The popularity of cooperative financial services has taken off in the United States. More than 4 million members joined a credit union for the first time in 2016, pushing membership growth to the fastest rate in 14 years. What’s more, credit unions originated $461 billion in loans last year — that’s more than 30 million loans. The loan portfolio hit a new high of $880 billion as share balances topped $1.1 trillion.
In this new age of consumer awareness, credit unions across the country are looking for smart growth and service expansion opportunities that fit within their overall cooperative strategy. One approach that has gained steam is the purchase of individual bank branches as well as full institutions.
United Federal Credit Union was on the forefront of bank acquisitions. Read more about this strategy in "United FCU Demonstrates The Benefits Of Being A Credit Union" and "Anatomy Of United Federal Credit Union," only on CreditUnions.com
Whether purchasing a single location or the bank in its entirety, credit unions have enough experience now to share best practices with industry peers. Achieva Credit Union in Florida, Royal Credit Union in Wisconsin, and Advia Credit Union in Michigan are three cooperatives that have undertaken bank acquisitions. Here, representatives offer advice on how to complete a successful transaction.
First In Florida
Achieva Credit Union ($1.4B, Dunedin, FL) was the first credit union in the state of Florida to acquire a bank when it purchased Calusa Bank of Punta Gorda in 2015 for $23.2 million.
CU QUICK FACTS
Achieva Credit Union
HQ: Dunedin, FL
Data as of 12.31.16
12-MO SHARE GROWTH: 8.1%
12-MO LOAN GROWTH: 5.7%
“Not only were we the first to acquire a bank, we were also the first to acquire a bank in a merger,” says Dennis B. Holthaus, senior vice president and chief financial officer of Achieva. “All of the prior transactions were simply purchases of assets and assumptions of liabilities, not mergers.”
Because of a provision in Florida state law, the credit union bought the stock from the bank’s shareholders after they voted to approve the merger. As a result, Achieva added $165 million in assets and four branch offices, including its first in Charlotte County.
“We had a gap in our locations, and Calusa’s branch footprint fit well,” Holthaus says. “The new locations provide a more effective network for our membership.”
Despite the fit as well as advantages to both institutions, the purchase was neither fast nor simple.
We had a gap in our locations. The new locations provide a more efficient network for our membership.
For example, when Achieva initially engaged a local investment banker to identify potential merger partners that met the credit union’s set parameters, Calusa Bank was not on the list. But after Achieva’s discussions with another bank ended and a transaction Calusa had planned fell apart, the two organizations came together.
Initial discussions between the financial institutions’ two CEOs began at the end of 2014. After the initial hesitancy of a bank and credit union CEO talking about a merger was overcome, the two organizations began learning about each other’s cultures, and the sale closed approximately one year later.
Dennis B. Holthaus, SVP/CFO, Achieva Credit Union
“Our cultures were similar,” Holthaus says. “I don’t think that is unusual with a small community bank, especially those in the $100 million to $300 million asset range. They are focused on their customer and employee relationships.”
Because of this predisposition to service and relationship-building, Achieva retained all of Calusa’s branch staff after the merger. The credit union’s members now have more locations, and the former bank’s customers, now credit union members, have access to consumer lending products the bank did not offer.
“Calusa was primarily a commercial bank and had an excellent suite of business services that was more extensive than our own,” Holthaus says. “On the flip side, Achieva has transitioned Calusa’s branches from strictly deposit-gathering centers to full-service locations that offer a complete range of consumer loans.”
Now that the acquisition and transition is complete, Holthaus has some insight from the trenches.
“Community banks are a better fit with the credit union industry than many might think,” the CFO says.
That’s because many local banks have strong community ties, solid customer relationships, and a commitment to service similar to credit unions. Selling to a credit union is appealing to a smaller community bank because, among other things, credit union options are an all-cash deal, whereas community banks exchange one illiquid stock for another.
Bank purchases also allow credit unions to reach a different consumer base; however, they need to educate new members about the benefits of credit union membership. That education requirement goes for staff as well as bank customers who opt-in to membership.
“Despite our communication efforts, we had bank customers saying they didn’t want to join a labor union,” Holthaus says. “They didn’t understand what a credit union was.”
After working with the former bank’s staff, however, the credit union’s new employees could explain the cooperative business model and prevent misunderstandings.
“Overall, I certainly wouldn’t discourage anyone from doing this,” Holthaus says.
Location, Location, Location
Royal Credit Union ($2.0, Eau Claire, WI) has participated in purchases that involved an entire institution, Capital First, as well as a single location, Deerwood Bank. According to Rudy Pereira, who was the CEO at Royal during both, the transactions were all about location.
“It wasn’t intentional whether it was a full bank or a bank branch,” Pereira says. “It was the opportunity to acquire a location.”
CU QUICK FACTS
Royal Credit Union
HQ: Eau Claire, WI
Data as of 12.31.16
12-MO SHARE GROWTH: 19.1%
12-MO LOAN GROWTH: 14.2%
At Capital First, the president was retiring, had no succession plan, and wanted to sell the entire bank. Deerwood Bank, on the other hand, sold a single branch to reduce its expenses. These acquisitions, Pereira says, are just one part of Royal’s precise strategy for growth.
