Third Federal swallows another former CU; open to taking on more CU partners

CLEVELAND – Third Federal Savings and Loan Association of Cleveland, MHC, has taken under its wing Community Plus Savings Bank – which until January 2002 was Community Schools CU. And it’s on the prowl for more affiliates, including credit unions. Said Third Federal president Marc A. Stefanski: “We have talked to some credit unions -that are purely credit unions now and they are considering a step to a mutual – and letting them know of the possibilities.” Stefanski said he believes “quite a few” credit unions are considering a switch to a mutual bank charter. “We’re letting them know of the possibilities, depending on what they are interested in.” Community Plus, based in Rochester Hills, Mich., is the second financial institution that Third Federal, a mutual holding company with $8 billion in assets, has brought into its fold. The first was Ohio Central Savings of Dublin, Ohio, another one-time credit union. Ohio Central had been Ohio Central FCU. Community Plus has assets of $40 million, and Ohio Central had $45 million in assets at the time of its affiliation last year. “This partnership is a great opportunity for us to reap the value of resources, knowledge and information that are not available to us as a small mutual,” said Brian Ashley, president and CEO of Community Plus. “We look forward to our new association with Third Federal.” Third Federal describes the two savings banks as part of what it calls a “Mutual Partnership Program.” Stefanski said partners operate independently of the holding company, which was born out of Third Federal Savings and Loan Association, an aggressive mortgage lender based in Cleveland. “They are underneath the umbrella of our holding company,” he said. “Essentially they are independently run corporations under the umbrella of our holding company.” Asked if money changed hands at the time of affiliation, he said, “No, not really.” Ashley said the trip from being a credit union to this affiliation would allow his financial institution to do a better job and stay independent. Community Plus began as Rochester Schools Credit Union, became Community Schools Credit Union in 1992 and converted to a mutual savings bank in January 2002. It has two branches in Oakland County, Mich. Third Federal was founded in 1938 by Stefanski’s parents and has become the dominant residential mortgage lender in northern Ohio, emphasizing no-frills offices and low mortgage rates. For the last three years it has been on Fortune magazine’s list of 100 best companies to work for. It has 29 branches, eight lending offices in Cleveland and 14 branches in Florida. A few years ago, it spent millions of dollars building a new headquarters and operations center in the same inner city neighborhood it was born in. Community Plus left the credit union fold because, said Ashley, “a common bond didn’t work for us and a community charter didn’t work for us. We didn’t want any limitations on field of membership. Now we can do business with anybody in the state of Michigan.” It was Third Federal’s heritage and its success at integrating Ohio Central Savings that attracted Ashley to the deal. He contacted Stefanski in 2001, even before the transition to a mutual was complete. “Their philosophy just intertwined with ours; the way they felt about employees, the way they felt about people, the way they felt about community,” Ashley, who worked in credit unions for 18 years, said. “It was unbelievable.” The relationship also offers Community Plus an alternative to a public offering that would expose it to takeover threats down the road. “At the size we were at, five years down from now, would we be merged in with another place that we didn’t want to be?” he asked himself and his board. Ashley believes the affiliation with Third Federal brings tremendous advantages. It gives him expertise in a lot of back-office operations – such as human resources – that he didn’t have on his own, and Third Federal’s size brings access to capital and efficiencies of scale. “When you’re that big, you have more efficiency with technology,” Ashley said. Added Stefanski: “We have a lot of resources we can throw at them that they can pick and choose from like a smorgasbord to help them build their businesses.” Stefanski noted that Community Plus had tripled its business in the last year, notably through mortgage lending and added, “we’re experts in it. We have the best of systems and the best of processes and usually the best rates, too. Now, they can double or triple their volume without running into capital constraints.” He added that Third Federal also can help retain management talent by offering executives a deferred compensation plan that is “similar to what they would receive in a public offering.” The advantages of the partnership for Third Federal are harder to pin down. The ability to buy and service mortgages from affiliates does help Third Federal grow and allows it to concentrate on that specialty. “We’re mortgage experts,” Stefanski said. “We just want to offer the mortgage loan and the home equity product.” It has been so specialized that, until it affiliated with Ohio Central Savings, it didn’t offer auto loans. Now, it’s learning from its Ohio affiliate how to build an auto loan portfolio. “We want to specialize,” Stefanski said. “We happened to find a company that specialized in something else, which ends up being a nice fit.” Stefanski also believes that these affiliations give it access to management expertise that could help it down the road. “There might be opportunities (for affiliate employees) with the mother ship,” he said. Beyond those tangible benefits, these partnerships allow Third Federal to spread its wings while avoiding going public. Stefanski believes strongly in the mutual form of operation and the value of community lenders. “A lot of these companies that mean a lot to their communities, they go public, they get bought out and, Guess what?” he asked. “You just have Big Bank USA. That ruins things, not only for the community but consumers in the area end up paying more for services.” Under the partnership program, the affiliates operate autonomously. Stefanski said he has no desire to slap the Third Federal name on everything and he said that while the affiliates might purchase some services from Third Federal, he doesn’t see charging for many things, from advice to customer lists. He said he even offered to put together what he describes as “pre-nuptial” agreements with its partners that would allow for a simplified “divorce” for the first three to five years. He hasn’t needed it so far. But, he said, “If an individual manager said, `We want to go public,’ we’d say OK.” Robert Hughes, president and CEO of Ohio Central Savings, is enthusiastic about the partnership, saying that until the affiliation, Ohio Central struggled to make mortgage loans. “We have tripled our loan volume as a result of working with Third Federal , and we see ourselves continuing to grow.” He said the bank is now also making $1 million a week in auto loans “and selling those to our parent.” [email protected]