By Ray Birch
LAKELAND, Fla.—The credit union that just agreed to close the biggest CU purchase of a bank to date made the decision in part because it believes not many medium-to-large CUs are seeking to merge today.
As CUToday.info reported, the $3.4-billion MIDFLORIDA CU here announced its intent to merge in $730-million Community Bank & Trust of Florida, based in Ocala, Fla. If the deal is completed, it will be the largest acquisition of a bank by a credit union to date. Previously, the largest bank purchased by a CU was just under $400 million in assets—the $5.2-billion Lake Michigan CU’s purchase of Encore Bank in late 2017.
MIDFLORIDA also announced it intends to purchase the Florida assets of First American Bank of Iowa—three offices, two in Naples and one in Cape Coral. The $956-million First American Bank is based out of Fort Dodge, Iowa.
“We are not saying that bank buys are better opportunities, they’re just opportunities. We would prefer to complete CU mergers, but the opportunities for larger credit union mergers are rare, especially in a good economy,” said Kevin Jones, CEO of MIDFLORIDA, noting the credit union has a history of merging in CUs, completing 15 credit union mergers over the last 25 years.
Influencing the Decision
“We've done large and small credit union mergers, but in reality a lot of credit union mergers of a larger size don’t happen unless something has occurred at the credit union, like the CEO is retiring, or there's trouble, or maybe the credit union is having difficulty finding board members,” said Jones. “Unless something monumental has happened, medium to large credit unions don’t want to merge, even if it’s in the best interests of their membership. So, that influences your decision and bank buys can become a greater consideration.”
With capital near 11% but a capital target of 9%-10%, MIDFLORIDA has always been building reserves to fund mergers and acquisitions, said Jones. “We’ll drive it up to near 11%, and then when we make a deal it goes back down and we begin building back up.”
Jones said he expects when both bank deals are closed by the end of the year, MIDFLORIDA’s net worth will decline to 9%. He declined to share the costs for both buys.
“Still, a very healthy level for a credit union our size,” noted Jones. “But we will get it back up to 11% soon enough.”
Contributing to the rebuild of capital, the CEO explained, is the fact both banks are profitable. Community Bank & Trust of Florida reported $7.8 million in net income in 2018 and $5.2 million in the previous year, according to FDIC data. For its entire operations, First American made $9.2 million in 2018 and $10.6 million in 2017.
Jones said the credit union has made projections for when MIDFLORIDA will see a return on investment and profitability on the acquired assets, but declined to share exactly when that might occur.
“What I will say is that time is not far away,” the CEO said.
Size Not Motivation
Jones said the asset size of CB&T had little bearing on MIDFLORIDA’s decision to move forward with the deal.
“This being the biggest bank buy by a credit union is incidental,” said Jones. “We didn't go into this with the idea that we would be doing the biggest deal to date. We struck the agreement with CB&T, and First American, because they both were perfect fits for our credit union. Community Bank is one of those unicorn banks—a small to medium-sized community bank that offers a lot of retail services, it has a lot of commercial customers, and is heavily involved in the community. What we were looking for in a merger partner is someone who is really focused on the retail side and the commercial side and is heavily involved in the community. Both banks fit that bill.”
Jones noted the First American Bank acquisition represents almost $242 million in loans and a “healthy” loan pipeline. The deposit base is $120 million.
“On the flip side, Community Bank has a lower loan-to-share ratio, about 50%, but they are in very fast-growing markets,” said Jones. “We feel there's a tremendous amount of opportunity for us to grow assets in those areas, and the bank has a very low-cost deposit structure. Their cost of funds is about 40 basis points. And since we have very strong lending programs, we think we can quickly accelerate that loan-to-deposit ratio.”
New Business Lines
What both banks also do for MIDFLORIDA is help it immediately enter new business lines and bring on board staff with skills the credit union has been lacking. Several analysts have told CUToday.info that such bank purchases are attractive to credit unions looking to quickly move forward in a new area of business, such as commercial lending.
“The advantage of these bank mergers is obtaining products and services that credit unions don’t normally offer,” Jones said. “We will be obtaining significant first mortgage and commercial loan portfolios, a large trust division and several experts in cash and Treasury management. These banks will supercharge our efforts in expanding into medium and small business banking and wealth services throughout our service area. So, we have now quickly entered new markets, picked up quality skilled staff, and picked up new business lines.”
Community Bank is also involved in agricultural lending, as well, while First American Bank has specialized in commercial lending and carries a good portfolio of jumbo mortgage business, noted Jones.
Michael Bell, attorney and counselor with Royal-Oak, Mich., based Howard & Howard, who is representing MIDFLORIDA in the Community Bank &Trust deal, addressed how bank buys can quickly bring new business to CUs.
“It’s true, these acquisitions offer an efficient method for gaining talent and capabilities, taking credit unions into new markets instantly and giving them the skilled staff to carry them forward in these new business areas,” said Bell, who pioneered these transactions and has been involved in a great majority of CU/bank deals. “I have seen it many times over the years when credit unions buy a bank, they jump start a new revenue stream with the skill to keep it going. I would say, if CUs are considering building their way into a new market and new business line, buy always wins.”
Economies of Scale
Despite CB&T representing almost one-fifth of MIDFLORIDA’s assets prior to the deal, Jones said the size of the addition to the credit union’s assets is not exclusively aimed at boosting economies of scale.
“When it comes to economies of scale, assets is not what we look most closely at,” said Jones, who acknowledged size does bring greater efficiencies. “We look more closely at the number of branches we have, the number services we offer, the number of members we serve, and our geographic area.”
What the buys of both banks will do most for the future of MIDFLORIDA, insisted Jones, is ensure relevancy with existing and future members.
“We want members and future members to feel we are full service and we can meet their needs wherever they are in Central Florida,” said Jones. “So if our members are traveling or moving around the state, we want a MIDFLORIDA branch nearby, within 15 to 20 minutes of wherever they are in central Florida. We want to be the most convenient credit union in this part of the state.”
Core Conversions Lie Ahead
The data systems conversions from the new acquisitions loom, but Jones expects both to go smoothly.
“We always do a best practice evaluation of the financial institution we are thinking about acquiring and we looked closely at Community Banks’ core system and online banking platform, and we don’t foresee any issues here,” said Jones. “Plus, we really like CB&T’s online banking platform and are considering adopting their online banking platform as an alternate platform for the entire credit union. Their online banking platform is more geared toward business banking and ours is geared more towards consumer banking. Community Bank’s data system contract expires on the same day we expect to do the data conversion, so that should make that process much easier.”
Jones said MIDFLORIDA is not concerned with its ability to turn a significant number of bank customers—1,600 from First American Bank in addition to the 25,000 from CB&T—into CU members, noting it has strong retail and commercial lines to support the converts.
“We feel we can retain those customers because we do both of those business lines very well,” said Jones. “However, we are concerned about retaining wealth and Treasury management customers. “We are retaining the services of the president of CB&T, and he will be heading up our efforts to retain and build this customer base.”
CB&T President Hugh Dailey will assume the title of market president and EVP, and First American’s Acie Forrer will join MIDFLORIDA as market president, Southwest Florida.