NCUA's Three-Page Letter Could Sink California CU Merger

In November, the $9.2 billion San Diego County Credit Union (SDCCU) terminated a merger agreement with the $3.3 billion Cal Coast. That action prompted Cal Coast to file a motion for a preliminary injunction to prevent SDCCU from ending the agreement and keeping the status quo pending a trial. A hearing on the preliminary injunction is set for Feb. 20. 

Over the last three months, the legal battle between the credit unions has only intensified. Both sides have submitted more than 180 court filings, including legal motions, sworn statements and exhibits in San Diego County Superior Court. Both credit unions have also deposed key executives involved in the merger process.

One of the nine provisions – and perhaps the most important one – outlined in the NCUA's letter involves governance. The federal agency directed the credit unions to "formalize documentation integrity and compliance to ensure accurate authorship and compliance with established agreements, including securing formal approval from the Integration Steering Committee." 

And that may be an insurmountable obstacle, at least for SDCCU. 

Major problems began after merger integration teams from both credit unions began work in July 2025 across lending, operations, IT and risk management. 

"It became common that our executives would return from joint integration planning sessions and report to me practices at Cal Coast that raised regulatory concerns," SDCCU President/CEO Teresa Campbell said in a sworn statement. She retained the law firm Sheppard Mullin in July to analyze Cal Coast's practices. 

"I specifically requested that the memoranda not be worded in a way that could weaponize matters or be used by third parties against Cal Coast in litigation," she said. "I still believe we were going to be a combined credit union, and I did not want to create ammunition that could hurt our own institution." 

Between July 18 and October 2025, Sheppard Mullin prepared eight memoranda. 

"The memoranda analyses confirmed that the practices and procedures (or lack thereof) our business personnel observed implicated violations of the rules and regulations governing  Cal Coast and that would govern the combined credit union," Campbell said. 

But Cal Coast saw the Sheppard Mullin eight memoranda as underscoring risk management considerations, not legal violations. For example, one memo analyzed the potential risks of offering members individually negotiated CD rates to members. While the memo recognized that there is no current federal prohibition on the practice but noted that this could change in the future and subject SDCCU to retrospective scrutiny, Cal Coast noted in a court filing.  

"Another notes that Cal Coast's policy of allowing discretion in loan decisions created a risk of potential discrimination claims but does not suggest that any such conduct has taken place," Cal Coast stated. "The closest any comes to finding a violation of law states that a now-cancelled program provides loans to San Diego State faculty, alumni and students would likely be considered a student loan that would need to be disclosed in Cal Coast's regulatory filings. Cal Coast disagreed, but to be collaborative, supplemented its disclosures beyond what the regulations required; the loans amounted to less than $100,000 or 0.003% of Cal Coast's total loan portfolio." 

Cal Coast also stated that SDCCU witnesses admitted that it would not even have been possible for Sheppard Mullin to identify a violation of law because it did not have the necessary data. 

"This is a case of buyer's remorse," Cal Coast argued in its motion seeking a preliminary injunction. "SDCCU threatens to terminate the parties' supplemental merger agreement based on risks SDCCU knew about before signing it, unless Cal Coast agrees to re-trade the control structure that SDCCU proposed to Cal Coast and that the parties integrated into the contract. SDCCU has no valid basis to terminate and is itself in material breach." 

One of the other provisions in the NCUA's letter included defined governance, reporting structure and executive team composition for ultimate decision-making authority on legal day one. Additional provisions include projected and detailed cost savings or increases, defined accounting and recordkeeping policies and processes, network infrastructure integration, core system integration, digital banking integration and fidelity bond coverage. 

READ MORE: The NCUA's Letter. 

Peter Strozniak can be reached at peter.strozniak@arc-network.com.