Mammoth Merger Planned for Colossal Florida Credit Unions
The two credit unions are based in the Tampa-area and both saw a significant rise in delinquencies in the second half of 2008, according to NCUA data. The merger was presented to both boards at their February meetings.
Suncoast Schools, at $5.9 billion in assets, saw an 84.4% growth spurt in total delinquencies for adjustable first mortgages between March 2008 and June 2008, rising from $26.9 million to $49.5 million. From December 2007 to December 2008 the credit union saw total delinquencies for adjustable first mortgages rise from $17.4 million to $78.5 million.
For first fixed-rate mortgages and hybrid and balloon mortgages, Suncoast had a rise of 78.8% in total delinquencies between June and September 2008. In December 2007 Suncoast had $86 million in total delinquent loans and by December 2008 they had grown to $165.9 million. The credit union's delinquency ratio rose to 3.46%.
The $1.9 billion GTE's total delinquencies for adjustable first mortgages rose 78.3% between September 2008 and December 2008. Overall, the total delinquencies for adjustable first mortgages at the credit union rose from $542,468 in December 2007 to $2.3 million in December 2008.
Delinquencies for all fixed, hybrid and ballon first mortgages mortgages rose 157.7% from September 2008 to December 2008, jumping from $783,157 to $2.0 million.
Overall, GTE's delinquency ratio was 2.66% as of December 2008.
Both credit unions also saw a rise in the total number of members filing for bankruptcy over last year. Suncoast had 760 members in bankruptcy as of December 2007, compared to 2,625 as of December 2008. The number rose by 134.6% from March 2008 to June 2008 and by 185.7% from June 2008 to September 2008. GTE had 708 bankrupt members as of December 2007, which expanded to 1,261 as of December 2008. That number rose by 123.1% from March 2008 to June 2008 and by 63.4% from June 2008 to September 2008.
Suncoast School's net worth dipped below 7.0%, the NCUA's top-tier benchmark for capitalization, at year-end to 6.85%. Return on average assets was negative 1.29%. GTE's ROA has plummeted to negative 1.38%. However, net worth was up some at 7.91% in the last quarter of 2008.
"The problems both of us are seeing are consumer driven and clearly due to where we live. Property values have declined, and there's been an increase in unemployment over the past several years. We made loans that looked good three years ago but are now underwater because someone got laid off," said Tom Dorety, president/CEO of Suncoast.
Bucky Sebastian, president/CEO of GTE, said that the two credit unions have talked on and off about a merger for some time but talks began in earnest last year.
"We talked prior to the economic downturn, but the condition of the economy crystallized our thinking. Our values are similar and we are compatible in most areas," Dorety said.
Dorety said both credit unions have strategies in place to combat the rise in delinquencies, and he believes they are both seeing results. He said they are both putting in more effort to work with members than ever before and that he believes both credit unions will see improvements this year. "I happen to believe we're first in, first out," he said regarding the economic recovery.
Dennis Dollar, principal partner of Dollar Associates, said that he expects 2009 and 2010 will bring more mergers like this.
"The economy is troubled, delinquencies are increasing, margins are tight, regulatory oversight is increasing and unbudgeted deposit insurance premiums are being assessed to cover losses to the NCUSIF through the corporate credit unions. When you combine these factors with the graying of the credit union movement, whereby over 40% of CEOs will reach retirement age in the next five years, I cannot imagine the merger rate going anywhere but up."
Mergers, Dollar said, have been a growing part of the industry for the past five years with credit unions averaging a merger per business day.
The two credit unions will conduct due diligence to review financial statements, reports of operation, contracts, loan quality and underwriting standards, computer and telecommunications systems, human resource practices and regulatory examinations for approximately six months before turning the merger proposal over to the NCUA for approval.
"When the application is received, NCUA will conduct a thorough review and respond as soon as possible," said John McKechnie, NCUA director of public and congressional affairs.
Dorety said that they're looking at the merger to take place about a year down the road and that it will bring diversity and flexibility to both credit unions.
"We're looking at a different economic structure a year from now, and with our combined resources, we won't just be dealing with problems but will have opportunity for growth. We believe we'll be in a different situation at that point together than we would be individually."
Dollar said that economies of scale and improved operating efficiencies are the primary reasons for a merger, along with regulatory compliance and marketplace competition.
"The cost-benefit analysis has weighed heavily in support of mergers more and more for just those reasons-economies of scale, improved operating efficiencies, stronger regulatory compliance support and better positioning for member service opportunities in a challenging financial marketplace."
Both CEOs said they expect the merger will not result in job losses. They said they were not sure who would be picked as CEO by the new board, but Dorety said they have a long and strong friendship and will be comfortable with whatever happens.
"Credit unions have been there for people through difficult periods, such as the Great Depression and what we are experiencing now. People always turn to credit unions and come back to them in hard times, and they will continue to do that, and we will be there," Sebastian said.
Sebastian has also been promoting a new charter idea he announced back in November, which he said is totally unrelated to the merger. The idea is to create a federal financial service cooperatives charter option that has no limit on field of membership, no lending restrictions and the ability for credit unions to accept outside capital. The credit union's would remain nonprofit and member-owned, would agree to a CEO salary cap of 20 times the average total compensation per employee and would pay taxes on income in excess of overhead expenses, dividends, reserves and any supplement the credit union wants to keep over 12%.
"I call it credit union on steroids. It's the answer to the quandaries of financial institutions. I'm promoting it, but it is unrelated to the merger and hasn't been brought up in the merger talks," Sebastian said.
Dorety has been CEO of Suncoast for 13 years and Sebastian has been CEO of GTE for 19 years.