State regulators last week effectively killed a proposal by University of Iowa Community CU to acquire a local bank, even before a formal application on the unprecedented deal had been submitted.
James Forney, superintendent of credit unions for the state's Department of Commerce, said he had been in discussions for several weeks with credit union officials over the proposal to acquire Iowa City-based Hawkeye State Bank, and told the $300-million credit union the deal would not work because of accounting difficulties. "We've reached a point in the inquiries and comments that they were making where we felt we had to provide them with a response. We couldn't approve their proposal in a way they wanted to proceed," said Forney.
The main obstacle to the deal was the effect the acquisition would have on UICCU's capital, which stood around 9% at year-end. Credit union officials had proposed folding in the bank's operations in a way that would not have permitted them to add the bank's capital to their own, thus diluting the credit union's capital to risky levels, said Forney.
"By bringing in $160 million in assets without bringing in any capital it provides some pressure on the net worth of the acquiring credit union," he said.
"What was proposed to us would mean that negligible capital would flow over with the transaction."
The deal, he added, "would put a serious strain on the net worth of the institution, requiring the credit union to rebuild its net worth."
Forney indicated that state law does not prohibit a credit union acquisition of a bank and the deal might proceed if structured differently.
But credit union officials were sounding the retreat last week, saying they were disappointed in the regulator's denial, expressing hope the bank remains in local hands, one of the goals of the unprecedented deal.
"Obviously, we are disappointed with the outcome of this process," Jeffrey Disterhoft, credit union president, said in a statement. "As we interpret the regulator's message, they were ultimately concerned the sale would place too great a burden upon the credit union's capital position. Initial research lead us to believe that we had processes in place to address that concern, and unfortunately the regulatory environment ultimately disagrees with that assessment."
Under the plan, the credit union was to pay an undisclosed amount of cash to buy the bank, financing the purchase with a note. However, the purchase proposal would have prevented UICCU from simply adding the bank's capital to its own, as is commonly done in credit union mergers.
The proposed deal caused so much controversy that bankers in Iowa have organized to get legislation introduced that would create a new tax on the state's largest credit unions.
John Sorensen, president of the Iowa Bankers Association, said the death of the credit union acquisition will not quell that initiative. He said legislative allies are expected to introduce a credit union tax bill over the next few weeks.