In addition to a strong vision for growth, Royal also has a firm handle on its purpose. And as a values-driven organization, it wants to ensure all employees, including former bank staff, fit its culture. That means not every bank staffer makes the transition. But that’s okay because, according to Pereira, the growth the credit union has achieved by staying true to its culture — and demonstrating the cooperative principles in practice — outweighs short-term hits it takes by not automatically retaining all staff members.
This can be a cost-effective alternative to creating a de novo branch. But the value proposition has to resonate with the market.
“I got emails and letters from a few customers concerned about the change or a favorite teller no longer being there,” says Pereira, who is now the CEO at Premier America Credit Union in Chatsworth, CA. “I always returned the call and had a conversation with that person."
Rudy Pereira, CEO, Premier America Credit Union (Former CEO of Royal Credit Union)
During these calls — and, occasionally, in-person meetings — Pereira explained the differences between a credit union and a bank, including the lower fees, better rate structure, and Royal’s active community involvement. That’s how Royal turns skeptics into advocates and converts former bank customers into active credit union members. At last count, Royal has retained more than 90% of the former banks’ accounts, which is better even than the credit union anticipated.
Read more about Royal’s bank acquisition strategy in "The Job Is Never Done".
Although it’s less customary for credit unions to acquire banks or bank branches, it has been a smart strategy for Royal, which has seen benefits to acquiring an existing location and not starting from scratch building membership there.
“This can be a cost-effective alternative to creating a de novo branch,” Pereira says. “Royal knows where it wants to be, so it searches for opportunities that fit its footprint. But the value proposition has to resonate with the market.”
Downtown Minneapolis is the big banks’ domain, so Royal looks for opportunities in the periphery, suburban communities where the credit union can have a significant impact and connect with members.
But even when values resonate, some purchases are not a beneficial move. Royal has used outside expertise to ensure it’s finding opportunities that make sense for the cooperative. For example, it enlists brokers and works with an attorney who has experience in bank acquisitions by credit unions. And although the credit union conducts most of its due diligence in-house, it has also outsourced loan portfolio reviews and investment portfolio valuations to external partners.
Royal Credit Union uses attorney Mike Bell to help it navigate its bank purchases. Find your next solution in the Callahan & Associates online Buyer's Guide.
“Just like with a potential merger, credit unions must take a close look at contracts, determine what obligations the acquired institution has, and take those expenses into account,” Pereira says. “They have to be weary of what they’re getting. Royal recently looked at two banks and turned them down.”
A Multi-Pronged Approach
Advia Credit Union ($1.4B, Parchment, MI) considers buying, merging, or purchasing financial institutions for a number of reasons, including the expansion of its footprint, talent, liquidity, and deposits.
“We bought Mid America Bank primarily because of location,” says Cheryl DeBoer, president and CEO of the Wolverine State credit union. “We wanted to expand our geographic footprint in Wisconsin. We’re buying another bank in Wisconsin, and we’re gaining additional talent in the commercial lending area.”
CU QUICK FACTS
Advia Credit Union
HQ: Parchment, FL
Data as of 12.31.16
12-MO SHARE GROWTH: 13.5%
12-MO LOAN GROWTH: 34.1%
According to DeBoer, the process of buying a bank takes six to eight months and comes with complications expected from dealing with multiple regulators, which must all approve the deal.
“One of our recent transactions involved four different regulators — the NCUA, the FDIC, and the Michigan and Wisconsin state regulators,” DeBoer says. “We learn something new every time.”
Advia tries to keep its bank employees, but DeBoer admits merging two cultures can be challenging.
“This is technically done to people, they had no choice,” the CEO says. “Sometimes they like to make a choice themselves about their career and choose to leave.”
We wanted to expand our geographic footprint and gain talent in the commercial lending area.
The terminology differences between credit unions and banks can also make acclimation tough. So Advia’s training department tries to ease the transition with online resources and training similar to what any new hire would receive.
Cheryl DeBoer, President/CEO, Advia Credit Union
“It’s like a different language, and lenders need to understand different regulations,” DeBoer says. “If you’re not a lifelong learner, that can be overwhelming. We try to spread it out over time and be patient during the learning curve.”
Advia bought Mid America Bank in early 2016 and has retained most of its accounts; however, DeBoer anticipates some run-off.
“Once we bring the new members over, we generally see a dip,” she says. “Then we see things start to go back up with new deposits and loans coming in.”
For credit unions looking for growth opportunities, DeBoer suggests looking within the industry first.
“If a credit union wants to look at a merger or acquisition, the credit union-to-credit union process is easier,” the CEO says. “It also helps to iron out details only learned through a merger. We had a lot of operational and functional processes down before we entered into a bank transaction.”
DeBoer points to different accounting treatments that dilute capital as well as questions about transferring from FDIC to NCUA insurance as additional considerations that fall outside of the normal merger or conversion details, such as factoring in termination costs for contracts, conversions, and other obligations.
It’s no surprise the CEO advises credit unions to enlist outside help in this type of transaction.
“We use several third parties to bring us deals and conduct a fair market analysis of the banks we are considering,” DeBoer says. “Our internal audit department handles due diligence as well, but some of the bank transactions are more complex and require different resources. For example, the expertise to evaluate a commercial lending portfolio may be needed.”
As parting advice, DeBoer offers this: “Be willing to walk away. It’s like buying a home, it’s only worth what someone’s willing to pay for it.”