In November, Baylake Bank, headquartered in Sturgeon Bay, announced it would buy an Appleton branch and deposits from Community Bank & Trust as part of its strategy to build its presence in key metropolitan areas. Earlier last year, Nicolet Bankshare announced that it completed its merger with Mid-Wisconsin Financial Services, the largest merger in Nicolet’s 13-year history.
Then in January, three credit unions – CitizensFirst, Lakeview and Best Advantage – announced plans to merge, creating a credit union with 47,000 members and 10 branches serving 15 counties. Two other credit unions – Pioneer and Capital – also announced they were merging.
“The M&A (mergers and acquisition) world is starting to gain some traction,” says Rob Cera, CEO of Baylake Bank. But it will take longer for that traction to gain any momentum, he says. Many smaller banks, which would be natural targets for acquisition by a larger firm, are waiting for their values to go up.
In a recent report on community bank M&A activity, Keefe, Bruyette & Woods (KBW), a New York-based investment bank specializing in financial services, agreed with Cera’s views on the reluctance of sellers to accept current valuation.
“There has always been a gap between the number of willing sellers versus demand from buyers, but in the current environment, we think this gap has widened somewhat and is acting as another headwind to any possible surge in M&A,” the report says. “Buyers now demand that deals be much more economically attractive, which is resulting in more prudent pricing, which turns off sellers.”
For the managers of a small bank, the issues raised by selling are stark – what are the bankers going to do next?
Cera says that Wisconsin banking varies by region. In Milwaukee and Madison, both attractive regions for business, small banks have difficulty competing against larger banks. The other attractive regions for banks are the Fox Valley, La Crosse and Eau Claire, he adds.
Small banks can continue to do well in smaller communities that larger banks don’t find profitable. In many smaller towns, banks play a larger role than providing return for shareholders – a community bank may be run by a family or be an integral part of the community.
“When you sell a bank in a smaller community, you aren’t just disrupting your own life but the lives of a lot of folks,” Cera says. “That is why banks may be different from other businesses.”
Mergers mean convenience
One significant pressure on banks and credit unions is complying with new federal regulations. The merged Capital Credit Union will have a fully-staffed, five-person risk management and compliance department, for example.
The mergers will make the credit unions more appealing and easier to use for members who routinely travel across the service areas for work, education, recreation or shopping.
“Fixed costs remain the same no matter what the size of the credit union,” says Pat Lowney, president and CEO of Lakeview Credit Union, headquartered in Neenah. The Lakeview merger with CitizensFirst and Best Advantage will provide more convenient service for members who commute across what had been the territories of the three.
“I was surprised at how many people we have who live in the Fox Cities work in Oshkosh, or the other way around. Now it will be much more convenient for them to run down the street to their credit union,” he adds.
The three also complement each other when it comes to loans and deposits. Lakeview and Best Advantage, based in Brillion, have more money than loans, while CitizensFirst has a lot of loans and is looking for more money.
The average age of members is over 50, so the credit unions want to appeal to younger people who need loans – meeting their needs while also providing income for older customers who have money but aren’t doing such heavy borrowing for cars or mortgages.
“The whole financial market is so different from 20 years ago,” he adds. “We have to work really hard to stay relevant to older members who have been with us a long time and provide the liquidity to make those loans. We have more of a stretched view than ever before in our history.”
The combined organizations will have an easier time supporting necessary, but expensive, services like mobile banking, which is almost a requirement for attracting and retaining younger members.
Kevin Ralofsky, president and CEO of CitizensFirst Credit Union in Oshkosh, says the three-way merger is unusual because it involves three strong credit unions, rather than the takeover of a failing credit union by a stronger one.
“The exciting thing about this is that it is a merger of choice where all three partners approached this as a strategic partnership,” he adds. “This historic merger will be the first of its kind in the state of Wisconsin, according to the Department of Financial Institutions.”
All three credit unions are working together through 13 committees that draw from all three organizations to choose the best products, services and people from each. They have found that often two of three are using a certain banking system, but rather than selecting that system, the committees are looking at each to determine the best technology available.
What will work with a $600 million credit union? The newly merged credit union will rebrand, but not until all accounts have moved to the same core banking system and all members can gain access to their accounts from any branch.
The three will run their operations on a CU Answer service bureau based in Grand Rapids, Mich. CitizensFirst, which runs on another system, will convert in October. Capital Credit Union will run its own Fiserv core banking system at a main data center and a backup.
The mergers have generated interest not only around Wisconsin but from across the country.
“It has become bigger news than we expected, as people ask what is the difference, how are we doing it so quickly, what are the challenges,” says CitizensFirst’s Ralofsky. The state now has about 170 credit unions; he expects it will eventually have about 100.
Alan Zierler, who will become CEO of Capital Credit Union after it merges with Pioneer Credit Union, says that Capital had been getting requests for a branch in Green Bay from some of the 2,000 members who live in the area, while Pioneer was getting suggestions it open in the Fox Valley.
“We got together and decided this was a great opportunity for expansion without spending on bricks and mortar. We are both highly capitalized and this will be two solid organizations coming together.”
Thomas Young, the current president of Pioneer, will assume the president’s position and run day-to-day operations.