An overextension of loans, oversights and inadequate examiner training led to the failure of Chetco Federal Credit Union in 2012, a report released this month by the National Credit Union Administration (NCUA) reads.
About 30 credit union members attended a forum Monday afternoon, apparently not so much to hear the details of a failed institution that had been in business since 1957, but to hear the success stories - and learning experiences - the credit union that took over had to share.
The report, released by senior auditor R. William Bruns of the Office of Inspector General of the NCUA, shows a downward spiral of decisions that led to Chetco's failure.
It paints a picture of a financial institution where management, through an exemption it was granted from the limit, allowed its business loan portfolio to grow more than 600 percent of its net worth in 2008; typically, that doesn't exceed 175 percent.
Management even expanded its business lending out of its area to include loans to entities as far away as New Mexico and North Carolina.
It outlines how officials used "loan renewals and modifications" to mask loan delinquencies - in one case, a "actively modifying problem credits" - that further increased its losses in the declining economy. Those losses would ultimately result in a $76.5 million loss to the National Credit Union Share Insurance Fund.
Credit union examination results depict Chetco's slow descent from the best rating of 1 in December 2005, a rating of 3 in September 2008, and a crash to 5 - the worst - by June 2011.
The report also outlines how internal examiners failed to spot the red flags issues that should have been seen."We believe red flags were present that may have indicated the existence of governance issues affecting the management of business loan credit risk," the report reads. "Examiner commentary identified 'tone at the top' issues exhibited by executive management, which we believe can signal more serious problems."
"Tone at the top" is a common phrase to describe an organization's general ethical climate as established by its board of directors, audit committee and senior management, the report reads.
And "economic conditions and regulatory restrictions to curtail the business loan concentrations exposed the risk management weaknesses," the report reads. "The result was high loan losses, increasing non-performing loans and a depletion of reserves."
"In September, 2011, Chetco Credit Union was deemed to be no longer sustainable on its own," said Gene Pelham, chief executive officer of Rogue. "The feds took it over, ran it until the end of 2012 and found Rogue to take it over."
Specifically, Chetco was found to have overextended its commercial loans in a declining economy and had no way out, he said. "There wasn't enough business in the community to help them." Rogue took over Jan. 1 of this year.
While in receivership, Chetco's assets - good and bad - went out to bid. Pelham said 14 credit union representatives from throughout the United States were in on the initial phone conference. Two that expressed interest were Alaska USA and Security First of Texas, two large financial institutions that have in recent years been acquiring troubled credit unions.
"We said, 'We know Southern Oregon much better than Alaska, or a credit union in Texas," Pelham said. "And we care about them (in Oregon). We fought really hard."
Rogue was one of two credit unions that bid on Chetco's assets; the other was Coast Central Credit Union of California. Rogue's bid was accepted two months later.
Now, Rogue Federal Credit Union is the largest institution in Curry County, with 30 percent of the market share - more than Umpqua and Sterling Bank combined, Pelham said. It had $187 million in deposits this year.
The Medford-based credit union is the largest financial institution south of the Lane County line.
And it's making consumer loans again. Those are up 300 percent in Brookings and 250 percent in Harbor.
"There is business over here if you work for it," Pelham said. "But after this report, we are under very different rules, regulations and oversight than before. Don't be discouraged if we put you through the wringer. If a regulator loses $80 million, they don't want to lose it again, so they're being very tough with us."
Pelham calls Rogue Federal Credit Union a survivor of the Great Recession.
"I used to say we weathered the financial catastrophe moderately unscathed," he said. "But after seeing what happened to others, I now say, 'completely unscathed.'"
The means a lot in an industry that is losing 300 to 500 credit unions nationally each year due to complex regulations and technological systems, Pelham said. He attributes their success to the people for whom he works and who work for him, from tellers to board members and auditors.
"We didn't overreact to crisis, and we didn't underreact to crisis," he said. "We said, 'If this is the worst, then this is what we'll do if this happens. It could have involved laying off people, cutting retirement benefits and closing branches. Everyone knew that if we didn't join together and work hard to do this, this was the next step.
"We had no layoffs. No branch closures. We learned that the sooner you address a problem, the more options you have."
Charlie Baggett, the chief loyalty officer, said any proposed idea is run through a filter to pass muster and be implemented. That filter determines if the idea will keep as members the credit union's "promoters," - those members who proudly discuss Rogue among friends and coworkers - its profitability and the returns for participants.
For example, a credit card with a "living local discount" gives holders a deal on local purchases; so far the credit union has signed up 10 of its hoped-for 30 participating businesses for the program.
The credit union is also trying to make larger grants available to the community.
"Chetco did lots and lots of little checks to lots of people," Pelham said. "We want to make grants meaningful, so they have an impact and benefit members and the community. Instead of five $50 checks, make one $250 check."
For all the success stories, there are still growing pains, Pelham said.
Credit union members asked why they weren't consulted when Rogue took over.
"It didn't belong to our members," Pelham said. "It was solely up to the federal government."
Another misconception is that Rogue "acquired" Chetco Federal Credit Union.
"We acquired the buildings, some of the assets and the people," he said. And among the first things done was to paint the buildings, install signs - and even replace leaking windows.
Those in attendance said they were pleased with how Rogue has addressed problems in the conversion, including call wait-time at the phone centers, the perceived lack of being "local" by targeting a younger demographic in its business model and problems with computer switchovers.
"Trying to go from Windows 7 to Windows 8 is hard enough," Pelham said. "Try doing it for 75,000 people."
They're taking it one lender at a time, Pelham added.
The housing market is steadily gaining strength in Medford, and on the coast it's "stabilizing in an improving economic environment," Pelham said. "We're very bullish in this market."