State Regulator's Claim of `Less Profitable' Illinois CUs Raises Questions, State Economy Cited as Main Culprit

CHICAGO-Are some Illinois credit unions in poor economic shape? Comments by the state’s top regulator in a publication of the Illinois Credit Union System claiming that 20% of Illinois credit unions are in a “break-even or less than profitable situation” raised some eyebrows this month. The regulator, Michele Latz, a former Chicago bank vice president who took over as director of Illinois’ newly-reorganized Division of Financial Institutions March 1, blamed the CU problems on economic conditions in the state, observing also that it is “a tough environment for single sponsor credit unions.” Leadership in the state League acknowledged there have been a high number of manufacturing layoffs, plant closings and downsizings in recent months, but a sampling of CU executives said both privately and publicly they were somewhat taken aback at Latz’s conclusions. “We’ve had no warning bells whatsoever about this before,” said one downstate CEO who asked not to be identified. In an interview, Latz insisted her remarks in the ICUS quarterly newsletter, “Indepth” under the headline, “Meet the new DFI Director” accurately reflected her views in response to a question about the “biggest challenges” for the industry. She replied in the article that “about one fifth” of the state’s 400 state-chartered CUs are in the “breakeven or less than profitable” category and that “as you can imagine, we are closely monitoring these circumstances” and adding “I believe the economy is near what was seen in the late `80′s” as to plant shutdowns. In an interview with Credit Union Times, Latz a former vice president at Northern Trust Co., said she based her comments “on the reports I’ve received from our staff examiners, and so while this might seem shocking elsewhere you have to remember that we have more state-chartered credit unions than any other state-a bigger pool.” She said Illinois has experienced a high number of mergers among small CUs in recent months. Figures from her department were not immediately available on what size of CU is experiencing poor profits, undergoing mergers or how serious any of the problem CUs have become. As to what is being done to aid beleaguered CUs, division staffers pointed to another section of the “Indepth” article which noted that DFI “provides assistance to preserve the progress of small CUs” under $3 million in assets or in low income areas through “help with record keeping, sub ledgers and reconciliation, marketing, budgeting strategic planning and collection policies.” “Plans are underway to allow credit unions to more effectively serve economically disadvantaged individuals that reside in what are called `investment areas’” she said citing the U.S. Treasury’s Community Development Financial Institution `distress’ criteria. She praised the Illinois League for an “initiative” it started this spring to provide CUs “a great opportunity to service the undeserved or `unbanked’ to diversify their deposit base and grow their operations.” As to her remarks about CU profit erosion, Eldon Arnold, the president/CEO of the $2.7 billion Citizens Equity First CU of Peoria, the state’s second largest, said he had “no idea” there were problems among such a large group of CUs. He said after reading the article he looked up capital ratios of some CUs and said a number with 18% “looked quite strong,” and so he said he could not quite see all “the problems.” Even so, he acknowledged that there have been a spate of corporate downsizings across the state. “You know over in Galesburg,” said Arnold, “Maytag has been doing a pullout and Butler Manufacturing with 1,800 employees has cut back and over in Bloomington that Mitsubishi plant has been hurt by declining sales volume and layoffs and don’t forget what happened to Bridgestone/Firestone in Decatur.” But Charles Rutan, a director of the ICUS and president/CEO of the $133 million University of Illinois Employees CU in Champaign, said Latz’s remarks “are something we should be concerned about.” But at the same time many small Illinois CUs are well capitalized but in the current rate environment find it harder to compete than medium size or large institutions. The problem, said Rutan, comes “in the long haul” which is why there have been so many small CU mergers in Illinois and elsewhere. “You know the competition is a lot tougher out there with the Internet and people buying certificates online, we all have to sharpen our pencils,” said Rutan noting his institution had “one of our best years last year.” Still, Peggy Cummins, also an ICUS director and president of the $9 million Three Rivers CU in Mt. Carmel, acknowledged her peer group in southern Illinois has struggled, but her CU “I guess is one of the lucky ones. We’ve even had an increase in loans and I don’t know how that happened.” She said her CU would have gone under “had we not diversified and gone to community charter” following a plant closing a few years ago by her former single sponsor, Snap-On Tools Corp. Apart from the Latz article, Arnold of CEFCU in Peoria said an overriding issue remains high quality regulation of state CUs, a fact which was threatened – and for the moment partially resolved – by an agreement in the state legislature in July averting a crisis over a so-called “raid” on CU funds by Democratic Gov. Rod Blagojevich. State CUs including CEFCU had warned that higher regulatory fees to finance the division might have triggered a switch from state to federal charter. “I’m happy the governor agreed not to take the $4.5 million after a hard fought fight, but he still retains the right,” said Arnold to dip into CU funds supporting the Division at a future date, a fact which he finds troubling. Officials with the League expressed overall satisfaction that the “raid” crisis was settled with the “Indepth” issue devoting its front page article to lobbying success on the budget agreement. “Due in large part to the lobbying efforts of ICUL” said the publication, “the dedicated credit union fund was not directly raided by the final budget agreement” and CUs “were spared from further regulatory fee increases as well as the fund `sweeps’” The budget agreement, said the publication, while not authorizing any new “raids” did “retain and enhance the authority of the governor and Office of Management and Budget to transfer monies” to a general fund. The League concluded it “opposes increases in credit union regulatory fees and credit union fund transfers to cover state expenditures unrelated to the supervision of credit unions.” One other concern of state CUs has been the impact of a reorganization of CU regulation under a new Department of Financial and Professional Regulation of which Latz’s area is a division. There has been concerns raised by some CUs that banking influence in the new department might create – as one CEO put it “skullduggery” – by ex-bank examiners who could put a kabash on CU business lending. [email protected]