A Federal Reserve report on the growing number of community banks merging with credit unions said some small banks with deep customer and community ties might find greater commonality with a credit union than with a distant megabank.
Reasoning along those lines contributed to a decision Richmond-based West End Indiana Bancshares, Inc. announced earlier this month to partner with Fort Wayne-based Three Rivers, which does business as 3Rivers Federal Credit Union.
Under their agreement, Three Rivers will assume the assets and liabilities of West End Bank S.B. in return for payment of between $34.91 and $36.81 in cash to West End Indiana shareholders. Based on the number of outstanding shares at the end of the first quarter, the payment would range between $37.2 million and $39.2 million.
The deal will make West End the first Indiana bank purchased by a credit union. Evansville Teachers Federal Credit union became the first credit union in Indiana to buy a bank last November when it bought American Founders Bank in Louisville.
“West End is a successful organization but we realized, especially for the future, that the size and resources of a company do matter when it comes to competing in the marketplace,” said Timothy Frame, president and CEO.
About a year ago, it began the early phases of “evaluating potential partners that would benefit our customers, our communities and our employees for the future,” he said.
“We were thrilled when 3Rivers Federal Credit Union emerged from the process,” he said. “The culture, mission and overall approach to financial wellness is very similar with both organizations.”
Andrew Meyer, a senior economist at the Federal Reserve Bank of St. Louis, noted in his April report on credit union expansion through bank and thrift acquisition that only 19 of those transactions have taken place, but the trend appears to be on the rise.
The annual number of those transactions has grown from only one in 2012 to two or three most years since, until last year, when there were seven.
“I’ve done a lot of work with community bankers. They don’t like at all the fact that the credit unions have a tax advantage over them. But, if that tax advantage allows them to get a higher price when selling my bank, then that’s not such a bad thing after all,” Meyer said in an interview.
The cost of regulatory compliance has been driving smaller community banks to seek buyers among larger lenders who can shoulder the burden more easily by spreading it out over a larger customer base, he said.
“Assuming that interest rates do start coming down again, that always puts pressure on the net interest margin, especially for small banks where that’s their bread and butter,” Meyer said, not speaking for the Fed but sharing his personal opinion as an economist.
“That’s going to put some profit pressure on the (smaller, community) banks and maybe make it so they would sell out to whoever would buy them, whether it’s the banks or credit unions,” he said.
Responses to an annual survey of bank supervisors has shown that the smaller the bank, the higher the proportion of expenses regulatory compliance becomes.
The number bank acquisitions by credit unions has been limited by field-of-membership issues, he said in his report, such as cases where a credit union’s membership is restricted to employees of a specific corporation.
Three Rivers has not had that kind of restriction since the early 1980s. The National Credit Union Administration granted it a Community Charter expansion in 2005, which allowed anyone who lives, works or volunteers in Allen, Adams, DeKalb, Huntington, Noble, Wells or Whitley counties to become members.
“Currently we are restricted by the geographical boundaries of the seven counties in our community charter,” Melissa Shaw, Three Rivers marketing director, said in an email.
“Our existing charter hinders us from expanding outside this area. We will be applying to the NCUA to convert our Community Charter to a Multiple Common Bond Charter. This new charter does not bound us to geography,” she said.
“Our newest branch in Decatur is the closest geographically to West End Bank. Both the Decatur and St. Mary’s, Ohio branches are roughly an hour and a half away.”
Prior to its West End agreement, the last acquisition Three Rivers made took place in 1988 when it bought Goodyear Credit Union in St. Mary’s, where it still has a freestanding branch, Shaw said.
The West End acquisition will be the largest Three Rivers has made in size and scale, she said.
West End operated four branches in Richmond, Hagerstown and Liberty with 24,000 customers and $298.8 million in assets at the end of March, according to the acquisition announcement.
Three Rivers operated 16 branches in seven counties of northeast Indiana and northwest Ohio with about 82,000 members and $1.1 million in assets at that time.
The acquisition was expected to increase the credit union to 20 branches, 106,000 members, 400 employees and about $1.4 billion in assets.
The transaction has received board approval at both institutions but still requires regulatory approvals and the approval of West End Indiana shareholders. Three Rivers and West End Indiana expect the deal to close during next year’s first quarter.