Two pending deals where West Michigan-based credit unions are buying small community banks follow an emerging trend nationally.
Across the U.S., transactions involving credit unions acquiring banks have picked up in the last year and a half. Attorney Mike Bell expects more such deals to come along through 2017 and into 2018, although they’ve still not yet become commonplace in the industry.
“This is real and will continue happening,” said Bell, a partner at Howard & Howard PLLC who specializes in credit union-bank transactions. “It is a niche that is becoming more and more mainstream.”
Bell is representing Berrien Springs-based Honor Credit Union in its proposed acquisition of Citizens Bank of Ontonagon in the Upper Peninsula that he expects will close this year or next. Locally, he also is representing Parchment-based Advia Credit Union in its deal for Peoples Bank in Elkhorn, Wis. Advia Credit Union previously acquired Mid America Bank in southern Wisconsin in 2016.
Bell also represented United Federal Credit Union in St. Joseph in its 2012 acquisition of Griffith Savings Bank in Indiana, which was the first time a credit union bought a bank.
Nationwide, there were three deals in 2015 involving banks that were acquired by a credit union and four in 2016, according to a recent report by S&P Global, a New York-based provider of independent ratings, benchmarks and analytics for the financial industry.
There have been three credit union deals for banks so far in 2017, including the Honor and Advia deals. Bell said he’s presently working with 14 credit unions across the U.S. — some of which are in Michigan — on possible bank acquisitions that may or may not actually close. He’s usually working on two to four at any given time.
“There’s been a sharp increase,” Bell said. “This is on fire compared to what it has been.”
Driving the deal flow are decisions by small banks to sell in a period of escalating regulatory costs and limited growth potential, combined with a desire on the part of credit unions to grow. To do so historically, a credit union invested in building branches and entering new markets, or pursued a merger with another credit union.
As small banks seek buyers in an era of consolidation, they often find a limited number of prospective partners willing to acquire small institutions. That then opens an opportunity for credit unions to enter the scenario, Bell said.
“Down at this smaller area, there’s nobody (among banks) there,” Bell said. “This strategy presents a new option for credit unions to grow in their geography, their loans, their members, deposits and perhaps products and skillsets. This is a tool to do that and it’s quite effective.”
Both banks and credit unions have been in an ongoing period of consolidation. For any bank or credit union that wants to buy, there remains plenty of opportunity, according to industry sources. One-quarter of the bank executives surveyed in 2016 by Bank Director magazine said they were open to selling, considering a sale or actively seeking an acquirer.
EXPLORING SIMILAR GOALS
For Advia Credit Union, acquiring a bank strategically “doesn’t differ significantly from the reasons two credit unions chose to merge,” CEO Cheryl DeBoer wrote in an email to MiBiz. The prior acquisition in Wisconsin and the pending deal for Peoples Bank enable the credit union to gain market share and presence, expand membership, fill in gaps in the branch footprint, diversify lending and markets, and add expertise, DeBoer said.
“The transaction itself is different, however the overall goals are very similar — provide better overall member experiences and strengthen the credit union through economies of scale, diversification and increased talent acquisition,” she said. “We have actually looked at many more deals than we have pursued.”
Advia Credit Union has 18 offices in Michigan, five in southern Wisconsin and one in northern Illinois with 133,000 members and assets of $1.38 billion. Peoples Bank has four offices in southern Wisconsin and assets of about $230 million.
Like Bell, DeBoer sees the pace of credit union-bank transactions growing as consolidation continues in the financial services industry and as regulators become increasingly comfortable with the deals, she said.
One key difference compared to a merger with another credit union is the process to complete a deal with a bank, given the traditional adversarial view they have toward each other’s industry.
“The vetting and approval process takes longer than a traditional credit union merger. Integrating cultures is always a challenge when you bring two organizations together. Combining a bank and credit union adds additional complexity since they have historically been positioned as adversaries,” DeBoer said. “Credit unions and community banks fundamentally have the same goal of serving their members (and) customers, however, and keeping that in mind helps to unite the two easier.”
However, deals between credit unions and banks aren’t limited to corporate acquisitions.
Grand Rapids-based Lake Michigan Credit Union recently bought two former branches from Fifth Third Bank, which has been reducing its office footprint.
Lake Michigan Credit Union in May opened an office in Ravenna, a village in Muskegon County, in a location that was previously a Fifth Third branch. Two months prior, the credit union also acquired a former Fifth Third office on Plainfield Avenue in Grand Rapids, according to city tax records.
Lake Michigan Credit Union is the largest credit union in Michigan with 41 offices — three of which are in Florida, assets of $5.06 billion and about 300,000 members.
Bell at Howard & Howard considers credit union-bank deals to be “in a sweet spot right now.” He expects the trend to peak in 2018 and perhaps tail off in 2019 before picking up again.
For banks that want to sell, opening the deal process to include credit unions helps attract more potential suitors and possibly drives up the transaction price, Bell said.
“If you want a really competitive process, why not involve a couple of credit unions to that as well?” he said.
In its pending transaction, Honor Credit Union would expand its footprint in the Upper Peninsula with the acquisition of Citizens Bank of Ontonagon. Terms of the deal, which is pending shareholder and regulatory approval, were not disclosed.
Citizens Bank of Ontonagon has three offices in the U.P. with total assets of $54.2 million as of March 31 and deposits of $46 million, according to a quarterly financial report filed with federal regulators.
The deal gives Honor Credit Union the ability “to provide financial solutions to more members,” Chief Lending Officer Kent Figy wrote in an email to MiBiz. “We will become an even stronger credit union because of this partnership, which will benefit our entire membership.”
Honor Credit Union has $734.8 million in assets, 64,880 members and 17 offices. It has three offices in the U.P. in Marquette, Negaunee and Gwinn that were acquired in the 2014 merger with SIR Federal Credit Union. Honor Credit Union most recently acquired Battle Creek Area Community Federal Credit Union and Post Community Credit Union.