Are credit unions the new community banks?

Credit unions, nationally and especially in Florida, are diving into a new form of expansion: buying banks. A pair of billion-dollar area credit unions lead the way in the buy-to-grow strategy.

By Business Observer Staff
| 6:00 a.m. June 14, 2019
| 1 Free Article Remaining!

Marketing and Events Manager Chelsey Wilson; CFOE Janice Hollar; Chief Marketing Officer David Oak

Finance

MidFlorida Credit Union, Lakeland

MidFlorida Credit Union CEO Kevin Jones is a popular executive — and not just for guiding the Lakeland-based institution to become the fourth biggest credit union by assets in Florida.

Calvin Knight. Kevin Jones has been with MidFlorida Credit Union in Lakeland for more than 25 years.

‘You might not get our level of customer service in a bank, and people are looking for that these days.’ David Oak, Achieva Credit Union

Much like popular retail and food chains, from Trader Joe’s to Shake Shack, Jones and his MidFlorida team often hear questions from members who want to know: where’s the next growth market going to be? “I get e-mails all the time,” says Jones, with people wondering “when you are coming to Daytona Beach, when are you coming to Apollo Beach?”

For two key markets in the Sunshine State, Southwest and Northeast Florida, the answer is now. MidFlorida recently announced a pair of deals: one is a merger with Ocala Community Bank & Trust of Florida, a $730 million-asset bank. The other is an acquisition of the assets of First American Bank of Iowa, with holdings that include a $240 million commercial and residential mortgage portfolio, mostly in the Naples and Cape Coral markets. Pending regulatory approvals, the combined entity will have $4 billion in assets, $3 billion in loans, 1,100 employees and 63 full-service branches. Financial terms of the deals weren’t disclosed.

On the state map, Jones says the deals provide connectivity. MidFlorida’s footprint, some 60 branches, is mostly spread from Orlando to Arcadia and on both Florida coasts, with a heavy concentration on Tampa, Lakeland and the Interstate 4 corridor. With these deals it can add Lee and Collier counties, in addition to Ocala, Gainesville and The Villages. MidFlorida has merged with other credit unions, including Bay Gulf Credit Union in 2010 and Indian River Federal Credit Union in 2012. But it’s never bought a bank.

These deals, beyond sheer size in dollars or map pins, also represent the first — and a big — strike in a new growth strategy for MidFlorida. The credit union, essentially, intends to become the non-bank bank — offering, for example, treasury and specialized cash management services for medium sized businesses without the overhead or bureaucracy of a large bank. It also plans to target medium-sized businesses, with 20 to 100 employees, for lines of credit and connected services.

MidFlorida’s commercial lending focus, for the most part, says Jones, has been in small and micro-businesses, entities with less than 20 employees. Buying banks and bank assets, he says, and inheriting some of their lenders and executives, allows MidFlorida to pursue new commercial clients. The merger with Ocala Community Bank & Trust also provides entry for MidFlorida into wealth management — more new markets. Says Jones: “We are about to move much more upstream.”

The non-bank bank theme goes back almost 20 years, when MidFlorida, founded in 1954 as the Polk County Teachers Union, created the slogan “what a bank should be.” Jones says Florida regulators required MidFlorida to drop the slogan when the credit union shifted from a national to a state charter in 2009. The theme was also used internally, where Jones and his team built a relationship-based model, growing in offering more services for existing clients, not just in adding deposits. Like a community bank, the model at MidFlorida, Jones says, is to provide excellent customer service, quick and local lending decisions and community involvement.

The “what a bank should be” motto also pushed Jones and the MidFlorida board to move quickly when approached about the potential bank deals. Up until now, MidFlorida, says Jones, had “been growing consistently, but we take the turtle approach. We don’t do anything to get us in trouble. We tend to do more of a ripple wave, not take big leaps when we grow.”

The acquisition of the Florida assets of First American Bank of Iowa is expected to close in November, while the Community Bank & Trust of Florida merger is expected to close by the end of the 2019, according to a statement. Jones says the two core challenges he expects to face in the integration are communication, with employees and members/bank customers, and data transfers. He’s already been meeting with bank employees in all the acquired markets, and the credit union has launched a marketing campaign to explain the ramifications of the deals.

On the future of credit unions buying banks, while Jones is excited about MidFlorida’s deals, he doesn’t think the trend will last, at least not In Florida. Not because the deals aren’t financially viable, but from lack of supply. With only about 100 community banks left statewide, and one-third of those in the uber-competitive Miami-Dade market, opportunities are sparse. “There’s just not a lot of community banks out there left to buy,” says Jones. “Credit unions are becoming the new community banks.”

Done deal

While it’s not a gusher, the trend of credit unions buying banks, on a national scale, is gathering steam. There were 19 such deals from 2012 to 2018, according to a new study from the Federal Reserve Bank of St. Louis. Eight of the acquisitions took place in 2018, and three each in 2016 and 2017.

