By CAROL ANNE BURGER

CU Times Special Assignment Reporter

PLEASANTON, Calif. — The insolvent Sterlent Credit Union here is now operating under a management agreement with Patelco Credit Union of San Francisco. The $98 million asset institution posted a net income loss for the second quarter of $5.5 million and has been operating under a cease and desist order from the California Department of Financial Institutions since Feb. 20.

Rather than place Sterlent into conservatorship, the California Department of Financial Institutions told Credit Union Times that the “DFI and NCUA are working together to best protect the credit union members' funds.” DFI Public Information Officer Alana Golden said, “DFI and NCUA determined that conservatorship was not necessary in this case. We expect full resolution in a timely manner. DFI continues to supervise Sterlent CU, and the NCUA continues to provide primary insurance for members' shares.”

Patelco CU President Andy Hunter said that Sterlent “isn't flying along; they are insolvent, but the scale is dramatically different than with Cal State 9.” Patelco has already announced its purchase and assumption of the ailing Cal State in Concord, following a bidding process about which Hunter declined to provide details.

The DFI defended its oversight of Sterlent, where a HELOC program initiated by the CU in 2003 was ended in late 2006 by current management. A press release issued by Patelco acknowledged that Sterlent “has been experiencing credit quality issues in the past year” from that program.

The sources of the HELOC program that racked up losses when the housing boom collapsed was World Savings/Wachovia Correspondent Brokers Network, said Golden. Wachovia Corp. fired its chief executive Ken Thompson on June 2 amid continuing turmoil in the financial sector and strategic decisions that led the bank to set aside $2.8 billion earlier this year to cover losses with problem loans. Thompson's exit follows that of Stanley O'Neal of Merrill Lynch and Charles Prince of Citigroup, who were also fired after their banks suffered huge losses from bad mortgages.

The speed with which Sterlent's balance sheet went downhill is startling, and Golden acknowledged that “DFI and NCUA have been aware of loan losses, which is reflected in examination reports.” At the end of third quarter 2007, Sterlent's net worth ratio was 6.08%. Although that earned an “adequately capitalized” rating, it was barely above the mark at which prompt corrective action is set in motion. At year-end, the ratio was 5.14%.

Golden said that DFI and NCUA issued a cease and desist order “earlier this year to discontinue unsafe practices.” Hunter noted that Patelco's relationship with Sterlent is different than what occurred with Cal State. “We are assisting [Sterlent] under an agreement,” he said, adding that it is concentrating chiefly in the collections area. Again, he remarked that the details of that agreement are confidential. Patelco's own press release on the matter declared, “the California Department of Financial Institutions has been aware of the problems at Sterlent Credit Union and in communication with Patelco leading up to this act of assistance.”

“Patelco's role right now is to assist Sterlent's management team in their continued efforts to provide stable member services and stem future losses wherever possible and that is what we intend to do,” Hunter said in a released statement. “I have every confidence that by working together, Patelco and Sterlent will focus on meeting the members' needs, as always.”

All member deposits at both Sterlent and Patelco are federally insured by the National Credit Union Share Insurance Fund (NCUSIF), which is backed by the full faith and credit of the U.S. government. Deposits are federally insured by the NCUSIF to at least $100,000, and IRA and Keogh accounts are insured up to an additional $250,000.

Hunter said that NCUA was focused on protecting the share insurance fund, noting, “That is their highest priority.” The fund has been impacted by losses at credit unions and the agency said that the need to reserve against future losses would prevent the distribution of a dividend to credit unions. It remains unclear if losses posted in the remainder of this year will make it necessary for the fund to assess charges to credit unions to keep it's operating ratio above required standards.

Golden told Credit Union Times that “DFI and NCUA performed a joint exam in September of 2007. We began trending Sterlent CU every month for the past several years.” She added “Sterlent CU has been examined annually for several years.”

Asked why there were no red flags raised as losses mounted quarter after quarter, she replied, “Due to losses and potential losses, DFI accelerated the exam cycle and also moved to monthly trending.”

Pressed about why has there had been no one held accountable for these loan programs, she responded, “DFI is considering all possible alternatives and remedial action but further investigation is necessary.”

When asked about the lack of transparency on third-party loan providers, Golden said that “DFI examines third-party providers by virtue of their service agreements with the credit union.” The NCUA has stepped up

its due diligence requirements of all third-party arrangements entered into by credit unions.

Golden said there is no recommendation for a criminal investigation over the losses suffered by Sterlent and that no one inside the CU or any member of the board (now or retired) was the responsible source of the loans. Further, she said that no one at Sterlent received any benefit from the granting of the loans

She also noted that California's budget crisis has not resulted in a loss of the total number of examiners available to do credit union examinations and that no examiners have been laid off or assigned to other duties. “In fact,” she said, “DFI has requested additional credit union examiner positions in 2008-2009.” But she did not indicate if that request for additional personnel had been granted.

Sterlent Credit Union was established in 1936 as EBTEL Federal Credit Union by 16 Pacific Telephone Co. employees. It has offices in Pleasanton, Sacramento, and Castro Valley.

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