To Merge or Not Merge? Ponder the Financials
The $1.6 billion Space Coast Credit Union is considered to be a well-capitalized credit union at 11.23% and has fared better than some of its Florida peers that are trying to recover from the Sunshine State's real estate bust.
Should a merger with $1.6 billion Eastern Financial become a reality, the combined entity would produce a net worth of 6.43%, putting the consolidated financial institution within NCUA's prompt corrective action radar. That includes corporate stabilization assessment funds, said David Bartoo, president of Merger Solutions Group, a Forest Grove, Ore.-based merger planning firm, who culled the numbers for both credit unions. Without those funds the return on assets would be negative 0.92%.
"The bigger issue is the total net worth post-merger," Bartoo said. "For members of Space Coast, would this merger bring unnecessary stability to the overall organization?"
Space Coast spokeswoman Meredith Gibson said the expanded credit union "will remain adequately capitalized and will not be under capitalized." After writing off all expected losses from EFFCU's loan and investment portfolios, the combined entity will still have approximately $200 million in net worth.
Another area of note is mortgage-backed securities-one of the culprits that led to the current crisis within the financial services arena. Space Coast had none, according to NCUA data as of March. Eastern Financial had approximately $140 million. Bartoo questioned whether a merger would put additional risk on the NCUSIF. He pointed out that there are 23 credit unions with more than $1 billion in assets and net worth-to-mortgage-backed securities that have an outstanding ratio greater than 100%. Eastern Financial's ratio, for instance, is 449%.
"To give you some scale on the mortgage-backed securities, they total more than $24 billion today versus the insurance fund that should have at least $3.7 billion in it," Bartoo said.
The NCUA has reiterated that the regulator has not approved a merger between Eastern Financial and Space Coast. However, the agency appears to be prepping for some form of intervention. According to the March 31, 2009 NCUSIF Preliminary Financial Highlights report, there was mention of "$10 billion represents liquidity loans to two problem credit unions" under the "Advances to Credit Unions: Share and Deposits and Loans" header. That's a staggering increase from $3.5 million as of February 2009.
"NCUA never reveals the recipients of liquidity loans," said John McKechnie, NCUA director of public and congressional affairs, adding it is a "supervisory [matter] and [is] thus confidential."
One CEO of a billion-dollar credit union that was approached by NCUA about merging with Eastern Financial questioned the timing and the large amount of the $10 billion liquidity loans.
"There's $10 billion that appears all of a sudden. It looks like the commitment is for two large credit unions," the CEO said. "It could be the corporates. Clearly, NCUA is getting ready to do something."
There has been talk in the industry that the $10 billion could be for several large billion-dollar credit unions that experienced losses in 2008 or an infusion for WesCorp and U.S. Central.
Nearly 6,000 credit unions will spill red ink this year and those that do survive will serve niche markets, said George Frerichs, chairman/CEO of The Frerichs Group, a Chicago-based firm that offers merger and acquisition consulting to credit unions and banks. As for a merger between Space Coast and Eastern Financial, NCUA and the industry should welcome the billion-dollar consolidation, he encouraged.
"The merger would be dynamite. Space Coast will be able to eliminate a lot of duality from an administration standpoint, thus saving a substantial amount of monies going forward," Frerichs said.
Space Coast has the potential to have a strong financial foothold up and down the Eastern seaboard, Frerichs said. Even though Florida is being hammered by foreclosures, he believes in two years, many will be kicking themselves that they reinvest in the area.