First Technology “Inside Job” Merger Approved Without Adequate Review

On October 15th, 2010 Oregon State regulators approved the $4.5 billion merger of First Technology Credit Union with Addison Avenue credit union, the biggest such merger in credit union history.   In my opinion, this results from a complete breakdown in the integrity of the credit union regulatory process.   For this reason I have written directly to the Securities and Exchange Commission and the FDIC with the hope that they will lend support to the notion that, prior to approval, important disclosure standards be first met.  See April 21, 2010 related blog post for additional background information.

During the last 6 months I have requested that both First Tech and Addison Avenue fulfill their responsibilites to members, specifically asking for more details regarding executive compensation, their respective investment portfolios and also allowing a 90 day period for member review rather than the planned 45 days.   To many members this merger is an “inside job” that would not be supported by members if adequate disclosures were made.  Although the CEO’s offered to meet me and discuss the issues several times, I thought it inappropriate and we have therefore only communicated via phone and email.  Adequate disclosure should speak by itself, and to all members simultaneously.

Here is a copy of the last email I received regarding this merger, one that was clearly mistakenly sent by First Tech’s law firm, Farleigh & Witt, to me.   The parties listed are the law firms managing partner, myself, First Tech’s Interim CEO and the director of regulation for credit unions in Oregon.  Putting aside the ridiculousness of copying me, what also strikes me as unusual is the ease with which the firm can communicate with the key regulator in charge of approving the merger, specifically advising the parties copied to “ignore me.”  Could one make something up as preposterous as this given the recent turbulence in the financial markets?

The recommendation to “ignore him” involved my comment that I was “stunned” to see the minimum level of disclosure regarding Collateralized Mortgage Obligations and Auction Rate Securities on First Tech’s statement.  Not to mention related disclosure issues for Addison. One need only google auction rate securities to examine the reason for the concern.   Again, this is the biggest proposed merger in credit union history and we the public confer tax exempt status on credit unions for a reason.

What the regulators should do is require both First Tech and Addision Avenue to provide a breakdown of their investment portfolios as follows:

CUSIP ID#,  Issuer,  Purchase Amount and Current Value

Other related issues include the following:

1)  Since last March I have requested that both Addison and First Tech fully disclose key executive compensation details yet they have steadfastly refused.   As a federally chartered Credit Union, Addison notes they are not required to make an IRS 990 filing, the form which fully discloses such compensation.   State Chartered credit unions like First Tech are required to make such annual filings yet in their case they filed two extension requests and make the filing only after persistent requests it be done prior to the merger.

2)  The disclosure of annual financial details for Addison Avenue are simply laughable.  Their 18 page annual report features 9 pages of photos,  various page of testimonials from members and “one simple page” of financial information.   This would be astonishing to anyone in the private sector.  If more disclosure is provided somewhere it certainly is not easy to find.

3)  Significant deferred compensation payments ballooned for the First Tech CEO during both of the two years prior to the merger.  Members should receive additional information on what clearly looks like a multi million dollar golden parachute agreement.  This should include information on which law firm drafted the plan, the terms for participation, vesting, etc.

4)  Investment Portfolios for both credit unions do not provide adequate disclosure.   Disclosures should be made as noted previously. by CUSIP ID #, purchase amount and current market value.

Many may ask, why spend the time to analyze a tax exempt credit union.  The reason is that, like public pensions, they can provide unique insight into the dynamics of the financial markets.  In addition, I have several clients who are long time members of the credit union and are frustrated by their inability to get any organized opposition to the merger.  Even the Oregonian, the State’s largest paper, has barely covered the story.