New territory

First Community Federal Credit Union, Parchment, Mich., began its strategy of gradually expanding its territory to encompass a broader region in 2006, when it merged with $15 million asset United Savers Federal Credit Union in Battle Creek, Mich., about 30 miles outside the Kalamazoo area where most branches are located.

First Community built on this strategy in 2010 through a voluntary merger with $60 million asset Education First Credit Union, Southgate, Mich., about 140 miles away, and a purchase-and-assumption merger with $120 million asset First American Credit Union, Beloit, Wis., about 250 miles away. The mergers created combined assets of $623 million.

“You know the saying, ‘It’s not good to have all your eggs in one basket,’” says President/CEO Cheryl A. DeBoer. “To some extent, this could be stated as a benefit of growing into new regions. As one region might be experiencing growth in certain areas, another region might be experiencing downturns. That can provide a balance in terms of growth opportunity.”

Technology such as web conferencing, which is combined with periodic face-to-face meetings, supports the transition to a single organization. That allows opportunity to outweigh distance as a merger consideration, even in a purchase-and-assumption merger.

“First American had undergone some stresses related to the economic condition within their membership,” DeBoer said. “We felt the partnership was a good one as our membership base was very similar, along with the culture within our credit unions.”

DeBoer acknowledges that many smaller credit unions want to continue to run independently. “We are seeing, though, with shrinking margins and increased product line demand along with economic and regulatory issues, that it’s becoming increasingly difficult for some small credit unions to thrive,” DeBoer says.

Economies of scale

Credit unions often cite the opportunity to pursue economies of scale as a motivation for mergers, but those savings can prove difficult to realize. Alliant Credit Union, Chicago,
with $7.5 billion in assets, achieves those economies by eliminating redundant expenses, according to President/CEO David W. Mooney.

That philosophy was reflected in mergers in 2008 with $96 million asset Kaiperm Federal Credit Union, Oakland, Calif., which served health-care employees, and in 2010 with
$170 million asset Continental Federal Credit Union, Tempe, Ariz., which served employees of Continental Airlines and U.S. Airways.

Alliant was founded to serve United Airlines employees and now counts more than 150 select employee groups (SEGs) in its membership base.

“In the case of Continental, the credit union’s airline heritage made it attractive,” Mooney says. “The other aspect was that we saw an opportunity to create financial value for our members through merger and integration and elimination of redundant expense.”

 Alliant announced the Continental merger in September 2010 and completed integrating operations in January 2011, retaining five branches and the related staff and some call center positions.

That enabled Alliant to eliminate approximately 80% of Continental’s operating expenses, or about $8 million annually. Mooney says conservative estimates put the merger payback at about 16 months to recover “integration expenses, write-downs to exit leases and contracts, and market value adjustments.”

Disciplined decisions

Mooney says it’s painful to eliminate jobs in a tough economic environment, but it’s essential to capture economies of scale.

“I’m a believer that credit unions need to be a little bit more disciplined about eliminating the redundant expense in mergers,” Mooney says. “Otherwise, the question I would have is, ‘Why bother?’ What’s the advantage of being bigger if you’re not going to capture the economies of scale? It’s imperative if you’re going to serve your members’ interests.”

Continental members gained high deposit rates and below-market loan rates along with strong online and mobile banking services. But Continental members also had to accept the Alliant branch model, which eliminates cash withdrawals and deposits in teller lines, relying on ATMs to supply cash.

“That certainly was unpopular with some of Continental’s members whose primary needs or preferences were cash from a teller,” Mooney says. “But fundamentally that was nonnegotiable because our model is cashless and that’s a big part of why our rates are as good as they are.”

This “thin branch” approach helps Alliant avoid what Mooney describes as an “arms race” to build the most branches. Instead, Alliant targets SEGs that allow the credit union to take advantage of both the affinity with the company and the sponsoring company’s endorsement.