CONCORD, Calif. -- The bidding for troubled Cal State 9 Credit Union here closed on April 25 and has kept mum on the bidders (See sidebar).
Cal State 9 continues to lose money like water through a sieve, and even as bidders may be circling the drain, it appears that a viable deal that would immunize the NCUSIF may be highly unlikely. Unless the NCUA absorbs losses like it did with Norlarco and other CUs that posted big negative numbers after making bad lending decisions, bidders may balk. Or, some restructuring of the debt may have to be done in order to make Cal State 9 a viable merger target.
Cal State 9 CU lost $61.6 million for all of 2007, but in the first quarter of 2008 it lost a staggering $53.0 million. The CU now has a negative 20%.0 net worth. The return on average assets for March 2008 is negative 60.01%. With delinquencies running at 20%, little hope remains for improvement amid a continuing housing downturn in the Golden State.
Delinquencies in the adjustable-rate mortgage category (two months or more) totaled $63.4 million at the end of the first quarter, up from $47 million at year-end. Cal State 9 CU set aside $80.5 million in allowance for loan and lease losses in the recent quarter. Its financial report to the NCUA posted no figures at all for unsecured credit card loans, labeling them not available. But for all other loans delinquent 12-months or more the figure was $539,169.
Conserved in November 2007 by the NCUA, Cal State 9 CU remains fully operational under the stewardship of Region V Director Melinda Love and Acting President Judith Hurst. Hurst declined to comment on Cal State 9's deteriorating financial condition, referring all calls to the agency. NCUA Director of Public and Congressional Affairs John McKechnie offered no further insight on merger negotiations. The process, which is called a purchase and assumption may be the best means of continuing credit union services for Cal State 9's members, but the CU's financial state will make buyers wary, said several CU CEOs contacted by Credit Union Times.
Not wanting to thrust himself into the fray on the record, one source said, "It won't be easy putting lipstick on this pig. It just went south very, very fast. In an appreciating real estate market what they did would seem great, but they just went too deep too fast. Then, when the market started to go bad, it started to spiral out of control."
What Cal State 9 did was initiate a program of buying HELOC loans from an outside vendor. In Cal State 9's member newsletter dated March 2007, then-CEO Jackie Wong and then-Chairman of the Board John DeClercq boasted of helping homebuyers and exceeding goals. They wrote, "Our loans grew a record 48% during the past year. More and more of our members continued to look to us for their mortgage needs, as the credit union funded a record $266 million in home equity loans to over 3,200 homeowners during 2006." They failed to mention that many of those loans were not made to existing members, but were rather created through a third-party. (CU Times, Nov. 14, 2007, page 1.)
Losses like those generated at Cal State 9, Norlarco, New Horizons and Huron River Area CUs spurred the NCUA to issue stronger guidelines to credit unions about the due diligence required in overseeing third-party vendors. But the barn door had already been closed by that time on these CUs, leaving the agency no other available option other than to find a willing merger partner.
For those four CUs, the bad loans were off loaded to the NCUA's Asset Management Assistance Center in Austin, Texas, where foreclosed properties may eventually find a buyer, but likely at a big discount (CU Times, April 9, 2008). The troubled loans from Norlarco and Huron River were centered in southeast Florida developments, long a magnet for boom and bust real estate offerings, while Cal State 9's loans are all located in California. However, in California, like Florida, home prices have declined and that means many of these mortgages may be underwater. And while the Florida loans were first mortgages, Cal State's liabilities are all in HELOCs.