Looking Bad With a One-Time Hit

In the short-term, Mountain America's ROA plunges but the merger that caused it looks like a long-term winner.

Mountain America Credit Union is the second largest credit union in Utah. Its roots trace to the credit union that began in the 1930s for Utah’s telephone company. It serves counties around Salt Lake City and thousands of SEGs, including some large technology companies. Through mergers, it now operates branches in Arizona, New Mexico and Nevada. Normally Mountain America has enjoyed double-digit growth. Before the merger described below some of its numbers were: 250,000 members, $2.5 billion in assets, 53 branches and about 800 employees. We sat down with Gordon Dames, their recently retired CEO to discuss the credit union’s performance in 2008.

You went from a healthy 0.8%-1.0% ROA in recent years to about 0% in the most recent quarter. What’s the story?

GD: The story is in a merger we did in the spring. We took over a troubled credit union, absorbed their losses and had to post them. But the losses will be off our books by the beginning of 2009, and we are budgeting a more normal 0.8%-1.0% ROA for us next year.

How did the merger and loss come about?

GD: There was a credit union here called Salt Lake Credit Union. It had about $265 million in assets, and during the good real estate market in this region earlier in the decade it made quite a number of construction loans to speculators anddevelopers, who eagerly sought these loans to build and sell at a quick profit in a real estate market that was increasing in value each year. As the real estate market softened in late 2006 through today, many of these borrowers walked awayfrom partially constructed homes after they determined they would lose money.

We had actually talked merger with this credit union five or six years earlier, but their board and management wanted to try and make it on their own and keptat it. Last year was different. At first they came to us and asked if we could buy some of their loans to meet liquidity needs. We did, with full recourse at that time.

But the real estate market was weakening even more.Delinquency on the real estate loans increased and both the state and federal regulators had the credit union increase their loan loss reserves by $7 million for probable losses. This and the prospect for increased future losses were reallymore than they could bear; they discussed merger with us again.

You went over their books, of course.

GD: Yes. Very carefully. They had about $16 million in total reserves and undivided earnings. We estimated their losses would cover every bit of this and probably more.

So you would take a loss on the merger. What attracted you to the deal?

GD: A number of things. But very attractive was their SEG of the community college system in the Salt Lake area. The system has 50,000 students and faculty, and 300,000 alumni. And, of course, new students enroll annually; thus the FOM gets bigger andbigger year after year. And they had 10 branches in the metropolitan area that over-map very well with ours — it would have cost us $40 million to build those branches.

There was also the good deed of helping a fellow credit union. Therewas also the act of keeping Salt Lake City CU from collapsing. That would have generated a good deal of bad press, particularly here in Utah, which has been the scene of bank versus credit union battles in the past, and, of course there was the actof taking the hit ourselves rather than allowing NCUSIF to take it.

But short-term the loss has fallen on you.

GD: Yes. The merger was accomplished on May 1. As you know, the real estate market got even worse, and then worse some more. Mountain America covered another $20 million of Salt Lake Credit Union losses. That is why our ROA wentfrom over 0.8% to 0%. But all of these losses will be off our books this year. There were about 200 of these loans with a total loan value of about $103 million. All of the properties had varying values. Some we were able tosell at a gain, others at break-even, others at a loss. We are working through all of them and will have everything cleared by year-end, not an easy thing to do in the current market. On average each bad loan loss is $160,000. Totallosses could exceed $30 million. But we are well reserved and look to a good year in 2009.

Were there other ruts in road on the way through this merger?

GD: Yes. Because of regulatory and accounting rules we had to post our post-merger losses without comment. It looked bad. People called us to ask what had happened. Our regulator questioned our judgment. But the story is easy enough to explain. And theCall Report and naked numbers show quantitative not qualitative information. Anyone can get the wrong idea looking at naked numbers.
Anyway, we truly feel we did the right thing. We look forward to serving the new and expanding SEG. We are astrong credit union with an excellent history of service and growth. This was a one-time event. We’re moving forward.

April 29, 2016

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