebraska, and the $753 million-asset Oxford Bank & Trust in Oakbrook, Illinois. Both deals were announced in May.

In March of 2020, Jeff Plagge, Iowa state superintendent of banking, rendered a decision that settled a dispute over GreenState's purchase of First American Bank, which Plagge argued proceeded without his approval. In the settlement, Plagge said "such a transaction is not authorized and … [the Iowa Division of Banking] will quickly deny any future application based on a similarly structured transaction."

In response to this decision, the president and CEO of the Iowa Credit Union League, Murray Williams, chastised the decision and called it a “conflict of interest.”

“Based on initial interpretations, [the superintendent's decision] would preclude credit unions such as ours from purchasing state-chartered banks domiciled in the state of Iowa, which has affected our strategy and willingness to entertain options within the state itself,” Disterhoft said.

Some banks still dig in their heels when approached by an offer from a credit union, said Kirk Hovde, head of investment banking for Hovde Group, which advised Midwest Community Bank in its deal with GreenState.

“I have clients that refuse to sell to a credit union because of the sentiment surrounding the talks and others that are open to the idea and then get very interested in it once they’ve spent time with the credit union and see the similarities in culture, so stigma either does or does not factor in,” Hovde said.

Experts on the banking side of these deals are concerned that the merger activity could hurt consumers after the two institutions integrate.

Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association, said the biggest concern is in rural communities where financial institutions number in the single digits.

“When these acquisitions result in the closure of branches in rural areas, it directly harms consumers and leaves them without needed financial services,” Oswald Poels said. “In addition to consumers, it’s also a direct hit to government revenue sources.”

She pointed to the example of Balsam Lake, Wisconsin, where Royal Credit Union closed the branch it acquired after it bought Anchor Bank in 2010. In July 2018, First Bank of Baldwin in Baldwin, Wisconsin, opened a branch in that community to fill the void.

The distinction between community banks and credit unions is getting more blurry, said Randy Hultgren, president and CEO of the Illinois Bankers Association and a former congressman. For the last decade, federal and state credit union regulators have eased the industry’s restrictions on field of membership, business lending and other core components of the credit union model, Hultgren said.

"The loosening of credit union restrictions along with the wave of acquisitions clearly illustrate that larger credit unions are now nearly indistinguishable from banks, and they should have the same tax liability," Hultgren said.

Despite bank industry criticism of these deals, many banks have found worthy buyers in credit unions. Hovde said banks have found that the credit unions are actually a bit “friendlier” to the seller's staff than other banks would be.

“While the credit union ultimately is going to look for some cost savings, they are willing to be a bit more patient in achieving that goal and so there is less turnover in employees of the seller,” Hovde said. “Also, given the credit unions are typically buying a bank that can help expand their commercial business, there is usually a lot of retention of the sellers’ employees on the commercial side.”

The three deals GreenState has announced this year have yet to close. The credit union is focused on completing these acquisitions rather than looking for its fourth target — but it's keeping its options open, Disterhoft said.

“It's a big project to successfully consummate any integration and acquisition, let alone three of them, so we will continue to explore additional opportunities as they present themselves, but we're sensitive to the workload that we already have in the hopper,” Disterhoft said.