Iowa credit union is leading the way in M&A
Credit unions are getting more active in the bank-buying business as a way to add scale and efficiencies.
Our guest is Jeff Disterhoft, who heads Iowa’s GreenState Credit Union, the most active M&A player in that market.
A few takeaways from our conversation:
- Even with three deals now in motion – including one facing regulatory opposition – GreenState is still open to future acquisitions.
- The pandemic has created challenges in getting deals and integrations done, but it’s also yielded some valuable lessons.
- GreenState fends off its critics by saying that it shares its success with members via attractive deposit and loan rates.
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Below is a full transcript of my interview with Jeff Disterhoft.
Jeff, you’ve been at the helm of GreenState, formerly known as the University of Iowa Community Credit Union, you’ve been in that role for about 20 years now. When you started as CEO in 1999, the credit union had around $180 million in assets. Now that number is around $8 billion, which ranks GreenState among the 30 largest credit unions in the country, and nearly all of this growth before you started getting into the bank-buying business. A CAGR of 19% a year for 20 plus years, most of it organic – what’s the secret there? How have you and your team been doing this?
Yeah, it’s a great question. I think there are three things that come to mind. The first of which is our culture. It’s a culture that attracts and retains outstanding staff, starting with the executive team that I am fortunate to surround myself. But it really emanates throughout the rest of the organization as well. Our first priority is to take outstanding care of our employees. That’s our true north. That’s our North Star. That’s where it all begins for us. The second is our business model. We really have a business model that’s predicated on efficiency. We try to give those savings back to our employees in the form of, hopefully, above-market compensation when they do well; back to our members in the form of better rates on loans and deposits; and back to our communities in terms of charitable support. The third – we’ve been very blessed to have a supportive board of directors over the years. They’ve had a vision for growth, and we have executed that growth, and we have seen the benefits of that growth for the stakeholders that I just mentioned.
So Jeff, to have that kind of growth, I assume you have to be growing your membership at a fairly good clip, too. Iowa is not a very big state, around three million people, and it’s been around three million people since the 1980s. And on top of that, Iowa has a pretty well-developed financial sector. What things are you doing to expand your membership or expand your penetration within your membership?
It’s really just a reflection of growing market share. Obviously, the State of Iowa is not growing a great deal, and we’re growing 15, 20% a year, including our membership. That means we’re picking up market share from either other banks or credit unions. That increased market share is really a reflection of maybe some of the success that we’ve had either in the mortgage side, the retail side, and in recent years, the commercial side. So at the end of the day, I think it’s a reflection of us just taking good care of Iowans. It’s not only in terms of the service levels that we provide but also in the pricing that accompanies the products we deliver.
As of now, GreenState has made four bank purchases. The first one in 2020 in Iowa, and as of this conversation, you have three other deals in various stages of completion. Two of these banks are based in Illinois, with operations in the greater Chicago area. The third is in Omaha, Nebraska. So what’s the thinking? What are you trying to do with your bank acquisition strategy?
There are four things that probably come to mind for me. The first is, any time that we can expand the convenience for our member-owners, either through our physical footprint, or the digital delivery that – in full candor – size allows us to enhance, that’s a good thing. So we’re enhancing and expanding the convenience for our member-owners. At the same time, we’re also expanding our product lines. Whether it’s treasury management, manufactured housing – there are things that we pick up and learn along the way from the institutions that we acquire that we can bolt on top of our existing operations. So it expands the breadth of what we do for a broader set of people. The third, and in today’s labor market is just terribly important, you always get exposed to new pockets of talent. We’ve seen that with each of our acquisitions, and so it’s a real blessing for us. But the fourth, and probably most important, is just the scope and the scale of what we do. We’ve always been believers that size lends itself to greater efficiencies, either through pricing advantages with our vendors or things of that nature. That added scope and scale really matters in today’s very competitive financial landscape.
Looking at it from a distance, though, this looks like a slow path to achieving scale. GreenState is $8 billion in assets, and these four banks combined are well less than $2 billion. How is this really moving the needle very much for you in terms of that pursuit of scale that you were just talking about?
