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Bankers Conspire Against Credit Union In Brutal Turf War

It started as a turf war over commercial loans. It turned into a decade-long conflict pitting a credit union against bankers and the University of Iowa.

Find out how lawyers, lobbyists and the Iowa state legislature became embroiled in a saga involving accusations of coercion, fraud and vote tampering.


Wait, Credit Unions Can’t Buy Banks… Can They?

Before 2003, no credit union in the United States had ever bought a bank. But the University of Iowa Community Credit Union (UICCU) was hoping to be the first when it announced plans to buy Hawkeye State Bank on January 23 of that year.

UICCU, a $300 million institution at the time, had recently entered the commercial lending market, and it saw its acquisition of Hawkeye State Bank as an excellent way to expand the effort. Jeff Disterhoft, President and CEO of UICCU, told The Credit Union Journal that he was attracted to the bank specifically because of its commercial services.

Disterhoft planned to merge all of Hawkeye State Bank into UICCU’s operations, including $97 million in deposits. That would have required converting all of the bank’s customers into new members of the credit union. And most importantly, the acquisition would have nearly doubled the credit union’s business loan portfolio — $12.7 million in commercial loans from Hawkeye on top of the $13.6 million in business loans at the credit union.

UICCU had initiated discussions with Hawkeye after the bank’s board fired its CEO, Ray Glass, in late 2002 for embezzling millions of dollars from the $162 million institution. The troubled Hawkeye State Bank had been approached by a number of suitor banks, but the credit union apparently offered the best deal.

The deal was far from straightforward though. In fact, it was highly controversial and needed approval from multiple governmental agencies to go through. You see, UICCU’s acquisition of Hawkeye would have automatically converted a tax-paying bank into an untaxed credit union. Also as a result of the acquisition, the bank would no longer need to pay Iowa’s franchise tax on banks. Bankers felt this was a gross injustice.

Bankers Go Berserk

UICCU’s plans to acquire a bank angered the Iowa Bankers Association something fierce. The IBA, which represents over 95% of Iowa’s 400 banks, has long complained about the unequal tax treatment of banks and credit unions. For nearly two decades, the IBA has fought viciously to have credit unions taxed just like banks because (they claim) credit unions nowadays are effectively the same as banks.

In 2002, the year prior to UICCU’s attempted takeover of Hawkeye, banks paid the state of Iowa over $29 million in taxes. Credit unions, on the other hand, paid basically nothing.

The tax dispute between banks and credit unions in the U.S. is nothing new, nor unique to Iowa. The battle has become so nasty over the years that it’s turned into the financial industry’s equivalent of sectarian violence.

But the UICCU/Hawkeye deal had finally pushed the IBA over the edge. In their view, UICCU was trying turn a member of their own tax-paying flock into an untaxed credit union.

Bankers Say, “There Oughta Be a Law!”

The first thing the IBA tried to do was get Iowa lawmakers to tax UICCU’s purchase of Hawkeye. John Sorensen, president of the Iowa Bankers Association, said that if a credit union can afford to buy a bank, it should pay taxes the same way banks do.

Then the IBA upped the stakes. At its annual management conference, the IBA announced it was initiating a major offensive against the tax-free status of the state’s six or seven biggest credit unions, one of which included UICCU. Soon thereafter, the IBA convinced Iowa’s Republican lawmakers to sponsor a bill.

Sharon Presnall, IBA’s senior vice president for government relations, described the bill as “very narrow,” affecting “only the very largest credit unions.” She also noted that the issue appeared to be “gaining traction” because of UICCU’s planned bank purchase.

“It’s the dumbest political thing I’ve ever seen for a credit union to buy a bank while the legislature is in session.”
– Chuck Gipp (R)

Roth & Company, a certified public accounting firm in Iowa, agreed. In one of the firm’s client bulletins, it noted that Iowa banks’ push for a tax on credit unions “got nowhere until the University of Iowa Community Credit Union attempted to buy Hawkeye State Bank.“

Iowa House Majority Leader Chuck Gipp (R) dialed the language up a notch, characterizing the credit union’s attempt to buy a bank as just about the dumbest thing he’d ever seen.

