TDECU ($1.9B; Lake Jackson, TX) has been on quite a buying spree. It launched a real estate services subsidiary with the acquisition of Birdsong Realty in May of 2011. On the heels of that purchase, TDECU gained a toehold on a lucrative urban market by merging with Houston-based Bluebonnet Credit Union. And in the first few months of 2012, it acquired another credit union and three independent insurance agencies before adding Texas Title Company to its already considerable holdings in June.
TDECU’s strategy for growth is as forward-thinking as it is bold because it simultaneously expands the credit union’s product line and geographical territory. By targeting companies with different expertise, the credit union is becoming a one-stop center of financial products and services while capturing business in new locales. Although an insurance subsidiary and a separate division for wealth management round out the credit union’s offerings, its real estate and title services are the jewels in TDECU’s crown.
“It was total integration of expertise for our members on what is one of their most important and largest financial decisions — buying a home,” says Bob Lockett, senior vice president of business and diversified services for TDECU.
Since the acquisition of Birdsong, now TDECU Real Estate, less than two years ago, the agency’s revenues have increased 68%. TDECU Real Estate sold more than $57 million of real estate in the first 11 months of 2012 alone, generating $345,209 that went directly into credit union members’ pockets in the form of dividends, low fees, and a generous rewards program. Although it’s too soon to evaluate the financial effect of the title company, it does contribute to the credit union’s goal of keeping real estate services—realty, mortgage, and title search—in-house.
Before approaching a business it wants to buy, TDECU does its homework. In addition to working with an outside consultant, the credit union has its own in-house team of experts who spend months researching every facet of the targeted business.
“We have a 30-page document of things we look at,” Lockett says.
First the research team finds agencies with a high volume of business and a reputation for top-notch service. Then TDECU considers whether the business will be a good fit.
“We look at which market the business is in, its dominance there, and the expertise it can bring,” Lockett says.
To that research, Texas Dow adds the consultant’s findings. Hired consultants who specialize in mergers and acquisitions are particularly useful for valuing a business, but they also assess the company’s clientele, operating capabilities, efficiencies, and territory to see if all will be a good match for the buyer, says Tom Linn, executive vice president for MarshBerry, which has brokered deals between credit unions and insurance agencies. For credit unions, an accurate assessment of territory is particularly important because it can indicate potential overlap with the membership and the ease with which the credit union can meet regulatory requirements for credit union service organizations, as these subsidiaries are known. For example, federal regulations stipulate that 51% of the CUSO’s clientele must also be credit union members.
Both Birdsong Realty and Texas Title were based in the same community as TDECU, and each offered key attributes that caught the credit union’s attention. The largest local real estate agency in Lake Jackson, Birdsong had captured 25% of the market for transactions of single-family homes and had several top-performing agents. The agency’s business extended to the opposite end of the county, where some of Houston’s fastest growing suburbs are located and where TDECU wanted to expand. Like concentric circles that expand steadily outward, the acquisition offered TDECU a way to gradually extend its territory without overreaching and running afoul of the 51% membership requirement.
Lake Jackson-based Texas Title Company also dominated the local market and satisfied another regulatory hurdle, this time at the state level. Texas requires title companies to have access to a title plant — a separate library of records for liens and property ownership that some title companies maintain and organize by location. In Texas, a title company without its own title plant must pay to lease one. TDECU has a 73% stake in Century Oak, a title company and CUSO that it helped create with title insurer Allied Solutions in 2009. Acquiring Texas Title, which had its own plant, saved the credit union the expense of leasing one.
Bringing Acquisitions Into The Fold
Once on board, the real estate agency helped drive referrals to the credit union and Century Oak, enabling TDECU to capture business that it might not have had otherwise. As the first contact for home buyers and sellers, TDECU Real Estate sent nearly $20 million in mortgage loans to the credit union from January through November of 2012 and referred nearly $30 million in title services to Century Oak, of which Texas Title had become a part. Because referral fees to realtors account for roughly half of title costs, the in-house referrals meant the cooperative and its subsidiaries could retain the entire amount and generate higher profits.
By law, CUSOs and their credit union parent can’t make doing business with one another a condition for their customers, but they can offer incentives that make it financially attractive and convenient to do so. Mortgages go hand in glove with title and realty services, giving credit unions with these subsidiaries an advantage for retaining clients throughout the entire process. When the credit union and its CUSOs handle the entire deal, “they coordinate everything for the client, simplifying the process and saving the customer money,” says Jack Antonini, president and CEO of the National Association of Credit Union Service Organizations.
To entice clients to keep the entire real estate transaction with the credit union, TDECU offers a rewards program that sweetens the deal. The more TDECU services a TDECU Real Estate client uses, the better the rewards. For buying or selling a home, TDECU gives all its clients, whether they are credit union members or not, a 20% rebate on the agent’s commission. If those same clients go on to use Texas Dow’s title services, they receive a $100 gift card, and if they settle their mortgage through the credit union, TDECU reduces the loan origination fee by 50%. Clients with mortgages that don’t charge an origination fee get a $450 discount on closing costs instead. TDECU Real Estate also offers a $50 gift card to clients who purchase property insurance from Texas Dow’s insurance subsidiary. The rewards program enables TDECU “to present all of the credit union’s products so they offer a hard dollar value to both members and nonmembers,” Lockett says.
Encouraging referral business isn’t the only way TDECU integrates its acquisitions with the credit union.
“We also have a strong, practical working relationship,” Lockett says.
Although each CUSO is a distinct legal entity with its own management team, the businesses promote one another, share information, and coordinate their efforts so a client or member using more than one service has a seamless experience. Having a supportive and involved credit union as a parent company is crucial to a CUSO’s success.
“There are some CUSOs that want a certain amount of attention from the credit union’s marketing department or exposure on the website and they can’t get it because senior management isn’t committed to them,” says Linn from consulting firm Marsh Berry. “The ones with full support from the credit union’s CEO do well and the ones that are the redheaded stepchild tend to struggle.”
How the credit union structures its holdings also plays a role. TDECU, for instance, created a holding company, TDECU Holdings, as its primary CUSO, with four separate CUSOs — for its insurance, wealth management, title, and real estate services — branching off of that. The additional layer the holding company provides helps protect the credit union from liability, but it also allows for a more efficient, nimble management structure. Because credit unions and CUSOs must have separate governing boards and leadership, the holding company offers a way to consolidate the subsidiaries under one roof to eliminate redundancies, improve communication, and simplify investments.
“One of the advantages of the holding company is we can invest cooperatively and easily through one organization,” Lockett says.
With so many new acquisitions in a short period, growing pains are a natural byproduct, but Lockett says the biggest stumbling block has come from an external source. Lake Jackson is a rural community, where broadband services can’t keep up with the data the credit union and its CUSOs send. TDECU is working with service providers to remedy the problem.
A long-term challenge, however, is TDECU’s growth strategy for Houston, where the credit union has a much smaller existing membership base.
“As we move from rural to urban areas, these are different markets we’ll have to adapt to,” Lockett says. With its robust real estate business serving as a launching pad, however, he is confident TEDCU will add Houston to its ever-expanding business.