Certainly, we could consummate all the acquisitions and go through all the organic growth that we wanted in the world, and we’d still be tiny relative to the largest players in the market. That’s one way of looking at it. The flip side of it is that, as I look at it today, we’re an $8 billion organization. We’ve got roughly $1.6 billion in acquisitions teed up over the course of the next year. And let’s say organic growth, given the growth rates that you mentioned at the onset of our remarks, is another 1.6 billion. So you go from $8 billion today to maybe $12 billion in a span of, let’s say, 18 months. Fifty percent growth in 18 months, I don’t think, is too bad relative to the market, and that doesn’t even include any credit union mergers that we’re pursuing. I look back 20 years and we had $200 million in assets and we’ve grown, let’s say, 40 times over. Keep that kind of growth going. It might not get us to the Chases, or the Citis, or the B of A’s of the world, but it does move the needle for us relative to our primary competitors in the markets that we serve.
What makes for a good target in your mind? Are you looking for banks that have a lot of operational similarities to GreenState? Are you looking for banks with different approaches that you can learn from and perhaps improve on how you do things? How does that part work?
There are a few things that we look at. For the time being, we’re looking at Iowa and contiguous states. There’s a size parameter that we’re looking at, and so really I’d think it probably needs to be at least 200 or 300 million dollars or more in assets. Finding a new market that doesn’t overlap physically with the markets that we currently serve is always helpful. Then just getting a sense for their quality of their branch locations. Are they in good locations? Are they in decent growth markets? Those four factors really probably drive more of it than anything.
Walk us through some of the things that you’ve learned from your first acquisition, the former First American Bank, based in Fort Dodge, Iowa. What has made GreenState better at what you do based on that acquisition?
Well, you know the old saying, “You’ve done one acquisition, you’ve done one acquisition.” So each one is truly unique and truly different. But there’s been a few things that I think we’ve learned. First, really making sure we focus on the retention of the existing commercial credits that we have. Making sure that I personally am out there, more engaged and involved in that process. I think another lesson we learned is the value of having a close date, and then followed by a combination date where you merge the systems and not trying to do them at the same time. Then the third lesson that we learned was that our mortgage operations and our retail lending can really shorten the payback periods. We always come into these processes with an anticipated payback period, but what we have found is that commercial banks that may be focused exclusively on the commercial, or primarily on commercial, we can really layer on top of that, some growth through both the mortgage and the retail side of things. So it’s been a pleasant surprise for us.
You’re doing all these deals during the time of COVID, which must create some unique challenges. Not just getting to the closing table, but also in integrating your new members, your new branches, your new team members, which you’ve been talking about. What challenges have you and GreenState been encountering on the acquisition front that are pandemic-related?
Yeah. The first one that comes to mind is just natural pauses. You rewind the clock to, let’s say, 18 months ago, when COVID roughly started hitting here in the United States, I don’t know that anybody really knew from an economic standpoint how things would feel in terms of unemployment, loan quality, all those kind of things. So there were some very intentional and deliberate pauses until everybody really felt like they knew how this was going to shake out for the economy as a whole. Aside from that, though, some of the bigger challenges that we run into are really more operational in nature. So little things like employee training. You’re talking about onboarding and training bigger groups of people. Last year as an example, when you’re trying to do that, when you’re physically not supposed to be or not able to be together, it just presents a whole new variety of challenges for us. Employee training is often a more intimate, hands-on environment and that was a challenge – one that we think we rose to, but it was certainly made more difficult through COVID. Then the final part was just relationship building, whether it’s between department leaders, key clients, key credits, community leaders, all the things that you think would be a natural part of an acquisition. In some cases, they are definitely made more onerous by COVID itself.
What stage is GreenState at with its digital banking strategy, and how does that compare with the banks that you’re buying? What I’m getting at is how much of a job is it going to be to get everyone up to the same level, and what do you think are the key moves to making that happen?
Well, the first thing I’d say is, we have what we call a digital roadmap that we developed two years ago, and we continue to methodically make our way through it. That digital roadmap – which maps out not only efficiencies internally, but how we deliver our products and services to our external markets – really hasn’t evolved much. We continue to make progress through that road map, and I don’t think it will evolve much through the acquisitions. I think we’ve got a good vision of where we’re trying to get to and we have the resources to help us get there. At the same time, I think we all recognize that we can compete with digital delivery, but I don’t think we can necessarily win at it. In other words, I look at our budget for digital delivery, it’s probably what Wells Fargo spends on paper clips. To think that we’re going to truly beat our competitors, our largest competitors at digital, I just don’t think that’s reasonable. Now, we can be competitive. We can give a great value proposition, but to say that it’s truly a differentiator, I don’t know about that. So we feel great about where we’re at, but we don’t necessarily see it as a decision point that consumers look at when they’re making their buying decisions. I think it’s table stakes to be really good, if not great, but I don’t see it as being the primary driver for consumer buying behavior.
