oSometimes acquiring failed credit unions is a defensivestrategy.

oRobust institutions don't just scout merger candidates, theyreceive calls pitching deals from struggling credit unions and theNCUA.

oIf it's apparent the target institution will end up as apurchase and assumption, a CU considers a strategic pass on mergingand angles for a P&A instead.

NEW ORLEANS — Representatives from four credit unions that wereinvolved in mergers or acquisitions shed some light on theclosed-door and detailed process during a CUNA CFO Council session.And the moderated panel took questions from the audience thatproduced some provocative answers.

Norm West, Alaska USA FCU's chief financial officer, shared hisexperiences merging two troubled Southern California credit unionsand negotiating a deal to acquire part of Arrowhead Credit Union,also in SoCal's hard hit Inland Empire.

“Mergers can be bloody, because they're so emotional andpolitical,” West said. Nonetheless, Alaska USA is always on thelookout for merger partners, with employees who routinely identifycandidates and suggest them to West.

However, the $4 billion credit union isn't just looking for aquick source of assets. West said Alaska USA was specificallylooking in California for community charter institutions to supportits robust in-house indirect lending program.

Fellow panelist Scott Waite, chief financial officer of the SanFrancisco-based Patelco Credit Union, said in his case, acquiringfailed credit unions Cal State 9 and Sterlent was more of adefensive strategy than an offensive one.

“On one hand, you want to measure how the merger will benefitmembers, and that's offense,” he said. “But defensively, you haveto ask yourself what happens if your competitor merges the creditunion and gains a larger footprint in your market.”

In particular, Waite said the $3.7 billion Patelco took on bothfailed credit unions at once to avoid losing market share to the$7.8 billion The Golden 1 Credit Union, also in northernCalifornia.

West said competing against the Sacramento-based The Golden 1also contributed to Alaska USA's decision to pursue opportunitiesin Southern California, although his Anchorage-based institutionprimarily competes with banks.

Large and robust institutions don't just scout mergercandidates, they receive calls pitching the deals from strugglingcredit unions and the NCUA.

“Normally, NCUA will push a credit union to merge and willsuggest specific names,” West said. “When I get that first callfrom a CEO, I usually turn around and call the NCUA and ask if theysent him, and if so, what are they looking for.”

Sometimes while performing due diligence on the ailing creditunion, West said, if it's apparent the institution will end up as apurchase and assumption, his organization considers a strategicpass on merging and angles for a P&A instead, which is lessexpensive because all contracts, including employment, arerepudiated by the NCUA upon conservatorship.

However, West said the longer a credit union operates in thered, the more it could cost the share insurance fund, so theregulator is motivated to resolve troubled credit unions as soon aspossible. ?The NCUA must balance the public response to failures,however. West said NCUA representatives have told him the agencytries to seize only one credit union at a time in a particularmarket to avoid panic among members of the community.

Pressures to minimize risk to the share insurance fund alsomeans NCUA often goes with the highest bidder in purchase andassumption deals, which means very little negotiation in the sealedbidding process.

“You either hit it or you don't,” Waite said.

West said NCUA regional offices present the board with loss andvalue numbers on the struggling credit union. The board approvesthat amount, and regions can't exceed it without further boardapproval. Negotiations sometimes occur to avoid involving the boarda second time, West said.

Ashlee Micale, chief financial officer of the $1 billion PublicService Credit Union, said the NCUA told her Denver-based creditunion that it was the smallest of four invited to bid on failedNoralco Credit Union. PCSU won the bid, but Micale said she wastold all four bids were “pretty close” in value.

Despite the NCUA's legal contract repudiation abilities, Micalesaid PSCU is still involved in a lawsuit brought by owners of acall center building leased by Noralco that PSCU didn't need.Although PSCU, assisted by the NCUA, won the initial suit, thebuilding owner has appealed the decision.

“I think they are trying to make an example of us, because theyknow more P&As are coming,” she said.

Waite said he's stuck paying IRS penalties for one of his mergedcredit unions, which didn't file the proper paperwork years beforethe acquisition.

Wilma Wells, chief financial officer at the $1.2 billion GenisysCredit Union, discussed her merger of equals when the $600 millionUSA Credit Union merged with the $600 million T&C FCU in2008.

When asked if she thinks a true merger of equals can exist, Wellsaid, “In one form or another, there will be a surviving charter,so you have to be very careful.”

For example, Wells said neither credit union was enthusiasticabout asking members to vote on being merged. Though neitherinstitution was under financial duress, one had experienced a dataprocessing conversion that had a negative impact on member service.Further, that credit union would also have to convert to a thirdsystem during the merger. So, the credit union without conversionchallenges handled the member ballots.

Wells said attracting merger partners and blending two mergingcultures is usually more difficult than anticipated.

“You really have to nurture that relationship with the mergingcredit union, because if their employees or members don't like you,you won't get anywhere,” she said. Wells that added herMichigan-based institution has experienced several small creditunions abandoning merger proposals because “they didn't want to seebig credit unions get bigger.”

Waite said Patelco's acquisition of Sterling Credit Unionproduced surprising resentment among members.Both credit unions hadtelephone company legacy sponsors, he explained, but Patelco hadhistorically attracted white-collar employees, while theblue-collar workers joined Sterling.

“We lost 10% to 15% to attrition in the first six months,members who could have joined Patelco the whole time but neverwanted to,” he said.

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