WEST ALLIS, Wis. -- The subprime mortgage losses suffered by the stressed-out Allco Credit Union here have made the mainstream and CU trade press recently, but there is more fire amidst the smoke raised by a late June story in the Milwaukee Journal Sentinel.

Allco reported a whopping $5.1 million in total delinquent loans for the quarter in its March 2007 5300 report to the NCUA, a big hit for a CU with $75 million in assets. And those were just the ones in the two to 12 month category. Another $3.2 million in loans were one to two months delinquent and the agency doesn't include those in the total. Almost half, or $1.1 million was in mortgages.

Allco isn't talking, except for a boilerplate statement sent to Credit Union Times by its chairman Eric Hofhine, which referred to the losses as "reserve earnings transferred into a reserve for potential loan losses account." Bad loans may very well be "challenges facing both banking and lending institutions," as Hofhine posits, noting that "Allco has not been immune from the effects of subprime lending and for the past seven months have been actively working with the State of Wisconsin Department of Financial Institutions (DFI) and the National Credit Union Administration (NCUA) to evaluate and restructure Allco's lending portfolio."

Off the Road

But Allco doesn't just have a mortgage mess for its interim manager Christine Dawe to clean up. It also has an auto leasing portfolio that has problems. Allco has $2.1 million in outstanding auto leases. Of the $2.1 million Allco has, $359,000 of those are in a delinquent status. In that category alone delinquency is 16.7%.

Allco charged-off $172,398 in auto leases in just the initial three months of 2007. This level of lease delinquencies and lease charge-offs is very high for a smaller-asset credit union. Typically, as little as some 2% of CUs are involved in such higher risk loan categories and while auto loans are historically a CU's "bread and butter," auto leases are not.

On the 5300 report the lease loans are categorized as indirect loans, meaning they are not generated in-house but through a dealer or dealers. The lease rate yield is close to 10%, which tends to the high side for new car leases. It is unknown whether or not these are subprime borrowers.

The lease delinquency rate is 25% for loans two-months-plus delinquent, and closer to 50% if lease loans delinquent one month or more is included. Why this delinquency rate is so high for the category remains an unknown, as calls to Allco about the situation went unanswered. Lease charge-offs for the initial three months of 2007 are $170,000.

Allco's 5300 also lists a $255,000 investment in Central States Mortgage, the Wauwatosa, Wis. mortgage CUSO whose subsidiary, CU Fleet, is located in West Allis. But CU Fleet CEO Ted Richards did not return a phone call message asking whether CU Fleet was the vendor that sold or originated Allco's auto lease loans.

Allco's 5300-report lists a $255,000 investment in Central States Mortgage, the Wauwatosa, Wis., mortgage CUSO whose subsidiary, CU Fleet, is located in West Allis. Tom Burns, president of CU Fleet told Credit Union Times, "We've been around for 14-years and we are a 'clean' CUSO and we want to remain that way. I'll tell you what; we've been through some hard times but not one of our credit unions has ever lost a penny on the residual value of a leased car. We're one of the best leasing CUSOs in the business."

"Our responsibility includes, if the car makes it to term, is to reimburse the residual value of the lease. We also administer it by following up on insurance and assist with data processing to track payments and registration. We do that for all our CU clients."

Not CUSO Subprime Leases

"Allco is an investor of ours, but CU Fleet does not do subprime leasing. We've never been in the subprime market. The paper that Allco wrote they did on their own. We have no authority to approve loans for a credit union. Allco would send members to us, we would find a car and Allco would approve the loan. If it were a lease we would follow our leasing policy. That means it had to meet our residual value guidelines."

"This is the first time that CU Fleet has dealt with a credit union that has gone that (subprime) route. But our overall lease portfolio --some 3,000 cars-- has never been over a 1% loss and in fact averages .6% (delinquency). We have very few repossessions. What we see at Allco is not indicative of our portfolio."

"If a credit union buys 'deep' it's their decision. That's not a common occurrence in our business. Allco decided to do that. They probably dealt with other dealers, but all I can say is that the approvals came from Allco to us."

Subprime Real Estate

After Allco's President Ralph Brunner resigned the CU brought in Dawe to restructure and reorganize in March. According to Hofhine, the new CEO has the "complete support of the Board of Directors, staff, the DFI, the NCUA and a private auditor" and began an in-depth evaluation of the subprime lending portfolio. "The findings of the audit completed in May, comprise the foundation of a collectively developed plan that will assure a successful rebalancing of the Credit Union's mortgage, auto, and leasing portfolios," wrote Hofhine.

But how and why Allco generated such a high concentration in subprime real estate loans, some $70 million, (over 79% of all their loans are in real estate) with more than half (52.5%) in Second Trust Deeds Home Equity loans is still unknown.

Given that total loan delinquency is 7.29% of outstanding loans while the credit union's peer group is 0.87%, more foreclosures may be on the way.

MBL Delinquency

Allco may also face problems from some of the member business loans it has made. It has an outstanding portfolio of $2.2 million for a total of 22 loans and more than $526,000 is delinquent two to six months and another $296,000 is past due in the one to two month category. That means that 25% of its MBL portfolio is delinquent.

Credit Union Times has learned that examiners for the NCUA had discussions on the Camel rating that Allco would receive, with one recommending a Camel code 2. A more experienced examiner promptly overruled that suggestion after a perusal of the CU's records. Later, a Supervisory Examiner was called on site and Allco went to Special Actions and a Special Case Officer.

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