CEO pay played role in merger failure.

Byline: Stories by Joe Mosley The Register-Guard

It was a plan based on the purest of business principles: unify to gain market share and expand.

Portland Teachers Credit Union, Oregon's largest such institution, would merge into Eugene-based Oregon Community Credit Union - the third-largest. The new entity would become a dominant presence in the state's two largest population centers. The $2.3 billion in combined assets would make it the largest merger in the history of U.S. credit unions.

The plan fizzled abruptly in late May, two months after it was announced, with Portland Teachers backing out. The credit unions shrugged it off as a matter of disparate operating practices that were too difficult to bring under one roof. Differing loan approval procedures and employee benefit packages were among the examples they cited.

But another classic business issue also appears to have played a role: lavish executive compensation, and an organization's reluctance to disclose these big paychecks to its shareholders - or in the case of a nonprofit credit union, its members.

Cliff Dias, the Portland Teachers CEO, who would have held the same position in a reconfigured Oregon Community Credit Union, earned an eye-opening $1.6 million in salary and bonuses last year, Portland Teachers' filings with the Internal Revenue Service show.

And the question of what he would earn at the new entity - and whether the credit union should be required to notify its members about that compensation ahead of the merger - prompted a confrontation with regulators that reached a boiling point just days before Portland Teachers called off the deal.

Neither the credit unions nor state regulators will reveal the executive pay proposed in the failed merger.

But Dias' pay last year at Portland Teachers is stunning by credit union standards nationwide. It was 4 1/3 times the national average for total salary, bonuses and other compensation paid to CEOs at the nation's largest credit unions, according to a recent national survey.

Records obtained by The Register-Guard under the state's public records law detail a chain of events surrounding the proposed merger that include Portland Teachers officials' efforts to keep the proposed executive pay secret from the credit union's 155,000 members, and even to limit regulators' access to the information.

The records also show a blunt threat from regulators that they would withdraw their tentative approval of the merger unless Portland Teachers told its members what Dias' pay was going to be. Five days after that threat, Portland Teachers backed out of the merger.

The two credit unions were running "potentially large reputation and strategic risks" if members found out about pay only after the merger, the state had warned in a letter.

Interoffice memos in the state Division of Finance and Corporate Securities indicate bemused surprise at news of Portland Teachers and Oregon Community scrapping the merger, along with an assumption that executive pay - not operational issues - caused the May 26 collapse.

"I'm a little surprised by this decision, but they avoid disclosure (of compensation) and Cliff (Dias) could still get an equally generous compensation contract," finance section manager Ed Simkins wrote in a May 27 e-mail to his boss, Finance and Corporate Securities administrator Floyd Lanter.

In a letter to the two credit unions' boards of directors six days earlier, Lanter had said regulators were satisfied with the soundness of the credit unions' operations. But regulators were concerned about "good corporate governance," the letter says.

"Any independent party looking at these (compensation) agreements could easily conclude that the directors and executive officers of (Portland Teachers) have placed their interests ahead of the members," Lanter wrote. "We are certainly led to that conclusion."

The pay details would have come into the public domain when the reconfigured credit union filed its tax returns in spring 2005. Credit unions' tax returns are a public record and must list executive pay.

But people rarely ask to see them, and regulators wanted proposed pay to be shared ahead of time with members.

No interview

One member of Oregon Community's board of directors says Dias' recommended base salary was to be about $800,000. Other documents suggest the possibility of a much more lucrative package of salary and bonus.

Dias has declined to be interviewed by The Register-Guard.

And officials at both credit unions insist that differences in operating procedures and management style killed the merger.

"It was the negotiation (between the two credit union boards) of everything, that was going to take forever to work out," said Gordon Hoerauf, Oregon Community's CEO. "Those are the issues that broke the merger apart.

"It had nothing to do with anything in that letter (from the state), as far as I'm concerned."

Portland Teachers board Chairman Steve Gray agreed.

"We simply couldn't get to final agreement on these (operational) and other issues to ensure a smooth transition for 250,000 members of both credit unions," Gray said.

