COLORADO SPRINGS, Colo. -
But in addition to the sought-after efficiencies and expanded branch presence that drives other credit union mergers, another primary driver has also played a role-the domino effect put into motion by bad loans largely attributed to Decibel Community's relationship with Centrix Financial, LLC, the Centennial, Colo.-based company that skyrocketed to prominence with an indirect auto lending program aimed at C and D borrowers. That rocket has since burned numerous credit union balance sheets, and has cost several executives their jobs. Centrix, which was the subject of a Letter to Credit Unions from NCUA during 2006, has since filed for bankruptcy (see related story, this page).
While DCCU president John Carpio was reluctant to say directly that the loan losses listed on its 5300 report were caused by bad Centrix loans, commenting "I prefer not to answer those questions," other sources close to the merger who asked to remain anonymous said that the $90-million CU has indeed taken a hit from Centrix-related loans, and it only made good sense to pursue a positive merger with the much larger, $2-billion Ent.
The 5300 report filed by DCCU in September 2006 shows nearly a quarter-million dollars in delinquent loans of 12 months or more, some $218,000 in the six-to 12-month category, $419,000 in the two-to six-month category and $378,972 in two months and under. Yet DCCU has only charged off some $126,000 in loans year-to-date, indicating more losses may have to be charged off by year-end. As of September, DCCU was reporting more than 8% in capital.
The idea that a waiver of filing a final 5300 might be permitted, which would obscure the losses caused by bad loans, was negated by David Francis, supervisory examiner for the Colorado Division of Financial Services. "There is no waiver. If they existed on the last day of the quarter they must file a 5300," said Francis. That report is due on Jan. 22, he added, and will be forwarded by the regulator to the NCUA in early February.
Carpio said that Decibel's members approved the merger on Dec. 18, with three-quarters of the 16,000 membership voting. He said the credit union was approved for a community charter about a year ago and soon after began considering a merger with Ent, which wanted to expand into the Pueblo area. Carpio referred calls about Centrix to the CU's attorney, Bob Wilson.
Meanwhile, the fate of what is left of Centrix remains in the hands of a Denver bankruptcy court as creditors, including credit unions, hope to recoup something from the sale of its remaining assets. "With the Chapter 11 in progress, credit unions are trying to stay quiet," one source told the Credit Union Journal. "But it's safe to say that Centrix lied about what they were doing. Yes, it has caused serious losses to credit unions, and delinquencies and charge-offs will go up because of it."
Charles Emmer, CEO of Ent, told the Credit Union Journal that he was aware of the loan-loss provisions at Decibel as part of the usual due-diligence required in a merger, and that there was a possibility that DCCU might recover some of those losses. "There is always a possibility of that, but there's been no recovery yet," he said.
If the losses were written off it would have a negligible effect on Ent's net worth ratio in any case, added Emmer. "Right now we're at 11.7% so it may take us down a few tenths of a point. We factored into the merger the effect it would have and, given the size differential, we could write off all the capital in Decibel and add the assets to our balance sheet and it wouldn't make a dent."
Asked if the merger with Ent had the effect of 'saving' Decibel, Emmer said, "I wouldn't use the term, 'saved' them. Who can say that, really? But I can say that Centrix has been a negative event in credit union history, with respect to CEOs and CFOs who are no longer in their jobs."
Emmer related that he came from the banking industry and remembers well the losses caused by the savings & loan debacle of the 1980s, and offered that the lesson learned from Centrix is that an institution must be very careful to evaluate the risks in any loan program, particularly indirect loan programs such as Centrix' Portfolio Management Program (PMG).
The merger itself will be beneficial to both sides, Emmer said, and came about when Gary Atkins, formerly the CEO of Mountain Bell CU, which had already merged with Ent, was talking with his friend, John Carpio. "They were just having a conversation and the idea of a possible merger came up because Decibel and Mountain initially had the same membership base, communications workers. Gary told John how well their merger had gone, how all the senior staff had been retained and so on, and suggested us as a possible merger partner."
DCCU was chartered in 1938 to serve employees of the Bell System Telephone Company and had since added community charters for Pueblo, Fremont, Huerfano and Otero Counties, which factored into Ent's growth plans, particularly in reaching underserved areas, said Emmer. "The Pueblo area is a 150,000-person community and if you have a local flavor you'll do better. (Ent had already received the OK from the NCUA to serve the area.) Decibel's been there since 1938 and is well-known and trusted, so it will give us instant credibility to start off, and then we'll have to walk-the-talk."
Ent will keep the Decibel name to honor its brand, Emmer said, and plans to add to its three branches by adding more, which will have the Ent name. "It'll become a unified brand some time in the future," he said.