We were talking before about the size of the banks that you’re acquiring, and they’re much smaller than you, so their digital spend would probably be even fewer paper clips at Wells Fargo. What about bringing them up to your level? Is that a big concern? Is that a big initiative on your part to get that done?
It’s always a big initiative. Any time you’re talking about you have got to change account numbers, and you have got to change routing numbers, and anytime those two things change, you’re going to have some opportunities for some hiccups. Thankfully, with the acquisition that we completed, we didn’t see much of that. But anytime you have thousands of consumers that change their account numbers and change their routing numbers, there’s a lot of opportunities for something to fall through the cracks. The good news is, though, that you’re right – most of these consumers are going to be seeing a considerable upgrade in the quality of their digital delivery, once they get there. Now, the hard part sometimes is getting there, but once they get there, they generally see very good things.
Jeff, I’ve heard you describe the culture at GreenState as “aggressive but caring.” Now, I’ll just mention that those adjectives are not typically paired together. Obviously, it’s working for you. But maybe, you could tell us how culture-wise, business-wise, expectations-wise, that aggressive and caring are a good match at a credit union.
As I said at the onset, our first priority is to take outstanding care of our employees. The reason for that is I believe that, if we take outstanding care of our employees, that they, in turn, will be best positioned to take care of our member-owners. If we do those first two things right, then collectively, we’re best positioned to serve our communities. So caring for our employees, creating the best workplace possible, really is our North Star. It’s the direction that we’re all pointed in. And I’m blessed that, I think over the years, we’ve created this consistency where everyone – starting with our board all the way through our frontline staff – know that not only are we a carrying organization, but we are an aggressive organization. We’re competitive. We’ve seen what that success does for our employees, our members and communities. So we work very hard, not that we ever have it all figured out, but we do work very hard to create alignment, starting with the board, running through the executive team, all the way through our staff, that we really do want to be caring. But we’re also going to try some things that not everybody else is trying, and the acquisitions is a perfect example. Again, I think we’ve seen the good things that it does for our three stakeholders, but it’s not everybody’s cup of tea and we know and respect that.
That’s a nice segue into the next question, which is, what you’re doing is generating some controversy among other bankers and in some cases, bank regulators. Your purchase of First American Bank in 2020, that was strongly opposed by the Iowa Division of Banking. Your other deals have prompted a range of complaints, including that GreenState has an unfair financial advantage due to its tax-exempt status and that you’re straying far from the credit union’s historic role of serving underbanked constituencies. I’m sure you hear these complaints a lot and others as well. How do you respond to those when they’re sharing those viewpoints with you?
Well, the first step is to acknowledge the fact there are some folks we’re not going to be able to convince or change their perspective. And so, as I said a second ago, I both respect and understand those perspectives. As far as serving the underserved, I don’t know what the math was exactly for last year. But the year before, I think GreenState had more loan losses than the largest five banks in the state of Iowa combined, which tells me that GreenState continues to take chances on people of low and moderate income. That’s as you said, was what credit unions were formed for back in 1938 and I think we’re still doing that. At the same time, I would probably agree that the credit union charter structure does have an advantage in that it does not pay state or federal income taxes. But as long as we are passing those savings back to our member-owners in the form of great rates on both loans and deposits, then I think the charter is working the way that Congress intended it to 70, 80 years ago. You can look with Callahan & Associates that our giveback – in other words, how low are our loan rates, how high are our deposit rates, and how low are our fees — we do an outstanding job of giving back to our 350,000 member-owners in the form of great rates in both loans and deposits as well as to our communities in the form of charitable support. At the end of the day, our success is a reflection of serving people with great rates and service, and in full candor, if providing those two things to consumers is wrong, then we don’t want to be right.
Jeff, a simple and straightforward to end our conversation on: Are you done with your shopping spree?
Well, done-done, as in forever, is an awful long time, Terry. I think for the near term, we have more than enough on our plate to keep us busy here for the next 12, 18 months. But to say that we’re completely done, we’ll always probably avail ourselves of opportunities as they come forward.
Yes, forever is a long time, and it does make sense to finish what’s already on your heaped-up plate before starting to think about your next meal. Jeff Disterhoft, head of GreenState Credit Union, thanks again for making the time to join us on the BAI Banking Strategies podcast.
Terry, thank you so much for having me.