Regulators Watching Credit Union -- $11 Million Loss Of Reserves At Seattle Telco

Federal regulators are closely overseeing a large Seattle credit union that lost more than $5 million last year.

Seattle Telco Federal Credit Union said the National Credit Union Administration (NCUA), the agency that regulates credit unions, has expressed "grave concern" over the loss of more than $11 million in capital reserves in the past year and a half.

The credit union's capital, or financial reserves, plunged from $15.9 million at the end of 1992 to $4.3 million March 31. The capital reserves dropped to 1.5 percent of total assets, down from 6.3 percent at the end of 1992. The ratio is a key indicator of a financial institution's health. The average federally insured credit union has a capital ratio of 9 percent.

However, the credit union said regulators have approved a plan for rebuilding its capital, and federal deposit insurance protects credit union members' savings up to $100,000.

Seattle Telco, whose assets rose rapidly though expansion and mergers in the past five years, is one of this state's larger credit unions, with just under 40,000 members. About 85 percent of those members are in King County, with the rest scattered throughout the country. Its assets were $287 million at the end of the first quarter of this year.

Members include employee groups from telephone and media companies, including both of Seattle's daily newspapers.

The credit union said its losses came from unrelated events that hit it like a financial one-two punch. Last year, the credit union lost $5.2 million after closing a money-losing mortgage subsidiary and writing off nearly $5 million as a result.

The second punch came in the first quarter of 1994 when a sudden rise in interest rates and a change in accounting rules combined to knock $7.3 million out of the credit union's capital, reflecting declines in the market value of securities Telco owned.

Cheryl Umbel, a spokeswoman for the NCUA, said that while the agency has no minimum capital requirement, the ratio "should be growing" from year to year. She would not comment directly on Seattle Telco's situation.

Since the start of this year, Seattle Telco has cut its staff from 121 to 102 through attrition, layoffs and terminations.

Sharon Sanford, acting chief executive officer, said the cuts have been in back-office functions, not employees whose jobs are to provide member services. "Our core business of serving members remains strong, and our level of service will not diminish," Sanford said.

She said savings and loan rates remain competitive, and the credit union's board recently raised its dividend rate on savings by 0.25 percentage point.

Robert Kunde, Seattle Telco vice president for finance, said the NCUA has approved a preliminary plan by Seattle Telco for restoring its capital, mostly through belt-tightening.

"To return to the 7 percent (capital ratio) that we are hoping for is probably a four-year process," Kunde said. "The only time capital comes into play in a credit union is when you are closing it down. Seattle Telco has been here since 1938, and there is no intention to close it down."

Last winter, Telco's board declined to renew the contract of its chief executive officer, Theodore Therriault, who had been Telco's highest-ranking executive since the mid-1980s. Therriault was Telco's representative on the board of the failed subsidiary, Credit Union Financial Services Inc. (CUFS), of which Seattle Telco was the majority owner.

Seattle Telco officials declined to elaborate on their decision to part company with Therriault. Sanford said the credit union is seeking a new CEO.

Therriault remains a director of CUFS, which operated three mortgage loan offices in Washington and early last year began aggressive expansion into California and Florida.

Last month, CUFS filed a lawsuit in King County Superior Court charging the Seattle office of Grant Thornton, an accounting and management firm it hired, with failing to adequately recognize and report CUFS' financial troubles.

Kunde said CUFS was formed in the mid-1980s and Seattle Telco acquired a small ownership stake in 1990 for $75,000. Seattle Telco gradually increased its ownership over the next three years, loaning CUFS $4.5 million and becoming its majority owner.

Last year, CUFS decided to expand into California and Florida to take advantage of a refinancing boom spurred by low interest rates. But CUFS directors discovered the company's expenses were growing much faster than its income, and the company's chief executive officer abruptly resigned in mid-June, Kunde said.

He said CUFS directors spent the next two weeks studying the business. "In two weeks, the board learned enough to say `enough' " and liquidate the business, Kunde said. "It seemed that most of their money was being spent on expansion. It was first cabin. We don't understand why they opened offices three at a time with five-year fixed leases."

Seattle Telco's larger drop in capital came from a required accounting change it adopted last January, affecting the way its books reflect changes in the market value of its $120 million portfolio of securities.

Like other bonds, those securities rise or fall in market value inversely with changes in interest rates. Until this year, such a change in market value was reflected in a footnote on the credit union's financial statements.

But now, such changes have a direct effect on the credit union's capital. That means that rising interest rates can automatically sap the capital, which is what happened to Seattle Telco in the first quarter of this year.

Kunde said Seattle Telco was gradually selling its most volatile securities when interest rates unexpectedly shot up last March, leaving it with paper losses that suddenly drained the credit union of nearly $7.3 million in capital.

However, there is at least a potential silver lining, Kunde said. If interest rates fall, the value of portfolio securities would rise, automatically restoring capital to the credit union.

Capital in a credit union is the equivalent of a household's saving account. Kunde described it as "a rainy-day cushion" to let a credit union weather financial setbacks.

---------------------------------- TEATTLE TELCO FEDERAL CREDIT UNION ----------------------------------

Seattle Telco's assets rose rapidly through expansion and mergers in the past five years, but the demise of a money-losing mortgage subsidiary led to a large loss last year. The credit union's capital ratio, a key measure of its financial health, plunged even more in the first quarter of this year because of a change in accounting methods.

YEAR PROFIT ASSETS CAPITAL RATIO ------------------------------------------ 1988 $6.4 $110 5.0 percent . 1989 7.7 117 5.6 percent . 1990 15.6 138 6.0 percent . 1991 11.2 168 6.7 percent . 1992 11.8 253 6.3 percent . 1993 (5.2) 298 3.8 percent . 1994 # 0.4 287 1.5 percent .

# First three months Dollar figures are in millions.

Source: Seattle Telco Federal Credit Union