DENVER — The unraveling of subprime lender Centrix Financial, LLC into Chapter 11 bankruptcy last September may have had its roots years ago, but the company’s dire troubles turned out to be one of the most jarring events to impact the industry in nearly a decade. By year-end, scores of CUs across the land, perhaps 400 with claims reaching $100 million, have been working feverishly to pare down the subprime loans on their books while the once high-flying Centennial, Colo., firm tries to recover in court through a sell-off to an East Coast insurance/investor group.

Centrix’ near-collapse has left red ink and forced out CEOs and CFOs from an uncounted number of both large and small CUs while also triggering a sharp pullback of the subprime market with a filtering down to the indirect market in some locales.

From Austin, Texas, to San Diego and from central Illinois to Miami, there have been numerous cases of CUs grappling with a high ratio of delinquent Centrix loans or struggling to receive regular cash payments from Centrix, now with a nearly depleted work force of just over 300.

Two years ago before NCUA’s June 2005 Risk Alert, Centrix had 1,500 employees and originally claimed 300 financial institutions as partners with 7,000 auto dealers having underwritten 250,000 loans totaling nearly $4 billion.

That number was reduced to $1.9 billion by the Sept. 19, Chapter 11 filing first in a Reno, Nev. U.S. Bankruptcy Court and later switched at the demand of creditors to a favored Denver court with the case assigned to Judge Elizabeth Brown. For its part, despite its crisis, Centrix has insisted it is meeting servicing demands of its client CUs and a sampling showed that has been the case in many areas leading to hope the firm can be set right once the Denver bankruptcy court sorts through sales offers and creditor challenges. However, CUs hit hardest by Centrix delinquencies and losses ended up witnessing the departure of CEOs though their exit may not be entirely related to Centrix, sources said.

Noteworthy in 2006 were resignations in February of Richard Ghysels, president/CEO of the $600 million First Financial Credit Union, West Covina, Calif., and the former chairman of the California Credit Union League, and in August, Kenneth Sorrels, president of the $1.4 billion Credit Union of Texas in Dallas.

“Look, there are hundreds of credit union CEOs who were smart enough to get caught up only a little on Centrix and then stop and then there are those in which it was a train wreck,” said one California CEO who asked not to be identified. One such “train wreck” was the $296 million New Horizons Credit Union of Denver, the state’s 10th largest, which fell under NCUA conservatorship last April at the request of state regulators who found large loan delinquencies in its construction and subprime portfolio.

Acting as conservator, NCUA ousted its President/CEO Tom Gressman, and nine directors who according to the Colorado Department of Regulatory Agencies, had voluntarily “resigned.” Months before the move, New Horizons had proudly listed Centrix as one of its prime SEGs welcoming Centrix employees as members.

Centrix also had a strong following in the San Diego market and the San Diego Business Journal noted the “profit squeeze” on area CUs due to Centrix in a Dec. 11 article.

It said the $2 billion Mission Federal Credit Union “was forced to boost its reserve balance by more than $10 million because of loan delinquencies including many from Centrix.”

“As of Sept. 30, Mission Federal held more than $17 million in delinquent loans, or 1% of its portfolio,” said the article. “That’s down from the end of 2005, when its delinquencies reached $25.7 million, or 2% of outstanding loans.”

The article added that, “because it was forced to increase reserves against potential defaults, Mission reported a net loss of $3.5 million so far this year.”

Officials of Mission FCU were not immediately available for comment, but the presidents of two other smaller San Diego CUs quoted in the article acknowledged their own Centrix losses with conditions since improved. “We had one of our best years ever in 2006 with 1.3 ROA and 11.3% capital and we now have less than $200,000 in Centrix loans,” said Joseph Schroeder, CEO of the $269 million San Diego Metropolitan Credit Union. Three years ago, well before Schroeder took over as CEO, the San Diego CU had $31 million of Centrix loans.

Likewise, John Weaver, president of the $55 million Great American Credit Union, said it now holds about $1 million in subprime auto loans and once held $10 million in Centrix, a fifth of its portfolio. The article noted that Great America posted a net loss of $1.1 million through Sept. 30 after boosting its reserve balance.

When asked what the Centrix lesson might be for CUs, “I think we have to be a bit more cautious about innovative products,” Weaver concluded. –