Indeed, the very idea that credit unions could accumulate enough tax-free capital to buy a bank gave the IBA’s tax proposal the momentum it needed to advance out of committee in both houses of Iowa’s state legislature in February 2003.

Full Court Press

The bill advocated an equal 5% tax on those credit unions with assets exceeding $150 million, fewer than ten of the state’s 189 credit unions at the time. In total, the bill would have cost Iowa’s top six credit unions about $1.4 million in new taxes every year. The spirit of the bill was essentially to level the playing field by taxing credit union earnings so they couldn’t, among other things, “buy banks.”

UICCU could never have foreseen how hard the IBA was going to fight its planned bank acquisition. But the IBA leaped into battle with one of its most aggressive media campaigns ever. To support the bill, the IBA began airing one-minute commercials on 24 different radio stations, and sent 10,000 letters to Iowa legislators. The IBA also produced three successive postcards for its members who were asked to sign and forward them to their elected officials. The head of the IBA’s anti-credit union task force even held a rally for the cause at the state capitol where 400 bankers turned out.

Meanwhile, James Forney, superintendent of credit unions for Iowa’s Department of Commerce, was evaluating UICCU’s bid for Hawkeye State Bank. At first, he acknowledged that the deal was indeed possible, saying “there is a provision in Iowa law that allows credit unions to make an investment in banks.” But he surprised everyone by rejecting the deal even before the credit union ever submitted a formal application.

Forney’s main obstacle was the effect the acquisition would have on UICCU’s capital. Forney said UICCU proposed acquiring the bank in such a way that would have not permitted them to add the bank’s capital to their own, thus diluting the credit union’s capital to unacceptably risky levels.

Forney denied there was any political pressure to kill the UICCU/Hawkeye deal that had fueled the dispute. In any event, UICCU’s bid for the struggling bank was dead.

Credit Union Tax Bill Buried After UICCU’s Hawkeye Deal Killed

Forney’s decision was welcome relief for Iowa’s legislature, who weren’t keen to take on the issue of credit union taxation. Politicians have always been reluctant to tax credit unions because of their popularity with voters, and in the end, Iowa’s lawmakers proved to be no different.

By April 2003, the bill was dead, despite all the pressure from Iowa’s powerful banking lobby. The Republican-controlled Senate needed damage control. Backpedalling, they said they voluntarily abandoned the Republican-sponsored bill to tax credit unions because they were adverse to introducing any new taxes at that time.

Ultimately, the IBA admitted legislative support for its proposed bill waned after UICCU’s plans to buy Hawkeye State Bank fell through. Once the deal was off the table, so was the bill.

Nevertheless, the bill was a huge scare for Iowa’s credit unions, who were one vote away from being taxed. They had mounted a strong defense, bombarding legislators with 11,000 letters, 5,000 emails and a petition with 7,000 signatures in support of their cause. They held their own pro-credit union rally at the state’s capitol where more than 1,000 people attended.

It was an issue of such importance to credit unions that some observers speculated whether operatives from CU industry groups had applied pressure to either Iowa’s credit union division or UICCU to get the Hawkeye deal killed. Credit unions were facing intense legislative heat — fueled entirely by the UICCU/Hawkeye fire — and perhaps the other big credit unions targeted in the Iowa bill didn’t think they should have to pay for UICCU’s decision. Everyone was pointing fingers.

Regardless of how the politics played out, credit unions in Iowa no longer faced the threat of taxation, and could once again breathe easy.

Iowa Bankers Stew

UICCU never disclosed how much was offered for Hawkeye, even after the bank sold to West Bank in Des Moines for an estimated $35 million. Tom Bengston, a reporter with the Northwestern Financial Review, noted that the credit union must have had a lot of money lying around if it had millions and millions to buy a bank with.

“Regarding business lending by large credit unions, let me put this in perspective: We have to stop them now.”
– Jeff Plagge,
Iowa Bankers Assoc.

Stung but undaunted, the IBA wasn’t about to give up. In 2004, about a year after the UICCU/Hawkeye debacle, Jeff Plagge, IBA chairman said, “Regarding business lending by large credit unions, let me put this in perspective: We have to stop them now, or we will look back in a few years and wonder where all our commercial and business loans went.”