"Executive agreements, which dealt with compensation and other conditions and terms of employment pertaining to senior executives at both credit unions, weren't a factor in the decision to end the merger," Gray said.

A trip to Portland

The credit unions didn't include the pay information in merger papers they filed with state and federal regulators. They refused to send a copy to the Division of Finance and Corporate Securities in Salem. But at the insistence of the state, Portland Teachers eventually relented and let Lanter - the division administrator - visit the Portland Teachers offices in Portland to look at the proposal.

Those salary figures don't show up in regulators' files, but memos and letters in the files clearly show regulators' unease with Dias' compensation, and suggest that its disclosure might prompt outrage among credit union members.

Yet whether Dias' pay package was excessive is unclear.

Oregon Community board Chairman Truman Baird describes Dias' proposed base salary under the abandoned merger as being "about half" of the $1.6 million he received in salary and bonuses in 2003. Oregon Community's board felt that bonus opportunities for Dias would have been limited in the first year of the merged entity, because the merger's midyear timing left little room for them to bear fruit, Baird said.

"Our thought was, there wouldn't be much of a bonus," Baird said.

Hoerauf's salary under the merger plan `wasn't any more than about a third more" than the $222,000 he received for 2003, Baird said.

But Baird's assessment doesn't fully explain regulators' level of concern, and it doesn't entirely follow the track of the two executives' recent pay.

Before his $222,000 in compensation last year, Hoerauf was paid $209,000 in 2002 and $199,000 in 2001. If he were paid 30 percent more than his 2003 salary to become chief operating officer of the merged credit union - the position penciled in for him - he would have received about $289,000.

But if Dias had been paid $800,000 - half of his 2003 total compensation - as CEO of the merged entity, it would have been a step backward in return for heading a much bigger credit union than the one he has guided since 1997.

Dias had received total compensation of $1.1 million in 2002, and $553,000 in 2001.

"No state or federal regulator has ever expressed concern, either before or after the proposed merger, about the level of compensation for Mr. Dias," Gray said.

Lanter, the state regulator, declined to be interviewed.

Department spokesman Steve Corson acknowledges that Lanter was anxious enough with the pay proposals he saw in the Portland Teachers offices that he advised against allowing the merger to proceed unless the pay was explained to credit union members before they voted on the merger.

Under the merger plan, Portland Teachers members had to vote, because Portland Teachers was merging into Oregon Community. Oregon Community members didn't have to vote.

"It's not an issue of the proposed merger being illegal in and of itself," Corson said. "It's a matter of making sure the members knew all the pertinent elements of the merger before it went forward."

In the dark

The state also was irked because the credit unions did not share pay package details with state and federal officials until after the regulators had tentatively approved the merger earlier in the spring.

"There had been a reference to those (pay packages) in the (main) merger documents, but we hadn't actually seen them," Corson said.

Portland Teachers Chairman Gray said his credit union's chief objection to disclosing the pay packages involved details of compensation that go beyond what is required on IRS tax forms, and could give away corporate strategies.

Gray said the two credit union boards voted unanimously in a May 22 joint meeting not to disclose executive pay to members before the merger.

But Oregon Community's chairman, Baird, said that there was no such vote and that Oregon Community didn't even know about the dispute between Portland Teachers and the state over disclosure until just a few days before Portland Teachers on May 26 said it was scrapping the merger.

If Portland Teachers hadn't backed out, Oregon Community probably would have gone forward, Baird said. "Some of the (Oregon Community) board members were relieved and glad it wasn't going through," Baird said. "But I think we would have gone ahead."

PROFILES OF THE TWO FINANCIAL INSTITUTIONS

PORTLAND TEACHERS CREDIT UNION

CEO: Cliff Dias

Headquarters: Portland

Members: 155,000

Assets: $1.6 billion

OREGON COMMUNITY CREDIT UNION

Formerly called: U-Lane-O Credit Union

CEO: Gordon Hoerauf

Headquarters: Eugene

Members: 80,000

Assets: $680,000