Credit unions back to normal following unusual 2012 high

Net income growth among nine big credit unions serving the metro area moderated in 2013 after record earnings for the industry locally and largely across the nation in 2012.

Many saw mortgage lending soften and less of the slashing of loan loss reserves they enjoyed in 2012.

The nine credit unions earned $46.1 million last year compared to $30.9 million in 2012.

However, they would have posted $53.7 million in 2012 had Eli Lilly Federal Credit Union not been hit by an extraordinary, $13.9 million loss. Eli Lilly FCU retroactively reserved $26 million in 2012 for souring student loans made to students of ITT Educational Services. Without that reserve, Lilly FCU would have posted 2012 earnings of $8.9 million.

Some credit union executives said growth last year tapered to more normal levels. For example, the $931-million-asset Forum Credit Union saw net income zoom in 2012 to $14.4 million and then fall to a more typical $4.4 million in 2013.

The recovering housing market gave credit unions a big boost in 2012, pushing net income for all Indiana credit unions up 45 percent, to $133 million. Not all credit unions have reported 2013 results, although mortgage loan activity slowed with the rise in interest rates.

The year 2012 “was just an extraordinary recovery,” said Forum Chief Financial Officer Andy Mattingly. “Now we’re kind of leveling off.”

Other credit unions were more even-keel in 2013. Columbus-based Centra Credit Union is one example, earning $9.3 million compared with $9.6 million in 2012.

Centra has invested in expanding into southern Indiana, with growth in cities such as Jeffersonville, New Albany and Clarksville.

Loan growth last year rose 10 percent overall, said Brad Davis, chief sales and marketing officer. That was due in part to gains in auto and small-business lending as the economy slowly recovers.

Meanwhile, Indianapolis-based Financial Center saw earnings fall to $1.8 million from $2.1 million in 2012. It’s perhaps a remarkably modest dip considering the expenses of merging with and absorbing smaller credit union Horizon One last year.

Horizon One slipped into red ink due to high loan losses and high operating expenses. Horizon was the credit union principally serving the former General Motors metal stamping plant in Indianapolis before it closed in 2011.

Fortunately, Horizon’s management had noticeably improved before last year’s merger, said Financial Center CFO Mike Nelson.

Nelson said a merger team also helped mitigate merger-related hassles.

The merger brought aboard about 10,000 new members for Financial Center, which also picked up a choice branch in Greenwood, for example.

Having a markedly better year was Eli Lilly FCU. The $1-billion-asset credit union generated net income of $12 million in 2013 compared with the restated 2012 results, which amounted to a $13.9 million net loss.

Setting aside the ITT student loan troubles, the credit union otherwise has done well in areas such as expanded auto lending through new relationships with local car dealers.

It also beefed up its mortgage lending staff and added employee groups such as Angie’s List and insurance/financial services companies CNO Financial and OneAmerica.

The Lilly credit union has defended its decision to join a consortium of credit unions to make loans to ITT students, who historically have had a high loan default rate.

The credit union said it considers student loans as fulfilling part of its obligation to serve the community. It also said ITT agreed to share some of the risk.

After IBJ published a story last month detailing Eli Lilly FCU’s student loan losses, the credit union issued a question-and-answer explanation to its 49,000 members.

In it, the credit union said that, at the time it entered into the loan agreement with ITT, the federal Consumer Financial Protection Board hadn’t publicly disclosed an investigation into ITT.

In February, the agency filed a lawsuit against ITT in U.S. District Court in Indianapolis, alleging predatory practices by the private chain of career schools.

Under the question, “Should the credit union have seen this coming?,” credit union management said, “Knowing what we know today, ELFCU would not have entered this agreement. Most important at this point, we are confident about and are committed to recovering these funds from ITT, as agreed.”

The ITT loan reserves did not materially affect the credit union’s capital levels, which remain strong.

For credit unions, which are owned by their members, net income is more relevant to the extent excess income can be plowed into offering better interest rates and terms on products and services.

Commercial banks have renewed efforts to have credit unions stripped of certain tax breaks they say will amount to an exemption of $12.8 billion nationally over the next five years.

Banks say the cooperatives have ventured far beyond their original fields of memberships to allowing most anyone to join. Meanwhile, many credit unions offer the same types of products and services as banks, including business loans.•