Credit Union Mergers on the Rise

4FrontMembers Credit Union in Traverse City and Bay Winds Federal Credit Union in Charlevoix were itching to expand. Members Credit Union was eyeing new business in the Petoskey area while Bay Winds wanted a presence in the booming Grand Traverse region.

Each was allowed to march into those areas under their charters, but they ultimately decided it made more sense to merge. On Jan. 1, the two credit unions became one—the $400 million asset 4Front Credit Union headquartered in Traverse City.

“These were two very successful individual organizations that felt they could harness the power of a joint effort,” said Keith Carey, 4Front’s vice president of marketing. “The boards of directors were like-minded. It made a lot of sense.”

Credit unions once were mostly tiny, nonprofit institutions that took deposits and made small consumer loans to members, which owned them. Their members were required to have a “common bond,” such as working at the same business or belonging to the same church. Their operations were restricted to a “field of membership,” a specific geographic area.

But over the years, state and federal laws have been eased to allow credit unions to greatly expand, and to offer many of the same services as banks do to just about anyone. And like banks, they are rapidly consolidating to offset growing costs of regulation and technology, and take advantage of other economies of scale.

Credit union officials say mergers also allow them to offer a wider array of services and more competitive rates to their member-owners.

The number of federally-insured credit unions has fallen 16 percent since the 2011, from 7,292 institutions to 6,159 credit unions as of June, according to the National Credit Union Administration.

In Michigan, there have been 17 credit union mergers this year, up from just five in 2012, according to the state Department of Insurance and Financial Services. The Michigan Credit Union League says there are 257 credit unions in the state. Of those, 162 are state chartered and 95 are federally chartered.

There are about 250 federal- and state-chartered credit unions in Michigan. Donald Mann, a Lansing-based banking industry consultant, said he expects that number to eventually fall to around 100 institutions. Much of that reduction is a result of struggling smaller credit unions being absorbed by larger institutions, industry officials say. Small credit unions are facing increasingly burdensome costs of regulation and technology, and difficulty in finding new management as their leaders begin to retire.

“It’s just a very difficult time for small institutions,” said Patrick McPharlin, director of the Michigan Department of Insurance and Financial Services.

The CEO of a small credit union has to be a jack-of-all-trades, having the ability to fix the sprinkler system and reboot the computers when they go down while managing the financial side of the operation.

“When the CEO decides to retire, that’s usually the tipping point for a merger,” said McPharlin, who became the state’s top insurance and financial regulator in May after serving as CEO of the Michigan State University Federal Credit Union.

Although United Federal Credit Union in St. Joseph was a large institution with $2 billion in assets, it merged with an even larger institution following CEO Gary Easterling’s retirement announcement.

UnitedUnited Federal announced in October that it would merge with Lake Michigan Credit Union of Grand Rapids, creating the 19th largest credit union in the United States with $8 billion in assets. The deal is expected to close by the end of the year.

Lake Michigan Credit Union began operations in 1933 to serve teachers in Grand Rapids. Whirlpool Corp. workers started united Federal Credit Union in 1949.

The merger of the two institutions is claimed to be the largest in U.S. credit union history. It will have 500,000 members and 1,400 employers. Its offices will keep their current branding and names, except that “Federal” will be dropped from United Federal’s name as the merged entity will by chartered by the state.

4Front also dropped Bay Winds federal charter and became a state chartered institution. “We wanted to be closer to our regulators,” Carey said. “Local governance simply knows better. It crafts rules and regulations specific to Michigan.”

McPharlin said a state has more flexible rules regarding the field of membership, making it easier for credit unions to expand.

While the number of credit unions is falling, those that remain are steadily growing.

The number of people who belong to a Michigan credit union has increased by 3 percent over the past year. That’s the highest membership growth rate in 27 years, according to the Michigan Credit Union League.

As of mid-October, 4.8 million people—nearly half the state’s population—belonged to a credit union. Loans increased by 11.6 percent in the fiscal year ending June 30, the fast annual loan growth in 20 years. The Michigan Credit Union League is pushing for new authority for credit unions to expand their fields of membership, offer trust services and establish online-only credit unions.

Legislation updating the state Credit Union Act allowing for such expansions passed the House Financial Services Committee in November, but had not been acted on by the full House at presstime.

The bills have inflamed the long-running battle between credit unions and the banking industry, which claims credit unions have an unfair business advantage because of their nonprofit, tax-free status.

“We’ve let them expand and retain their tax-exempt status,” said Mann, the state’s former top bank regulator and a consultant to the Community Bankers of Michigan. “They’ve diluted the common bond and field of membership.”

That’s allowed credit unions to offer interest rates on auto and other consumer loans that banks can’t touch.

The credit union league declined to make an official available to comment for this story. But it publicly trumpets credit unions’ nonprofit advantage for consumers.

In a recent news release, the league said consumers will save an average $1,019 over the life of a five-year, $30,000 car loan by getting a loan from a credit union instead of a bank.

The legislation to expand credit unions’ powers in Michigan is opposed by the Michigan Bankers Association and the Community Bankers of Michigan.

In a joint statement, the banking associations called the credit union bills “an enormous overreach that expands their business model and their excessive profits to the detriment of community banks throughout Michigan.”

But banks are unlikely to win their ultimate goal of getting lawmakers to end credit unions’ tax-free status, Mann said, because of their average-consumer appeal to Congress and state legislatures.

“This is the bankers’ Vietnam War,” he said. “They can’t win it.”

But credit unions risk losing touch with their member-customers as they become more like large commercial banks.

Carey, of the 4Front Credit Union, said there has been some concern by its Charlevoix members that it was “becoming big city” with lending decisions being made “by folks residing in the ivory towers on Front Street.”

4Front’s leadership is trying to allay that concern by alternating weekly management meetings between its Traverse City and Charlevoix offices.