- Key insight: A court battle between two California credit unions that had agreed to merge illustrates the importance of understanding whether there's a cultural fit early in the M&A process.
- What's at stake: A judge faces the question of whether to issue an order — sought by the smaller of the two credit unions — that would keep the proposed merger alive.
- Forward look: A court hearing in the case is scheduled for Friday.
When two financial institutions decide to merge, the companies often make public note of how long the two CEOs have known each other. The idea is that years of private conversations have provided comfort that their firms share similar corporate cultures.
But mergers don't always follow such a courtship phase.
The proposed merger between San Diego County Credit Union, which has $9.3 billion of assets, and the $3.4 billion-asset California Coast Credit Union started to show cracks last fall. After SDCCU said in November that it wanted to change the deal's terms, California Coast filed suit, alleging breach of contract. Since then, a slew of unflattering information has spilled out — including allegations that California Coast disregarded regulatory compliance obligations — and dirty laundry continues to emerge.
In a recent court filing, SDCCU Chief Executive Officer Teresa Campbell said that the two credit unions initially appeared to be good merger partners because they share roots in San Diego, and both had California state credit union charters. Though Cal Coast was less than half the size of SDCCU,
The deal also provided a way for SDCCU to go over the $10 billion-asset regulatory threshold in one big step, rather than more gradually. Bank and credit unions with more than $10 billion of assets are subject to caps on interchange-fee revenue.
"It is pretty much a given that credit unions must either find ways to reduce costs and achieve greater earnings, or their earnings will decline," Campbell wrote in her court filing. "Greater scale allows the combined organization to earn more on its assets while fixed operating costs do not increase proportionally."
But Campbell also noted in her court filing that the timing of her decision to explore a merger was driven by her plan to retire. Because Cal Coast's CEO, Todd Lane, appeared to be of a similar age, Campbell expected that he was also planning to retire, she said in her court filing.
"When Mr. Lane told me that he did not want to retire, I was surprised," Campbell wrote. Though she'd initially expected new leadership to be named at the combined institution, she later agreed to a plan in which Lane would take over as CEO. Her court filing gave no indication that the two CEOs had ever met each other prior to the merger talks.
Campbell now appears to regret her decision to hand the top job to Lane.
Campbell said in her court filing that she became concerned last fall that "Cal Coast's leadership had instituted a culture of non-compliance." By November, it was clear to her that "the issues we had identified were systemic and traceable to a culture installed by Mr. Lane from the top down," she wrote.
"I also came to believe that Cal Coast intended to delay addressing the issues identified by SDCCU until after the merger closed, when Mr. Lane believed he would have control," Campbell stated.
Cal Coast has argued that what SDCCU characterizes as legal noncompliance are instances of the two institutions having different risk appetites.
"Cal Coast has a longstanding record of strong regulatory compliance, sound governance, and responsible risk management," Lane stated in a Feb. 5 court filing. "Cal Coast is routinely examined by the regulators and consistently earned the highest ratings while operating in full compliance with all applicable state and federal laws and regulations."
Lane also fired back at Campbell, stating that she was paid more than $18 million in 2024, while his own compensation that year was $1.2 million. Moreover, he said, in 2022, SDCCU experienced what Lane described as a "severe liquidity crisis" amid the rapid rise in interest rates, which he laid at the feet of SDCCU's management, saying it was "common knowledge" that an influx of deposits during the COVID-19 pandemic would be withdrawn in the short term.
"Despite poor management, SDCCU's executives have been compensated at an
extremely high level that is out of line with the norms for non-profit credit unions," Lane stated.
Campbell responded that her credit union is not facing a liquidity crisis now and was not at the time Lane claimed. "SDCCU remains well-capitalized, well-managed, and financially sound," Campbell stated.
Despite all the bad blood, Cal Coast is asking a state court judge to keep alive the possibility of the April 2025 deal closing. It wants the judge to find that SDCCU violated the terms of the merger agreement by pausing integration work, and to order the larger credit union to pay damages and legal costs.
"While SDCCU continues to poison the well with inflammatory and personal attacks, Cal Coast remains focused on what matters most: serving our members, supporting our employees, and strengthening the communities we serve," Cal Coast spokesman Robert Scheid said in an email. "These issues are being addressed through the proper channels, where facts, not rhetoric, will determine the outcome."
Scheid declined to answer questions about whether the smaller credit union still wants the merger to be completed, and if so, how that would work, given the public animosity between SDCCU and Cal Coast.
Attorneys for Cal Coast are arguing that SDCCU breached its contract with the smaller credit union, and that Cal Coast "will lose a unique merger opportunity and suffer irreparable harm" unless the judge enters a preliminary injunction that preserves the status quo pending a trial.
But lawyers for SDCCU argue that the proposed injunction would "hobble and imperil" SDCCU "without helping anyone." The relief Cal Coast is seeking would require the SDCCU to obtain prior approval from either the court or Cal Coast when it wants to incur expenses of $500,000, make changes to insurance policies, or hire any new employees with a salary above $150,000, according to SDCCU's lawyers.
"When two heavily regulated, multi-billion-dollar entities bitterly diverge over what the law requires, the last thing a court should do is order them to unite, in perpetuity, as one," SDCCU's lawyers wrote.
A hearing in the case is scheduled for Friday.
Further complicating the situation is the fact that the merger would need the approval of the National Credit Union Administration, which has so far deferred a decision, in light of what an NCUA official has described as "areas of concern" that the agency identified.
In a Jan. 27 letter to Campbell, NCUA Western Regional Director Julie Cayse asked for a host of additional information, including a defined governance structure, defined risk tolerances and comprehensive integration plans.
"My staff identified multiple weaknesses in governance practices and strategic planning related to this proposed merger," Cayse wrote.
