ALEXANDRIA, Va. -- Nearly six months into its conservatorship, Cal State 9 Credit Union of Concord, Calif., will be absorbed by $4.2 billion Patelco Credit Union of San Francisco.
NCUA, which has run Cal State 9 since the California Department of Financial Institutions asked the agency to step in as conservator last November, selected Patelco as the best bid and best provider of ongoing CU services to Cal State 9's remaining 29,000 members. The deal is expected to become effective on June 30. NCUA reported Cal State 9 assets at $339 million.
But the source of Cal State 9's demise, some $250 million in delinquent home equity lines of credit, will not be inherited by Patelco in this NCUA-engineered purchase and acquisition. That portfolio of loans was sold to an outside buyer, said NCUA Director of Public and Congressional Affairs John McKechnie. Cal State 9--in relation to the P&A--conducted the sale itself. It was not brokered by the NCUA, as has been reported by other news outlets. McKechnie also stressed that NCUA did not pay any guarantee to Patelco. But without the prior sale it was unlikely that the Patelco deal would have been concluded.
The sale of the loans relieves the NCUA of transferring the bad debt to its Asset Management Assistance Center in Austin, Texas. It also forestalls the agency from having to take further additional reserves against future losses to the NCUSIF. AMAC is already awash in loans that were assumed from Colorado's Norlarco and Huron River CUs, following their own loan program debacles in southeast Florida real estate.
Patelco spokeswoman Alison Jones would neither confirm nor deny that the terms of the P&A included Patelco receiving a scrubbed balance sheet. "I'm not allowed to discuss the particulars," she said, "due to a confidentiality agreement."
A fuller picture of Cal State 9's financial conditions may be gleaned when its second-quarter filing is posted by the NCUA. Cal State 9 CU lost $61.6 million for all of 2007, but in just the first quarter of 2008 it lost $53.0 million. The CU had a net worth of negative 20.0%. The return-on-assets for March 2008 was negative 60.01%. And with delinquencies running at 20.0%, there seemed little hope for a turnaround, given the continuing housing downturn in the Golden State. The charge off figure prior to the P&A was not available at press time.
The secrecy of the deal has made it difficult to determine whether the deal signals the end of red ink, possibly inherited by Patelco, due to real estate loans made by Cal State 9. The value of its remaining real estate portfolio is hard to place, given the secrecy of what has been sold, to whom it has been sold and at what price.
Amid the real estate boom, Cal State's aggressive HELOC loan program was highly touted by former CEO Jackie Wong and Chairman of the Board John DeClercq, although the architect of the program was former Chief Financial Officer Richard Headrick. All have since left the CU. In March 2007, Wong boasted that the credit union "funded a record $266 million in home equity loans to over 3,200 homeowners during 2006." Many of these loans were not made to existing members, but were rather created through the third-party vendor, CU Funding Group of Pleasanton, Calif., according to a source close to the deal. Cal State 9 said it did all underwriting of these loans, many of which had a 12% yield.
Patelco purchased all loans except for the indirect HELOC portfolio. It will assume operation of all Cal State's five branches and buildings and assume all share accounts. It also obtained the field of membership and members of record.
"This is exciting news for both credit unions," said Andy Hunter, CEO of Patelco, which has 40 branch offices throughout the state. "There are no plans to close any of the five Cal State 9 branch offices, so those members will experience only benefits through this change. Patelco gives Cal State 9 members greater depth and stability, which translates into lower cost loans and higher savings rates, as well as a broader range and convenience of services."
Hunter spoke of the value of CU service to the faculty of and students at the University of California-Berkeley, Cal State East Bay in Hayward and San Francisco, who will now have access to "a much wider array of services as well as 45 office locations. This also benefits existing Patelco members by the addition of five new locations in our service area," said Hunter.
Follow up calls to Hunter and Judy Hurst, who has served as acting CEO at Cal State 9, were not returned as of press time.