SAN DIEGO -- When the losses started to mount it was inevitable that the management and board of directors at Great American Credit Union here began to consider the merger option. "Our members have been looking for more services than we could deliver, more branches in the northern and southern part of the county," said John C. Weaver, president of GACU. "We lacked the economies of scale to be able to do that, so the board made a decision to seek a merger partner and we put the process out to bid."

In 2005, Great American (www.great

americancu.org) showed a net income loss of $859,150, total charge offs of $1,008,448, indirect loans of $36,175,126 that were point of sale and $2,890,551 in the outsourced loan category. With total loans of $54,340,042, GACU set aside $1,641,666 for its loan loss reserve for the year.

In GACU's annual report for 2005, Secretary/Treasurer Kimberly J. Crouch noted that during the supervisory audit, "there was a concern that we were not as conservative as we could be given the risk in our loan portfolio." So GACU made a change in the method used to calculate the "adequacy of allowance for loan and lease losses," going from a 36-month to a 12-month rolling average. The CU hoped that many of the loans for which it held reserves for would pay off in 2006 and it would show positive performance.

Those expectations proved wrong, however. Losses from Centrix loans caused Great American to post a net income loss of $1.5 million in 2006 and set aside $2.1 million in loan loss reserves for the year. The $57 million GACU had heavy exposure in both its Centrix Portfolio Management Program and its own indirect lending initiatives with some 95% of charge offs in indirect loans in 2006. GACU had more than 70% of its loan portfolio in the indirect category.

In the 2006 annual report, Crouch wrote off the "flatter yield curve and negative personal savings rates," and even cited "an increasing housing slump. We saw delinquency rates begin to climb." Yet GACU had zero delinquency in its first mortgage portfolio, but did post indirect loan charge offs of $1,237,480. GACU showed no losses in its real estate portfolio and almost all its reportable delinquency was held in the indirect category. That forced GACU to "look for ways to manage costs."

As of June 30, 2007, GACU had a total of $39,096,093 in indirect loans, both point of sale and outsourced. But it also reversed some $250,927, putting back that amount from its loan loss reserve, allowing it to show a net profit of $312,608. So in addition to finding ways to cut costs without severely impacting member services, this time period seems to have coincided with the search for a likely merger partner.

Indirect loans proved to be a bad deal for Great American as a growth and income strategy. "We clearly took a risk on Centrix, as others did," said Weaver. "I don't think anyone got in expecting to take the type of losses we took." But Weaver also noted that if members do not approve the merger, (ballots have been mailed and a special meeting is set for November 13) the CU would continue on its own. "We could choose not to merge. But I think it will be approved and the benefits will far outweigh not merging."

Asked about the indirect lending program, CEO Weaver acknowledged the hard lesson. "For those credit unions that choose to get involved in indirect lending--and I believe it is a good fit for some and not others--I'd hate for this single experience to keep credit unions from looking at new products and services and going where CUs haven't gone before." GACU was involved in the CUDL program for several years, but not recently, added Weaver, and its bad loans all came from Centrix and its own indirect lending platform.

The Hardest Thing

Weaver rued the losses, but came away with a "lessons learned" experience. "Anytime a CEO has to present a loss to the board it's the hardest thing to do," he said. "But without looking for new methods or new ideas...well, its 'change or die' in my opinion."

Weaver said that most mergers among credit unions are done strictly to benefit the members. "It's what we're here to do." The economies of scale and the regulatory approval needed help assure that, he said. But he did allow, "Some credit unions can survive at lower asset levels with good management provided they have a niche. And the more cooperation that exists in the movement, the likelier such institutions will be able to survive."

Once the merger option was deemed the best way to proceed, the board decided to hold a bidding process. Nine credit unions responded to the bid and six came back with a merger proposal. "Our board did its homework," said Weaver. "We mystery-shopped the credit unions, we spoke to people who were members; we did analysis. Then we narrowed the field to two credit unions and those two made formal presentations."

Three of the proposals were from other San Diego CUs and one was a finalist. Wescom was already invested in the San Diego market and seemed a good fit, said Weaver. "We wanted the best deal for members, then secondarily, for employees. It was a requirement that all our branches remain in operation and all employees be retained." Wescom met and exceeded all those requirements, he said.

"I believe the reason the board selected Wescom was that they epitomized member service. The satisfaction levels of their members were the highest. In mergers, it's hard to make comparisons on any one component; as one CU may have better rates, another may have more branches or more services. It's hard to find a finite measurement, especially in a market like San Diego (which is already rich in CU competition). It came down to the service component, and Wescom does it and does it well.

"All GACU employees will have a place in the CU and the board has been offered director emeritus status and will continue to serve," said Weaver. Final details will have to wait until GACU members weigh in, but Weaver said that the CU is prepared to merge on Dec. 1.

The upshot is that GACU members will receive better rates than the CU currently offers, have 400 ATMs at their disposal and a whopping total of 50 branches they might use as members of Wescom Credit Union. "And nobody in San Diego is open on Sunday," said Weaver. Wescom introduced Sunday hours earlier this year.

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