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OLYMPIA, Wash. – Three months after they announced a merger plan that would have created one of the largest credit unions in the Pacific Northwest, officials at Harborstone and Twin County credit unions have called off the deal. “We actually were proceeding fairly well,” said Tim Johnson, senior vice president of Twin County in Olympia. “We were all systems go,” added John Renforth, senior vice president at Lakewood-based Harborstone. “Things were moving swimmingly.” All that apparently changed when regulators at the Washington Department of Financial Institutions (DFI) said the new credit union would be held to a 12.25% cap on member business lending – not the 20% that Harborstone was granted through a waiver. Renforth said DFI had earlier indicated that the higher cap could be carried over to the merged institution. “That concerned us greatly,” Renforth said of the lower DFI’s cap. “Harborstone over the last year-and-a-half made a major organizational change to allow itself not only to just offer business loans, but a full suite of business banking services for local small businesses. We saw that potentially jeopardized, not right away, but a couple of years down the road without the waiver. “Our board did not want to take that huge investment only to have it in a couple of years, perhaps, turn out to no longer be a core competency of the new credit union,” he explained. “We believe that credit unions in the right markets need to be serving small business. We need it for our portfolio structure. We need it for the yield that it can bring. And we need it because a lot of our members are business owners. A big chunk of Harborstone’s membership is small business owners and they’ve been asking for this for a long time.” Harborstone officials also balked at DFI regulations concerning the make-up of a merged board, warning that it could eventually result in a board lacking any representation by Harborstone. “Here we are trying to create a “merger of equals” but the regulations on the board level sound as if they’re made for a typical acquisition when a large credit union takes over a smaller,” Renforth said. He said Harborstone officials were alarmed that within two or three years “it’s conceivable that the Harborstone membership might not have any representation on the new company board.” The DFI regulations proved to be major stumbling blocks, prompting the Harborstone board to end the merger talks. Officials formally announced the dissolution of the talks Friday, May 13. Had the merger gone through, the new credit union would have had more than 120,000 members, $1.1 billion in assets and branches from Tacoma to Vancouver, Wash., and from Grays Harbor to Bonney Lake. The proposed deal would have combined two “vibrant and growing” credit unions in what had been described as a “merger of equals.” Harborstone, with assets of $580 million, serves some 50,000 members in two counties. Twin County has $540 million in assets and 70,000 members across five counties. “There wasn’t an issue between the credit unions,” said Renforth. “It was more of a reaction to regulatory burdens put on the table (by DFI). The regulatory situation is something we can’t do anything about. It (dissolution of talks) was a reaction to that.” Both Renforth and Johnson said the two credit unions – which already are involved in several joint ventures – would continue to work together and seek to expand offerings to their members without a formal merger. Ventures already under way include CU Dealer Direct, a dealer direct auto loan program serving six credit unions and 90 dealers in Washington; Financial Services Management Group, which provides investment and insurance program management for credit unions, and Member Access Pacific, which provides credit and debit card processing for 20 credit unions nationwide. Both Twin County and Harborstone allow members to use ATMs at each other’s credit union without surcharges. Plans being looked at for the future include a shared branching network. “Our due diligence proceedings allowed us to identify several areas where we can provide better access for credit union members by combining technological and human resources,” Rick Schmidtke, president and chief executive officer of Harborstone, said in a prepared release announcing the end of merger talks. “One goal of the merger was to provide innovative ways for members to use our products at lower costs to them,” added Marshall Ellison, president and CEO at Twin County. “We’ll still be able to accomplish this by growing our collaborative business partnerships.” Both Ellison and Schmidtke were out of town and could not be reached for additional comment at press time. Harborstone and Twin County have community charters and had been looking at expanding into each other’s market. That competition appeared less likely now even though the merger talks fell through. Johnson said he also expected the cooperation between the credit unions to continue. “I don’t think that will falter,” he said. “It will be very valuable and valid for us in the future. If you say something about `turf wars,’ that’s your statement, not ours.” -

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