Like most credit unions, Eastern Financial Florida Credit Union cites modest roots, formed more than 70 years ago for pilots of now-defunct Eastern Airlines to get decent savings rates. Maybe to secure a boat or car loan.
But over the years, the Miramar-based, tax-exempt, member-run cooperative certainly morphed.
By the time regulators swept in 10 days ago to seize the $1.6 billion Eastern, the third-biggest credit union in the state was over its head in real estate and securities speculation. It had strayed into investing in exotic securities like collateralized debt obligations, which helped broaden the country's housing collapse. It peddled interest-only mortgage loans. It made a $30 million loan for a waterside West Palm Beach condo project that never got built and tumbled into foreclosure.
To some, including rivals in the banking industry, Eastern Financial is a poster child for how credit unions have strayed: They wanted to become so much like banks, they overextended themselves and put their members at risk.
"This is going to be Exhibit A for the Florida Bankers Association and for banks overall as to why credit unions should not be allowed to expand their powers," said Ken Thomas, a Miami-based bank consultant and economist. "Some have gone well beyond their original scope and started to act like highfalutin banks."
Within the credit union industry, however, Eastern is painted as an anomaly.
The vast majority of credit unions have stuck to conservative loans, are well-capitalized, growing deposits and, most important, still lending, says Jay Johnson, executive vice president of longtime credit union consultant Callahan & Associates.
"What you have here is a very healthy industry. Credit unions seem to be the one area in the financial services marketplace that are functioning the way they're supposed to."
The reality, like many issues in the country's current financial quagmire, lies somewhere in between.
There's no doubt the worst recession in at least a generation has taken its toll on all financial fronts, including credit unions. Largely overlooked in bank battles over TARP funding, credit unions nationwide have struggled. Their combined net income last year plunged 47 percent to $2.4 billion.
Most remain highly rated. Yet, 10 of the 150 largest credit unions have nonperforming ratios (delinquent loans and leases as a percentage of total loans and leases) in the worrisome range over 3 percent. A few credit unions in Florida, notably Bay Gulf and Suncoast Schools, have gotten poor ratings as they've bolstered their reserves to pay for rising loan losses.
Moreover, amid all the talk of a bank bailout, credit unions have been busy orchestrating a bailout of their own that goes to the heart of their system. At the center of the storm are two corporate credit unions, U.S. Central and Western Corporate (or WestCor), which were seized by regulators in late March.
Corporate CUs bundled
A corporate (or central) credit union operates as a credit union's credit union. Corporates clear checks for members. They take mortgage and vehicle loans from various credit unions, bundle them, repackage them and sell them as securities. Then, almost akin to the Federal Reserve, they lend the money back to those credit unions to help them fund operations.
When the National Credit Union Administration seized WestCor and U.S. Central, the two entities had combined assets of $57 billion — a huge slice of the $80 billion that credit unions have in deposits in corporate credit unions.
Few individual credit unions may have dabbled in mortgage-backed securities — those troublesome repackaged and rebundled risky mortgages that were sold as securities — but corporate credit unions did.
"We're estimating losses on some of the mortgage-backed securities that these corporates were holding to be $6 billion," Johnson said.
The losses are covered by the National Credit Union Share Insurance Fund, the industry's federal insurance fund, which in turn will be replenished by assessing member credit unions.
The National Credit Union Association is pushing Congress to let members replenish the insurance fund over seven years so individual credit unions could stretch out assessments. But while waiting for that relief, credit unions across the country have been forced to take their entire assessments in the first quarter.
Suncoast Schools Federal Credit Union, Florida's biggest credit union with $6 billion in assets, just booked a $30 million assessment in the last quarter as its share of the bailout. And it probably faces another $13 million assessment in the future, Suncoast CEO Tom Dorety said.
Dorety points to the assessment program with pride, as a positive way credit unions are different from banks. The credit unions handled their problem internally, among all the credit union cooperatives across the country. They didn't seek a taxpayer bailout, he says.
Neither did Suncoast itself, which lost $77 million in 2008. Suncoast's financial stress persuaded ratings agency Bauer Financial to give it a two-star, "problematic" rating. It also helped spur the institution's proposed merger with fellow Tampa credit union GTE Federal.
But Dorety scoffs at critics who say that's a sign credit unions have become too aggressive. He says banks are using the issue as a red herring, trying to gain a foothold in their longstanding battle against the tax-exempt status of credit unions.
"We're not doing anything different today than we were 25 years ago in terms of the types of loans to consumer we make," he said.
Suncoast's problems are simply a reflection of its members' problems, Dorety said, with members who have lost their jobs or sources of income unable to pay back loans.
Auto loans went sour
By Bauer's standards, Bay Gulf Credit Union's situation is even more dire. Since last year, Bauer has rated the credit union as a one-star, signifying a "troubled" institution.
Bill DeMare, Bay Gulf's president and CEO, said the rating reflects a largely bygone problem centered on auto loans. Bay Gulf had agreements with more than 20 auto dealers to fund loans for them under what DeMare called a novel indirect loan program.
"The program from a conceptual standpoint was good; the timing was really bad," he said. Delinquencies shot up from an anticipated 2 percent to well over 4 percent as a lot of car buyers with no allegiance to the credit union stopped paying.
However, from a peak of 40 repossessions a month, the repo rate has since fallen to fewer than 10 a month. In the most recent quarter, which has yet to be assessed by Bauer, Bay Gulf came close to break-even, excluding the special assessment for the corporate credit union bailout.
"We'll continue to have some small losses or small profits, but we're not going to be taking any significant hits in the future," DeMare said. "We have excess cash. We're very solvent."
Asked if some credit unions today are in trouble because they've gotten too aggressive, he acknowledged, "I think in some cases there's truth to that."
For one, he blames Eastern Financial's's blowup on that over-aggressive mentality. So does Meredith Gibson of Space Coast Credit Union, which is temporarily managing Eastern and has proposed merging with the company.
Gibson said she'll leave it to others to decide if credit unions have strayed.
But she notes that credit unions were first created to make business loans to farmers, "so business lending is not out of a credit union's scope."
That said, most credit unions still shy away from doing those large (and risky) commercial loans. "Most are very happy to leave that to the banks," she said.