Until recently, the future looked bright for Wescom Credit Union.
The Pasadena financial institution, the county's second largest credit union with assets in excess of $3.2 billion, was building up its mortgage business by gobbling up smaller lenders around Southern California. At the same time, Wescom vastly expanded its membership, adding nearly 40,000 members in 2007 alone.
But as the housing market imploded and the economic recession set in, the institution has taken a beating.
Wescom has closed more than a dozen branches since the beginning of last year and has announced plans to eliminate more than 200 positions. What's more, the credit union lost $53 million last year, more than any other credit union in Los Angeles.
The credit union didn't want to talk about its problems, but other industry veterans acknowledge these are unprecedented times.
"I don't remember ever going through a crisis like this before," said Jeff Napper, chief executive of LBS Financial Credit Union in Long Beach, which lost nearly $12 million in 2008 the institution's first annual loss in at least three decades.
"We are suffering collateral damage. There are probably very few financial institutions that are not suffering from the downturn in the economy."
There are nearly 200 credit unions in Los Angeles County with around 3 million members and total assets of about $35 billion. More than one-third lost money in 2008, some for the first time ever, and many have resorted to employee layoffs alarming for an industry that historically avoided staff reductions at all costs.
The not-for-profit cooperatives, owned and controlled by depositors, have been historically among the most conservative lenders. They generally avoided subprime mortgages during the real estate boom and most remain financially sound. But many institutions strayed from core product lines, offering services such as home equity lines of credit that turned out to be a bad bet.
What's more, with rising job losses, falling home prices and declining household income, many credit union members are finding it difficult to keep up with payments on even the most basic debt, such as auto loans or first mortgages.
Now, the rising loan losses are becoming a significant problem at credit unions, which depend on their owners-depositors to help keep the institution financially viable.
"Credit unions go as their members go because they are in a very symbiotic relationship," said Daniel Penrod, an industry analyst for the California Credit Union League, a trade group representing some 400 credit unions in the state.
Credit unions began cropping up largely during and after the Great Depression to offer credit at reasonable rates to people of "modest means."
They took deposits and offered a range of small loans to consumers. After a while, the institutions began expanding their product lines, offering mortgage and small business loans.
Though they operate similarly to community banks, credit unions restrict membership to a select group of people, often limited by employer, industry, geographic area or religious group. Los Angeles, once a leading aerospace center, still boasts a number of credit unions with aerospace links.
Membership has grown considerably in recent years after restrictions were loosened. In the early 1980s, the institutions were allowed to expand membership to a specific industry rather than just a single company; in the late 1990s, credit unions opened up to people based on residency and family ties.
With the changes, many credit unions started marketing and advertising their services and changed their names to reflect expanding membership bases.
For example, Kinecta Federal Credit Union, the largest in Los Angeles County, had been known as Hughes Aircraft Employees Federal Credit Union until 2001. Today, the Manhattan Beach institution, which was started for Hughes employees, now has 228,000 members in Greater Los Angeles and select ZIP codes in Orange County.
Membership levels at many credit unions ballooned after the rule changes as customers fled traditional banks. There has even been some strong competition among credit unions, which has generally competed politely.
In 2007, Wings Financial Federal Credit Union launched an unusual hostile takeover of Continental Federal Credit Union in El Segundo an effort that prompted federal regulators to step in and end the bid.
The strong growth in the membership base combined with the bursting of the real estate bubble, rising unemployment and now the deep recession has caused some credit unions to suffer. The average loan delinquency rate among L.A. County credit unions is 3.21 percent, according to Business Journal calculations. More than 10 local credit unions have delinquency rates in excess of 10 percent.
By comparison, the average rate at credit unions nationwide is 1.37 percent and the rate at banks insured by the Federal Deposit Insurance Corp. is 2.93 percent, said Ray Springsteen, senior vice president of business development for Callahan & Associates Inc., a credit union consulting firm. "There were pockets where credit unions had challenges."
In Los Angeles County, the problem has been compounded by an unemployment rate that is hovering around 10 percent, and other factors contributing to a decline in household income.
"There's so many people that are still employed, but either they get no bonus or the sales commission they used to make has been cut way back or they're being cut from a 40-hour week to a 30-hour week," said Kinecta Chief Executive Simone Lagomarsino. "Some companies are asking their employees to take a decrease in pay. We have members that are having a difficult time paying their auto loans, their home loans, their credit cards."
As a result, credit unions such as Kinecta, which has more than $4 billion in assets, are being forced to set aside large amounts of money to cover future loan losses. Kinecta lost $44 million in 2008 after allocating more than $66 million to its loan loss reserves.
The losses dropped its capital ratio, which regulators use to determine whether an institution is financially sound, to 7.64 percent. Credit unions with a ratio above 7 percent are considered well-capitalized.
"We are monitoring it," Lagomarsino said.
