SAN DIEGO -- Mission Federal Credit Union here lost $8 million in 2006, much of it due to Centrix Financial loans. The once soaring subprime auto lender whose Portfolio Management Program was halted by the NCUA's Risk Alert in June 2005 went bankrupt and reorganized. But some credit unions are left with the consequences of having invested in a program that was touted as providing "improved yields" while covering risk through "A-rated insurance."
Everest National Insurance, a provider of that insurance, has sued former Centrix CEO Robert Sutton and others alleging fraud and civil conspiracy and the outcome remains to be seen, but Mission FCU, which is certainly not alone, is now feeling the sting. MFCU reported a $6.1 million loss at year-end and later filed an amended 5300 report adding another $2 million in losses for the year. In the first quarter of 2007, MFCU had a loss ratio of 0.92%, double the peer ratio of 0.42%, lost $83,883 and charged-off almost $5 million. The $1.9 billion CU also shrunk in asset size by over $100 million in the final quarter.
Mission's CFO Jim Miller told Credit Union Times they hoped to have turned the corner and look forward to doing much better in the second quarter. "Clearly, the large number is because of Centrix. The good news is that we have a significant reserve, half of which is for Centrix. They're not charge-offs yet, but the balance is required and it is a very challenging situation." Regulators are monitoring MFCU very closely,
At the height of its Centrix involvement, MFCU had some $130 million in loans in its portfolio, all of them from participations, Miller said. He would not answer exactly where they came from or who brokered the loans. Neither would he acknowledge a legal challenge between MFCU and the Credit Union of Texas.
But Ken Sorrels, the former CEO at the CU of Texas who lost his job because of the Centrix debacle did. "There's a lawsuit between Mission Federal and the CU of Texas. This goes back a long time. They let me go as a scapegoat. I got caught up in a situation and tried everything I could to make it right. It's all gotten very ugly," Sorrels said.
Since leaving last August, Sorrels has witnessed the cascading losses at some CUs result in mergers, for example, Decibel Community Credit Union in Colorado Springs, whose merger with Ent became final in January filed massive losses in the fourth quarter, going from a YTD loss of $175,000 as of Sept. 30, 2006 to a loss of almost $6.3 million at year end. Decibel had assets of only $90 million and so, while the merger may have been a very good fit, as Ent President and CEO Charles Emmer said at the time, Centrix losses were taken prior to the merger.
The number of charge-offs on MFCU's yearend 5300 related to indirect loans (most of which are Centrix) is $2,368,540 and the charge-offs related to indirect participation loans are $5,396,595 (these are loans to nonmembers). The total of both these Centrix-related categories are $7,765,635. The total charge-offs for the entire year for all loans was $14,112,240. So it appears that 55% of Mission's charge-offs may be Centrix related. The amount of charge-offs on the participations at $5,396,595 is a staggering number. Credit Union Times checked similar sized CUs and found no others that came close to charging off this much in participation loans.
Miller said that MFCU's portion of Centrix loans was 2.5% of its portfolio, down from 4% a year ago. He responded to a series of questions, including those concerning losses and participation loans during an interview and via e-mail. He noted that the CU's ROA and charge-offs are "primarily a function of the unusual reserve required for the Centrix portfolio. All trends, other than our allowance for loan loss and charge offs, are ahead of plan. The servicer for Centrix loans (Flatiron Financial) decreed that loans that were considered a skip, regardless of where they were in the delinquency cycle were to be written off. This required an unexpected charge off. April was back within budget and produced our strongest financials in months."
Noting that the CU's fiscal year ends on March 31, "many of the 2006 losses were actually adjustments required to the continually changing methods for calculating the ALL account and those entries for our March 31 year-end were not entered until September 2006 due to the length of the field work," Miller related. This was happening while news of the Centrix bankruptcy was unfolding, causing the auditors to recommend additional reserving.
Other Factors In Play
The decline in assets in the fourth quarter was attributed to several other things happening at the CU, including the sale of a student loan portfolio and the sale of a portion of the commercial loan portfolio in December. That is not an unusual activity for the CU, Miller said. Not helping matters was the fact that MFCU did not get an inflow of funds in the fourth quarter, which they say was consistent with low industry growth in deposits in that period.
MFCU also disputes that the charge-offs related to indirect loans are not to members. "These are members of the originating credit unions and we bought participations in those loans," Miller said.
The CU declined to discuss any ongoing negotiations regarding Centrix.
The CU reported that for the year, total deposits have increased by $40 million, up 3%. "We have seen strong growth in checking deposits and certificates of deposit. Total loans have decreased a net $42 million, a decline of 3% that is primarily due to runoff in our purchased loan portfolio," Miller said. The CU had a healthy loan-to-deposit ratio of 89% at the end of April and a net worth ratio at the end of April exceeding 10%, indicating an ability to manage Centrix's impact to its net income.
Mission got into the Centrix program after several years of intense growth and increasing assets over a six-year period, Miller said. Due diligence was done regarding the Centrix program, including on-site visits from several MFCU managers, who stayed several days. "We had a very thorough and rigorous discussion of the process." He added that the program seemed "a very attractive proposition at the parameters it started with, but it didn't flow at the end."
"The point was to make an investment with an attractive yield and help the industry. No one was led to believe there would be such high charge-offs. It was consistent as long as the operation kept going. When the alerts came it changed the business model."
Miller offered no comment on whether or not the NCUA Risk Alert precipitated the downward spiral of Centrix, but did say that Mission had profits related to the program before it was issued. "I'm not going to say its NCUA's fault or anything like that. We've had to move beyond all this and I think we have. It has been an intense learning experience."