ALEXANDRIA, Va. -
The addition to loan-loss reserves makes it likely that credit unions will continue to experience losses on their loans as delinquencies and charge-offs rise over the coming months, according to several experts.
“It’s collateral damage from the subprime crisis,” said Bill Hampel, chief economist for CUNA, who explained that the loans going bad for credit unions are not subprime mortgages, but appear to be other loans taken out by members affected by the mortgage crisis, like car, credit card and other consumer loans. “This year (2007) is going to be probably the worst year for credit union losses in over two decades.”
“I’m a little surprised by the magnitude,” said Hampel, “but not surprised that it’s happening.”
The biggest losses have accrued to credit unions in California, southern Florida, Michigan, Ohio and Indiana, where the economy has already gone into recession, according to Hampel, noting that those markets are already seeing large numbers of job losses and devaluation of home prices, putting increasing pressure on credit members.
The biggest loser in the fourth quarter was Wescom CU, the $4-billion Pasadena, Calif., credit union. Wescom boosted its loan loss reserves by $24.3 million, or 68%, in just the fourth quarter, causing losses of $26.3 million for the quarter, and a whopping $33.2 million for the year.
Several other large California credit unions, where the mortgage market has been hit harder than most states, also reported huge losses for 2007, like Telesis Community CU, a loss of $6.7 million; USA FCU, a loss of $5.8 million; Sterlent CU, $4.8 million; Kaiperm FCU, $3.8 million: Xerox FCU, $3.4 million; E1 Financial CU, $1.4 million; Musicians Integrated FCU, $1.4 million; and Kaiser Lakeside CU, $1.4 million.
Struggles & Pressure
“Really kind of what we’re seeing in credit unions that are struggling is that overall, consumers are coming under a lot of financial stress,” said Terrin Mendivil, an industry analyst in the California CU League’s research and information department. “This is the kind of thing you normally see when the economy is going into a downturn.”
To cope with the losses, some of the California credit unions have begun to cut staff in an effort to reduce expenses. American First CU said last week it is laying-off 12 employees as part of a restructuring. Last month Wescom said it is eliminating 110 positions. And earlier, USA FCU cut 30 full-time positions.
But the red ink was also spread around the country.
Credit Union of Texas, the biggest player in failed subprime auto lender Centrix Financial, reported a $5.8-million loss for the fourth quarter, and a $13.7-million loss for the year. Centris FCU lost $6 million for 2007: Alabama Central CU, $5.7 million; Capital Community CU in Grand Rapids, Mich., $8.8 million; CommunityAmerica CU, $6.8 million; Allco CU, $6 million; Peoples First Choice FCU of New Jersey, $5 million; U.S. Alliance FCU in Denver, $3.5 million; Bay Gulf CU in Tampa, Fla., $3.1 million, and Allegacy FCU, in Winston-Salem, N.C., an $8 million loss.
That doesn’t include some of the biggest losers that have been liquidated by NCUA and merged out of existence, including Huron River Area FCU, which had a $59-million loss for the first three quarters of the year; Cal State 9 CU, which lost $46 million for the first three quarters, and Norlarco CU, which lost $13.1 million, and is being liquidated.
Dozens more credit unions reported losses of $1 million or more in 2007.
Most of the credit unions are operationally sound but the losses represent additional allowance for loan losses, which must be taken from the bottom line under normal accounting rules.
So Allegacy FCU tripled the amount of its reserves, adding an additional $11 million, thus pushing the $1-billion credit union into the red.
Many other healthy credit unions were hit by the same requirement but were able to remain in the black. Suncoast Schools FCU, for example, reported a 95% decline in net income, from $56.5 million in 2006 to just $1.9 million in 2007, after adding $45 million to its loan loss reserves.
“What we’re talking about is an increase in delinquencies and the provision accounts, an increase in expected losses,” said Tun Wai, chief economist for NAFCU. “They’re in a position of being ultra-conservative. Managers would rather recognize losses today, than later on. That means they expect things to get worse.”
More losses are expected in the next few quarters. “In California, we expect to see more of what we saw in the fourth quarter, and probably a deepening of losses, increased loan loss reserves and charge-offs,” said the California league’s Mendivil.
“A lot of credit unions are going to see their loan losses double and triple,” said Hampel. But, he noted, delinquency and charge-off ratios remain near all-time lows among credit unions, and in most cases the credit unions are well-positioned to handle it.
Hampel said the good news is that the losses are coming at a time when credit unions are sitting on record levels of capital, an average of almost 11.5%. That means they have the reserves to absorb losses and maintain the same level of services to members. He urged the affected credit unions not to respond by raising loan rates and reducing dividends or by eliminating services, because that would cause a further diminishment in their finances.
“You build capital for a rainy day. It’s raining out there; open up your umbrella and use your capital,” he said.