The IBA’s vice president of communications, Ben Hildebrandt echoed that sentiment. “We’ve been fighting for 10 years and we’ll be back.”

“It’s not over till it’s over,” John Sorenson, the IBA’s president, added ominously.

Bankers’ New Name for Revenge

Bankers remained bitter about their defeat. Commenting on the Iowa’s financial climate in the months following the credit union’s unsuccessful bank buyout, Tom Bengston observed that “the mistrust between the bankers and the credit union industry in Iowa was palpable.”

Ever persistent, bankers were determined to make UICCU pay for its shot at Hawkeye, and for encroaching on its historical turf — commercial lending. But how could they strike back? Perhaps there was some way they could exploit the millions of dollars they donated to the university? Besides, what did UICCU do for the school but provide financial services to staff, students and alumni? Many observers have speculated that it was this imbalance of leverage that enabled bankers to dragoon the university into taking some sort of action.

“Leadership at the university made it clear that they would feel more comfortable if the credit union and the university had their own separate brands and identities.”
– UICCU, 2006
in the Daily Iowan

The framework for the new battle plan was in place. Bankers could argue that it wasn’t fair competing for commercial loans with a credit union that brandished the University of Iowa’s good name. After all, wasn’t the state showing favoritism to an untaxed credit union by lending the University of Iowa brand as a defacto endorsement? What local businesses wouldn’t prefer to secure their banking relationships and commercial loans with a financial institution bearing their alma mater’s name?

The squeeze play must have paid off, because at some point between late 2004 and early 2005, conversations between the university and UICCU about a name change began.

Initially, there was some confusion about who initiated the dialogue. At first, the school said it was the credit union’s idea. UICCU confirmed that version of the story… for awhile. A few short months later, the credit union would be singing an entirely different tune.

Members Approve New ‘Optiva’ Name

In mid 2006, when UICCU first publicly announced a decision to change names had been reached, the official explanation raised more questions than it answered. In the Daily Iowan, UICCU said it “had dialogue with several individuals” from within the University of Iowa, and “leadership at the University made it clear that they would feel more comfortable if the credit union and the University had their own separate brands and identities.”

Wait… Did the university ask for a name change? Is that what UICCU was ever-so-gingerly implying? No one seemed to notice, or care.

On October 4, 2006, UICCU’s membership — unaware of any political pressure or backroom dealings — narrowly approved changing the credit union’s name to Optiva by a margin of 198-192.

The next day, the credit union dutifully began preparations for the transition to Optiva. They started ordering new signs, brochures, posters, staff apparel and other items to the tune of over $100,000.

In the middle of all this, the credit union’s contract with the university had come up for renewal. Fears over what might happen to the credit union’s on-campus branches and ATMs if the name change failed had undoubtedly compounded pressure on UICCU leaders to keep the university happy.

But the name change to Optiva had been successful — at least for the time being — and University of Iowa officials must have felt satisfied the conflict between bankers and the credit union had finally been put to rest. The university inked a fresh five-year contract with the credit union, along with a two-year option on top of that, and both parties were content to move on.

Unfortunately, it was too soon for celebrations.

Angry Dissenters Protest ‘Optiva’

In the fall of 2006, a handful of members unhappy with the new Optiva name started tossing about accusations of vote rigging and fraud, suggesting UICCU’s management had stuffed the ballots in favor of the name change. Their grievances eventually wove their way to James Forney, Iowa’s Superintendent of Credit Unions who just three years prior had quashed UICCU’s bid to buy a bank. This time, Forney was on the credit union’s side. He shot protestors down, certifying the vote and ruling that the credit union could carry out its plans to become “Optiva Credit Union.”

Optiva’s opponents, furious over Forney’s decision, circulated a petition to force a revote. According to the credit union’s bylaws, a petition would need signatures from 2% of the membership — or about about 900 of the credit union’s 45,000 members — to be successful. Optiva’s opponents wound up only mustering 157.

