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Attorney: Action Hurt Credibility Of Credit Union - Nov 6, 1988 - Omaha World-Herald

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Attorney: Action Hurt Credibility Of Credit Union; [Sunrise Edition]

Paul Goodsell. Omaha World - Herald. Omaha, Neb.: Nov 6, 1988. pg. 1.B


Full Text (1088 words)

(Copyright 1988 Omaha World-Herald Company)

The Franklin Community Federal Credit Union may not be able to survive its takeover by federal regulators, William Morrow, an attorney for the credit union, said Saturday.

The decision by the National Credit Union Administrative Board to take control of Franklin Friday "probably destroyed the credibility of the institution," Morrow said.

Morrow said he did not know whether federal officials would allow Franklin to operate again or if it would have to merge with another institution.

Records Removed

Saturday, federal workers removed boxes, file cabinets, computers and other records from the credit union's offices at 1723 N. 33rd St. They loaded the materials into a 17-foot-long rented truck as Omaha police officers stood guard.

Credit union members, whose accounts are insured up to $00,000 by a federal agency, will be able to conduct business Monday at a temporary office in the Federal Courts Building, 215 N. 17th St.

J. Leonard Skiles, a regional director of the national credit union organization, said authorities placed Franklin under a conservatorship because of "unsafe and unsound practices and the potential losses that have and could occur if they were to continue."

FBI and Internal Revenue Service agents seized some of Franklin's records Friday.

The World-Herald also has learned that a federal grand jury requested information from the City of Omaha about Franklin, its affiliates and its chief executive, Lawrence E. King Jr.Subsidizing Group

The World-Herald also has learned that Franklin's operation has been subsidized extensively by its affiliate, Consumer Services Organization Inc. (CSO).

In 1986, for example, CSO provided $35,000 in grants to Franklin, according to records in the Omaha City Planning Department. The credit union reported net income of $34,227 for that year. Without the CSO money, Franklin apparently would have lost about $00,000 in 1986.

In June 1985, a confidential examination report by the National Credit Union Administration cited Franklin's reliance on CSO grants and indicated that the money was needed to keep the credit union afloat.

At the time, the examination report gave Franklin a "fair" rating, indicating that the credit union "has some problems that need attention but is not expected to fail."

The report also noted that King was instrumental in raising the necessary grants. It suggested that the credit union board obtain "key man" insurance for King because of his importance to Franklin's health.

Grant Money Sources

The grant money from CSO has come from churches, corporations and foundations. A 1986 financial balance sheet for the organization lists $88,838 in donations - nearly all of CSO's revenues for the year.

In addition, some of Franklin's employees are paid through CSO, a former employee said. Franklin's annual report for 1986 listed $1,967 in salaries and benefits. The CSO report for 1986 claimed $42,820 in salaries and another $22,779 for payroll taxes, health insurance and pension contributions.

Morrow acknowledged that CSO's help is needed "to keep the credit union functioning." He said many credit unions require similar assistance from a related organization.

"CSO, as I understand it, is the principal sponsor of the credit union," Morrow said.

The credit union was founded Dec. 31, 1968, by a Franklin Street neighborhood group concerned about a lack of financial institutions in north Omaha. King became Franklin's manager in mid-1970.

The credit union serves the near north side - as well as South Omaha neighborhoods - accepting interest-paying deposits and making loans.

Decisions Questioned

CSO was started in 1974 to teach clients about money management, provide advocacy services and help people in financial crises. The organization also has received federal grants to underwrite its efforts.

The 1985 examination report of Franklin questioned some Franklin management decisions.

"The growth in this credit union is erratic because of the reliance upon high dollar amounts of solicited certificate money and borrowing," the report said. "The credit union has borrowed $60,000 presently for no obvious purpose."

The 1985 report also questioned several loans that Franklin had issued. A more recent examination, also by the national credit union group, also raised questions about some of Franklin's loans, according to several people who have seen the report.

Morrow said it is common for examiners to find fault with a financial institution's loans, regardless of whether the organization is sound.

"They always criticize loans," he said.

'Magic Buzzword'

Morrow said the description of Franklin's practices as "unsound" does not indicate serious problems.

"That's a magic buzzword of regulators," he said.

Morrow said he did not believe that poor loan performance was the reason behind the federal takeover.

Franklin's interest income from loans has remained relatively stable for the past five years, according to the credit union's annual reports.

Loan income was $6,128 for 1983 and $8,555 for 1987.

The credit union's assets more than doubled in the same period - from $,063,233 at the end of 1983 to $,252,413 at the end of 1987.

When Franklin's doors were closed Friday, federal regulators said the credit union had $.5 million in assets. Both the 1987 and current totals are below Franklin's 1986 year-end assets of $.4 million.

Morrow said he presumes that the credit union aggressively sought depositors by offering high interest rates, then reassessed its position and let interest rates drop.

Loan Portfolio

One Franklin board member, who spoke on the condition that he not be identified, said the credit union had made adjustments in its operation to satisfy federal regulators.

The board member said the credit union has been required to write off additional bad loans as a result of the federal examinations. At least some of the CSO grant money has been used to offset the loan losses, the board member said.

The board also has been told to develop a policy for managing the maturity dates of Franklin's investments to avoid cash-flow problems.

The takeover at Franklin occurred the same week that the City of Omaha transferred administration of a $.3 million loan portfolio from Franklin to the Community Bank. The Community Bank will collect mortgage payments and keep records for the City Planning Department, which has provided low-interest loans to low-income Omahans to renovate their homes.

Assistant Planning Director Robert Peters said the city received a check from Franklin last week for $06,113 to cover tax and insurance escrow accounts. But he said the credit union still holds an estimated $0,000 in city funds, representing the past month's mortgage payments. Franklin had planned to transfer the money to the city Nov. 10.

"Sure, I'm concerned," Peters said, adding that he did not know whether that transfer will be held up because of the takeover.

Credit: World-Herald Staff Writer

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