To save money, Kinecta took a number of strategic steps, including opting not to renew a lease on some of its existing office space and laying off about 50 employees.
"We are seeing layoffs, not only in the rank and file but also the senior leadership teams," said Mike Juratovac, chief operating officer of O'Rourke Mitchell and Associates, a credit union staffing firm. "A reduction in force is not something that we've historically seen in the credit union industry."
For some smaller credit unions, layoffs are not even an option. Many of the smallest institutions have only a handful of members and if times get tougher, they may be forced to shut down.
Consider the case of CIP Federal Credit Union, which opened its doors in 1974 with a mission to give small loans at good rates to the local employees of automotive parts manufacturer ITW CIP.
As the American auto industry imploded last year, the Illinois company shut down its Santa Fe Springs plant and laid off several dozen employees. As a result, the tiny credit union, which at its peak had a little more than 100 members and assets less than $700,000, closed its doors in September.
"It's sad; I've been here for 34 years," said Jack Leslie, chief executive of the credit union.
Three California credit unions were closed by the federal National Credit Union Administration in 2008 still far lower than the number of seized banks as a result of large losses on risky mortgage loans. Nationwide at least a dozen federally insured credit unions were shut down last year. Credit unions generally avoided subprime and other risky mortgage loans, but lending tied to real estate still has been a source of red ink.
Meanwhile, Pasadena's Wescom had been active in wholesale mortgage lending, in which independent mortgage brokers generate loan customers.
Wescom, which started as the Telephone Employees Credit Union in 1934, exited the wholesale market in 2007 after it became clear it was a risky venture, but the damage was done. The credit union's $53 million loss in 2008 dropped its capital ratio to 7.01 percent. Wescom declined to comment for this article.
"There are some credit unions that went out a little too far on the risk spectrum, perhaps," said Bill Cheney, president of the California Credit Union League. "I don't think you could say they were mistakes at the time that they did them. Obviously in hindsight, they didn't turn out to be good lending decisions."
However, many credit unions have been aggressive in addressing the problems that have plagued them.
Kinecta has launched its own home loan modification program. The credit union consulted with advisers from Fannie Mae and Freddie Mac, and analyzed the FDIC's loan modification program in putting together a plan that executives believe outpaces the government's efforts.
Unlike some other loan modification plans that restrict participation based on debt-to-income ratios, Kinecta will allow a member with high levels of debt to participate if it is determined he or she can afford modified monthly payments.
"We literally, in each situation, analyze it based on each individual member's situation," Lagomarsino said. "Probably the most important thing for us right now is to try to make sure we help our members keep their homes that are having problems making their payments."
A number of other credit unions have explored loan modification programs, as well as other measures, such as more robust collection efforts, to avoid further losses.
"I think that there is a more personalized, high-touch approach to serving their members during this time of turmoil," said Juratovac.
Glimmer of hope
Still, it's important to put the troubles in perspective, credit unions say. In the fourth quarter, the average credit union nationwide had a capital ratio of 10.9 percent, well in excess of the well-capitalized threshold.
Even in Los Angeles County, a center for the real estate bust, the capital ratio for 161 credit unions reporting financial data to the National Credit Union Administration was 13.5 percent though that figure is not weighted by assets.
"Credit unions are terrifically well-capitalized compared to banks," said Dorothy Asbury, treasurer of Motion Picture Federal Credit Union, a small institution in Valley Village serving members of motion picture unions.
Indeed, many credit unions point to the well-publicized troubles in the banking industry as evidence that they are relatively strong.
Banks and credit unions have sparred for decades, with banks claiming credit unions receive unfair tax exemptions due to their not-for-profit status. Banks claim this gives the institutions an unfair advantage; credit unions say they fill a specific niche in the market that is separate from banks.
"It's very strong competition community banks compete head on with credit unions every day," said John Hall, a spokesman for the American Bankers Association.
Though credit unions have maintained a steady 6 percent market share of deposits in recent years, credits unions hope and banks fear that the cooperatives are in a prime position to capture additional deposits as consumer confidence wanes in the faltering banking system.
Already, Juratovac said, some credit unions are seeing deposits increase as customers seek out what they consider to be the safest institutions. The high number of bank failures and general public distrust of the banking industry could benefit credit unions - even those experiencing losses, given that credit unions offer federal deposit insurance similar to banks.
"This could be a tremendous opportunity," he said.
- Update: Credit Union Placed in Conservatorship (FREE)
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Credit Unions Narrow Gap With Banks Under New Rules
- Credit Unions Come Up Short
- Credit Check
- Credit Unions Step In as Big Lenders Falter
- National Protest Flips Switch for L.A. Credit Unions
- Who's Who In Banking & Finance: Keith Sultemeier
- Branching Strategy Spreads to Non-Profit Credit Unions
- New Parent to Close West L.A. Office of Online Bank