Despite being 743 signatures shy of the requirement, the petitioners submitted their request to UICCU on February 8, 2007. Everyone headed back to Forney’s office for another ruling. The credit union thought its case was a slam dunk, but the Superintendent of Credit Unions saw it differently. For some unknown reason, Forney ruled the petition was valid and compelled the credit union to revisit the issue.

Rather than challenge Forney’s decision in court, UICCU’s Board of Directors agreed to hold a second vote on the Optiva name.

Duck and Cover

Smelling the magnitude of controversy starting to brew, the University of Iowa distanced itself as far as it could from the credit union’s name change. In the Daily Iowan, Marcus Mills, the university’s General Counsel, said the university “in no way forced the name change.” Steve Parrott, the Director of Relations for the University of Iowa, said it was credit union officials who came to them about the name change, to which the University responded, “That’s fine. That’s your decision to make, not ours.”

When pressed on the issue, UICCU officials admitted the University of Iowa had expressed its preference that “the two organizations had separate identities.”

“The university is still interested in having us change our name. Someday, we’ll have to fry this fish.”
– UICCU, 2007

But the credit union’s hands were tied. It was a Catch 22. They couldn’t — or wouldn’t — publicly point fingers back at the university. So when members asked why a name change was necessary, all UICCU could talk about were the “opportunities for growth” made possible by eliminating “the confusion that only University of Iowa employees could join the credit union.”

On February 26, 2007, two days before second vote on the new name, the university sent a letter to UICCU telling the credit union that the university would likely insist the credit union drop “University of Iowa” from its name sometime in the near future if members rejected the Optiva name. The letter went on to say the university would have to take control of UICCU’s marketing and business banking services if members elected to retain “University of Iowa” in the name. The letter was signed by Marcus Mills, the University of Iowa’s General Counsel, who just days earlier denied the school had forced UICCU to change names.

Two days later, when the credit union held its second member vote on February 28, UICCU’s leadership read the university’s letter aloud to everyone who attended. But it was too little, too late. Members were not persuaded, and this time they voted the name down, 806-631.

Regarding the university’s letter, the credit union would later say it was “not a demand, but you will have to draw your own conclusions.”

Fallout and Aftermath

Hundreds of thousands of dollars down the toilet. Accusations made and reputations drug through the mud in the local press. Bankers surely rejoiced at their handiwork. Indeed, they probably had no idea that the plans they first hatched back in 2003 would lead to such a painful embarrassment for their victim. “Operation Optiva,” as you could call it, had exceeded bankers’ wildest expectations.

Within a month after rejecting Optiva in the second vote, an embittered faction of members took their frustrations out on UICCU’s board. Thinking that the credit union’s board must have lost its mind to approve a name change, the group moved to oust three directors specifically over the Optiva scandal. However, the attempt failed.

In the days and weeks that followed, stories began to trickle out linking the University of Iowa to the name change. At one point, the university insisted there were no future plans to force UICCU to come up with yet another name. But in an apparent contradiction, the university has also admitted it “may want to revisit” the issue of UICCU’s name, particularly in light of its market expansion into commercial services. University officials have remained cagey about the school’s role, but they swear any theories about coercion from alumni bankers are little more than “rumors.”

“If we go down this road again, we’ll take a different approach and make sure that all parties are on board with the initiative.”
— UICCU, 2007

So after being forced to blow a whopping $435,000 on its first attempted name change back in 2006, will UICCU be asked to repeat the process again?

“The university is still interested in having us change our name,” the credit union said back in 2007. “Someday, we’ll have to fry this fish.”

The credit union acknowledged the subject of rebranding was brought up by university officials again a couple of years ago but was not advanced.

“We find ourselves in some regards caught in the middle,” the credit union said, “between what may be the preferences of the university and what may be the preferences of the membership.”

“But if we go down this road again,” said a spokesperson with UICCU, “We’ll take a different approach and make sure that all parties are on board with the initiative.”

The five-year contract between UICCU and the university for on-campus banking services expired nearly five years to the day after members had first approved the name change to Optiva. But no sooner than the contract ran out, UICCU was booted off the University of Iowa campus — forget about that two-year option. And then who took UICCU’s place? Who will now provide banking services, branches and ATMs on the University of Iowa campus? Yep, you guessed it: a bank. They got a sweetheart deal worth about half the rent and royalties that UICCU gave the university.