The report cites two reasons for the rise. One, is credit unions, which normally by charter only need to cover operating costs, provide member services and maintain adequate capital, don’t have the pressure a bank might face in generating shareholder returns. “Thus, if a target bank’s profitability is under pressure, a credit union buyer might be more willing to take a chance on the purchase,” the report states. “For the 19 banks (credit unions bought) six of them had a negative return on assets as of the quarter before the transaction, and the average ROA was only 0.08%.”

Another reason, loosely related, is credit unions, as nonprofits, don’t pay taxes — a setup bankers have lobbied to change for years. “This favorable treatment,” the report states, “may make it more likely for a credit union than a commercial bank to purchase a marginally profitable community bank.”

Achieva Credit Union

Achieva Credit Union sent a shock through Florida’s financial industry in 2015 when it acquired, for $23.2 million, Punta Gorda-based Calusa Bank.

Founded by Pinellas County teachers in 1937 and headquartered in Dunedin, Achieva, now with $1.76 billion in assets, aspired to grow its footprint, especially south of the Sunshine Skyway Bridge. It did that even more late last year, when it bought another institution — Fort Myers-based Preferred Community Bank, with $116 million in assets — for an undisclosed sum. Both deals are part of a rare, but growing, segment of the financial sector: credit unions buying banks.

“Getting into new markets was the biggest driver” of the acquisitions, says Achieva CFO Janice Hollar. “If you build a branch and start from zero, it takes quite a while to build your deposits and your members. To go into a new market and acquire a bank that already has the branches, the customer accounts, the deposits — it’s a faster return.”

Yet, Achieva officials stress, there’s more to the process than simply writing a check and swapping signage. Credit union officials must not only educate and keep the customers they’ve acquired — many of whom might be unfamiliar with the credit union business model — but also kick-start organic growth in an area where the business has little to no brand recognition.

And with competitors like MidFlorida Credit Union buying banks, too, Achieva faces more threats than ever. Its solution? Ensure potential members know the Achieva name, then blow them away with next-level customer service.

“There’s a branding initiative that’s still ongoing,” Chief Marketing Officer David Oak says of Achieva’s efforts to improve the results of an annual brand recognition survey it conducts in new markets. “We’ve seen tremendous growth. Early on in 2016, it was maybe 15%. Now it’s 30-40%.”

Role reversal

With credit unions buying banks a an unforeseen pace, will a bank soon buy a credit union?

Not likely.

“A bank can absolutely but a credit union, but credit unions have limits — they have only so much capital and a limited number of things they can do with it,” says Mike Bell, an attorney with Howard & Howard, a business law firm in Royal Oak, Mich. Bell, with 150 credit union clients nationwide, specializes in helping credit unions buy banks, and he worked on both Dunedin-based Achieva’s and Lakeland-based MidFlorida’s recent acquisitions.

“They can invest in technology or build more branches and fill them up with members,” he says. “But so many credit unions are just so darn small. So it’s just not interesting [for the bank]. It’s not a good enough strategy. It doesn’t make sense.”

Banks, Bell explains, have more ways to use capital, like investments and shareholder returns. “You have a list of, like, 10 things you can do with your money. It’s just less desirable” for a bank to buy a credit union, most of which are focused on consumer, rather than commercial, banking services like auto loans, credit cards and first mortgages.

Hinting at other deals he has in the works, Bell forecasts a “micro-trend” of credit unions buying banks in Florida. “This year alone, 2019, you are going to hear more ‘credit union buying a bank’ announcements than you’ve heard in the past 10 years. You’ll hear double-digit announcements, no question about it.”

— Brian Hartz

Achieva has aims to reach eyeballs where they are — not where they used to be. Oak says that means fewer ads on cable TV and in newspapers, and more spots on streaming services like Hulu.

“It’s such a busy environment in terms of marketing and advertising,” Oak says. “You have to be present in many, many channels. There’s a lot of digital and social [media] that we do. There’s a lot of data that exists now that allows us to target the right customer with the right product at the right time.”

And like MidFlorida, one of the best strategies to grow a customer base, Achieva has learned, is through referrals and word-of-mouth. That comes mostly on the service end. “You might not get our level of customer service in a bank, says Oak, “and people are looking for that these days.”

In that regard, Achieva bucks the banking trend of café-like branches lightly staffed but filled with video devices that connect customers to bank tellers in remote locations. “Our public definitely like to see a living, breathing person in the branch,” Oak says. “They want that friendly face, a cup of coffee and one-on-one time.”

Hollar adds, “We're not ready to give up on branching. We think it's still a strong strategy. The question is where, how big and when?”

Achieva also strives to win awareness via GOODperks, its mobile app that provides discounts at local businesses. The app uses geolocation to send notifications when a user is near a company offering a special or discount — and users don’t even have to be Achieva members. In addition, Achieva offers ancillary, in-demand services such as smartphone insurance and identity theft protection.

Because credit unions, as a whole, have such a small percentage of Florida’s total deposits — about 7%, Hollar estimates — and many are unaware of the differences between banks and credit union, Achieva believes there is a vast, untapped market of potential members. “It’s an unlimited opportunity,” Hollar says.