NASHVILLE - VolCorp and WesCorp not only have to prove thatthere are no safety and soundness issues related to their merger,but also that the merger will benefit the credit union members ofVolCorp. Regulators typically don't get involved in the benefits ofa merger, but the Tennessee Department of Financial Institutionssays the circumstances surrounding this merger demand that it doso. The department recently informed VolCorp that it would notapprove the merger of the $26 billion WesCorp and $1 billionVolCorp as it is currently structured. In a letter to VolCorp, thedepartment's acting commissioner, Greg Gonzales, states thatVolCorp was created by legislation from the Tennessee GeneralAssembly - legislation that provided no authority for VolCorp tomerge. Gonzales goes on to say that he could accept the argumentthat VolCorp be permitted the same powers as a natural person CUunder the state act (which includes mergers), but the state'sgeneral assembly must still be considered, and it has not expressedany desire for VolCorp to merge. Thus, he writes, the merger wouldhave to have "compelling" benefits to VolCorp members in order forit to be approved. Gonzales said he is aware of the rate benefitsWesCorp will bring, but noted that VolCorp's members could getthose same rate advantages now by simply joining WesCorp on theirown. WesCorp CEO Bob Siravo said there's a counterargument to thatposition. "That sounds good on paper, but is not practical. Theinfrastructure we will bring is going to be the most beneficial,especially to smaller credit unions. A lot of things happen on thepayments side of the house that is built in our infrastructure. Weinvest in all the newest technology. It's not just about rates oninvestments," said Siravo. Gonzales also cited capital issues,stating that he is "particularly concerned with the relativelysmall amount of capital in the form of reserves and undividedearnings to be returned to member credit unions." VolCorp hasplanned to give approximately $4 million in capital back tomembers, though that number will fluctuate based on its balancesheet. VolCorp CEO Bruce Fahnestock said he is very disappointedwith the department's ruling, and noted that in all prior corporateCU mergers, only one (WesCorp/PacCorp) saw the merged CU returncapital. "We're giving back about 20% of our RUDE. While it's notunprecedented, it's extremely rare, and we think it's very good formembers," said Fahnestock. VolCorp could not pay out all of itscapital, because it must ensure WesCorp's capital level does not godown because of the merger. VolCorp has options. It could convertto a federal charter to bypass some of these holdups or it couldact legislatively and have a merger clause added to VolCorp'scharter. Either way, Fahnestock said he is confident the deal willget done. "We're moving forward. We've been in contact with NCUAand the state. The regulator said we needed some compelling memberbenefits, which we feel that we have and our members feel that wehave," said Fahnestock. He noted that WesCorp has been verysupportive, but at this point it is a VolCorp issue given it is thestate regulator in Tennessee that is in control. Gonzales toldCredit Union Times this is a "precedent setting transaction" forthe department so all aspects must be scrutinized. "If the partiescome back with another request, we will certainly give itconsideration," he said. Asked whether the department was bowing toany pressure being put on it from Tennessee CUs seeking a largercapital payout, Gonzales said the department doesn't consider anypolitics in its decisions. [email protected]