The nearly $2 billion DFCU Financial Credit Union, headquartered in Dearborn, and the now almost $218 million CapCom Credit Union, headquartered in Lansing, announced their intent to merge last month. Like several other recent Michigan mergers, the move would leave DFCU as the surviving credit union but with a state charter. DFCU has been a federal credit union since its founding.

Some DFCU members have questioned the merger after they discovered from NCUA records that CapCom has dropped roughly $33 million in assets since June of last year. Then CapCom was almost $251 million and has since shrunk to its current size. Neither credit union mentioned the reduction in the merger announcement; CapCom explained that the decline was the result of getting caught up in a development loan participation in Florida that went bad.

CapCom CEO Renee DeMarco did not go into detail about the failed loan participation but made it clear that it was not the same development deal that ensnared and eventually overcame another Michigan CU, Huron River Area.

"This was a loan participation which we could have kept on our books in the hopes it would right itself, but we decided not to let it linger for years but to take the hit and move on," DeMarco explained. "It has had no impact on our decision to pursue this strong opportunity with DFCU."

DFCU members who declined to comment on the merger for the record said they were uncertain about it both because the merger announcement did not mention the drop in assets at CapCom and because some still bear suspicions of DFCU's leadership after a failed attempt to convert to a mutual bank in 2006.

"We have always been a federal credit union. Why all the rush to change charters all of the sudden?" wondered one member who would only use her first name, Rose. "Is this another way into a bank?"

But DFCU CEO Mark Shobe reiterated that DFCU has no plans to convert to a mutual bank and pointed out that moving from a federally chartered credit union to one regulated under Michigan law means moving to a charter where conversion would be more difficult.

Under a federal charter, a converting credit union would only need to win the votes of a majority of members who participate in the charter-change balloting, whereas Michigan law requires the approval of two-thirds of the voting members.

Shobe also pointed out that members should also be reassured by the switch to the state charter because it signals that both DFCU and CapCom are healthy credit unions. NCUA regulations forbid a merger between well-run federal and state-chartered credit unions; so long as they are well run, the only way the merger could go forward would be for one of the institutions to change regulators first. By contrast, NCUA regulation would permit such a merger only if one of the CUs were in economic distress.

Because of that requirement, the merger will in fact be two conversions, one immediately following the other. First, DFCU will exchange its federal charter to a state charter and then immediately merge with CapCom, Shobe said.

Shobe credited the improvements in the state credit union charter for DFCU moving to a state charter rather than CapCom shifting the other way. David Adams, CEO of the Michigan Credit Union League, said this has become fairly common.

"It's become something of a mini-trend that there have been mergers between federally chartered credit unions and state-chartered credit unions where the state charter is the surviving charter," Adams said. He estimated that there have been four of these federal-state mergers in the last year, the most recent between T&C Federal Credit Union and USA Credit Union (see news brief, page 8), in which the surviving credit union will be the state-charted Genisys Credit Union.

Uncertain members have also pointed out that, according to CapCom's most recent Call Report, the CU is below the 7% standard for being well-capitalized. The credit union's June report puts its net worth ratio at 6.93%, which would not seem to reflect a strong credit union.

But DeMarco sought to reassure members that NCUA Call Report data does not reflect CapCom's continued improvements. "As of this month we are over 7%," DeMarco said.

She declined to comment on any personnel changes that might have taken place at CapCom in the wake of the failed Florida loan and said only that the credit union has put the loan behind it. Shobe said DFCU had confidence in the shared leadership that the new credit union will have after the merger.

Both Shobe and DeMarco asserted that the merger would be good for both credit unions in terms of opening up parts of Michigan they currently cannot serve. DeMarco said she has been fielding calls from members concerned about the merger with the larger institution.

"We have long had aspirations to grow eastward," DeMarco said, pointing out that CapCom's roots lie in the Western part of the state, "whereas [DFCU] needs to grow out of their relatively constrained area around Dearborn and Detroit and move west. Both credit unions will benefit and that's what's most important."

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