As for the on-campus branches and ATMs UICCU lost to one of its competitors, the credit union said the new bank can have them. They weren’t really profitable anyway.

For all its trials and tribulations, the credit union may be getting the last laugh. In 2003, UICCU had $300 million in assets. At the time of the Optiva name change kerfuffle in late 2006 and 2007, the credit union had swelled to $575 million in assets. Five years later, they had grown to exceed $1.4 billion. And throughout all this, the credit union has consistently ranked among the highest in the industry for return-to-members. In the end, UICCU may have lost a battle (or two), but based on their performance, it sure seems like they’re winning the war.

[Editor's Note: This article is an opinion piece based on the observations of these events as they were conveyed in news articles and public records. Over 100 different sources were used, and a list with many of those references can be found here.]

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Comments

  1. Interesting article! And I agree on the assessment of performance since the start of the skirmish. The credit union has a performance score that puts it in the 90th percentile of the industry HealthScore we publish. They have done quite well in serving their members regardless of the efforts of those inclined to slow the credit union’s progress.

  2. I’m always fascinated by name-change fights in credit unions, since they are a deeply symbolic symptom of the declining influence of the founding community. Here in Vermont, the Vermont State Employees Credit Union attempted to change its name to a $50000 consultant-developed “brand” a few years back. The attempt generated a flurry of letters to editor in the local paper, and the change was ultimately voted down with about 20,000 ballots cast. Thanks for the history!

  3. Ben Rogers says:

    Fantastic history. Thanks for the post.

  4. I found this to be highly interesting. Thanks for taking the time to cover the story in so much detail!
    The editor has a very clear and fair viewpoint and he has covered this with a great amount of enthusiasm and professionalism. That said, it would be cool to see someone from the Credit Union or the IBA now chime in with their comments. (Probably a lot of wishful thinking there I know.)
    Thank you for taking the time to post this cautionary tale! Then again, perhaps I need to shift my paradigm and see this story as less a cautionary tale and more of a reminder that “any publicity is good…” Or, “that what doesn’t kill you makes you stronger.”
    Certainly these old adages are not always true, but things tend to work out for the courageous. That is why I admire this credit union; they are unafraid, and focused. Those traits are what the banks should fear more than anything else.
    Optiva is a cool name- its too bad they can’t roll with it. They shoudl sell it to one of the agencies who peddle names at $50K to $100K per engagement. Or, could they “return” it to whomever helped them in the first place? Maybe they could even sell it to a new bank that moves into town! What a turnaround that would be!
    It wouldn’t surprise me if one day they just convert to a mutual savings bank themselves as Optiva Bank and own their state. That would make the stuffed shirts at the IBA really twitch.
    I look forward to following updates on this one!

  5. @Trent – Thanks for your comments and feedback. The only reason it’s a cautionary tale is that not every credit union has the appetite/capacity to deal with such stresses. For credit unions, there’s more to think about in the war over commercial loans than just CUNA lobbying to get the MBL cap raised.

    I wouldn’t hold your breath waiting for anyone involved in this story to comment — UICCU, the university, the IBA or Iowa’s bankers.

    UICCU has nothing to gain by saying anything.

    The university probably doesn’t like the position it’s been put in and may feel some embarrassment, but they really can’t be blamed for catering to the needs of their core constituency: donating alumni. Things probably would have turned out better for both the university and UICCU had everyone just put all their cards on the table from the get-go. After all, how bad would it have been to say, “We (the university) are uncomfortable letting UICCU use our name to compete for the core business of the alumni donors that give so much to our school?” But that’s water under the bridge. No advantage for the university to speak up now.

    As far as the IBA and other Iowa bankers go… They have nothing to explain, nothing to apologize for. I know the article seems to paint bankers as villains, but that’s for narrative effect as much as anything. Bankers stuck by their convictions, and acted upon them with full force. Nothing they did was illegal; they just played hardball. You have to ask yourself, if you were an advocate for Iowa’s banks, would you have done anything differently than they did?

  6. If the banks are so concerned about the tax inequity, perhaps they should convert in to a credit union.

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