The financial woes that ultimately sank Wallingford-based Constitution Corporate Federal Credit Union have cost retail credit unions in Connecticut nearly $70 million and they’ll likely be forced to pay tens of millions of dollars more down the road.
Those losses, felt during the past 12 to 15 months, cut deeply into credit union earnings and likely stunted the flow of credit in the state over that period.
But things could have been worse, and credit union officials say the industry remains relatively strong, and ready to lend money.
In fact, net income for Connecticut’s 136 federally insured credit unions more than doubled during the first half of 2010, totaling about $13 million, an indicator that the state’s not-for-profit cooperatives have remained resilient.
“We’ve been able to weather the storm,” said Tony Emerson, president and CEO of the Credit Union League of Connecticut. “The good news is that even though things are tough, we still have pretty high capital ratios.”
Regardless, Connecticut credit unions are being forced to pay for mistakes made by its larger counterparts.
Constitution Corporate Federal Credit Union serves as a Federal Reserve-like bank to credit unions, principally in Connecticut, by providing wholesale financing and investment services.
Federal regulators seized Constitution Corporate – along with two out-of-state corporate credit unions – and placed it into conservatorship on Sept. 24, after major investment losses threatened its viability.
Conservatorship lets the government run troubled financial companies while keeping them open. As part of the takeover, William White has been named interim chief executive of Constitution Corporate, replacing the former president and CEO, Robert Nealon.
Constitution Corporate’s operations will likely be merged with another corporate credit union in the region.
But the broader impact to retail credit unions in Connecticut is their financial losses.
To benefit from Constitution Corporate’s services, credit unions invested capital into it, totaling 1 percent of their assets or a maximum of $2 million each.
As Constitution Corporate struggled financially over the past two years, it burned through those investments, costing Connecticut retail credit unions $66 million, said John McKechnie, a spokesperson for the National Credit Union Administration, the industry’s chief regulator.
In addition, credit unions are being hit with special assessment charges to pay for the failure of other corporate and retail cooperatives, which has strained the National Credit Union Administration’s insurance fund.
All U.S. credit unions have been paying those charges since at least last year and they will have to ante up as much as $9 billion through June 30, 2021.
Both financial hits have had a steep impact on earnings, especially in 2009, when Connecticut credit unions posted a combined net loss of $30 million, according to NCUA data. The credit unions have rebounded since then, but concerns remain.
Credit unions are not-for-profit organizations so the only way they can grow is through retained earnings. They don’t have access to capital markets like banks.
“I think it’s a significant deal for every credit union in the state,” said Connecticut Banking Commissioner Howard Pitkin. “It’s certainly going to stretch their earnings and it’s something the industry has to work out.”
Merger activity, or higher interest loans could be part of the fallout.
But things could have been worse.
While Connecticut credit unions’ capital at Constitution Corporate has been wiped out, their deposits and certificates there, which total $1.4 billion, are safe thanks to an adopted federal program that guarantees them through Dec. 31, 2012.
If those funds had been threatened, it could have sent shock waves throughout the industry.
Despite the challenging times, however, Connecticut credit unions largely remain financially healthy, industry officials said.
BauerFinancial, an independent bank analysis firm based in Florida, recently ranked the majority of Connecticut credit unions as financially stable, based on their capital ratios, income and nonperforming loans.
The firm listed 14 credit unions as “troubled,” or “problematic,” including Connecticut Transit Federal Credit Union and Franklin Trust Federal Credit Union, both of Hartford; East Hartford-based First New England Federal Credit Union; and Achieve Financial Credit Union in Berlin.
But the broader question is lending, which has been on a steady decline since the end of last year.
Total loans held by Connecticut credit unions fell by $127 million, or 3 percent to $4.3 billion, since September 2009, NCUA data shows.
Some industry officials, however, blame demand more than a lack of liquidity in the market.
“Demand is down because people are worried,” said Ed Danek, president and CEO of Hartford Federal Credit Union. “They are concerned about job stability.”
Danek said his credit union has money to lend, and it is getting aggressive with rates to try to spur activity. The credit union, for example, is touting 3.99 percent rates for home equity loans, with no application or annual fees, closing costs or pre-payment penalties. It’s also offering auto loans as low as 3.99 percent.
“We are very eager to lend,” Danek said.
Emerson said more people are also paying down their debt, which is making it tougher to find willing borrowers.
“We are out there trying to make loans but it is really tough,” Emerson said. “Loan volume is down across the board.”g
