Credit unions post net 3Q loss, but climate slowly improving

Lou Hirsh

Nov. 7, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- Loan delinquencies and writeoffs continued to batter the balance sheets of Inland-based credit unions in the third quarter, with the three largest of the member-owned cooperatives reporting net financial losses for the fourth consecutive period.

A climate of high unemployment and loan foreclosures took the biggest toll on San Bernardino-based Arrowhead Credit Union, which posted a $46.3 million loss in the latest period, ending Sept. 30.

That was worse than its $28.8 million loss at the end of the prior period, and was due primarily to additions to its pre-emptive loan-loss reserves. Those regulator-mandated reserves protect institutions against future losses but count against current net income.

Filings with the National Credit Union Administration showed Visterra Credit Union, based in Moreno Valley, posting a third-quarter loss of $7.3 million. The loss was $1.8 million for Riverside-headquartered Altura Credit Union.

Credit union regulators collect financial data quarterly, and the numbers reflect their year-to-date status.

Credit union leaders and an industry expert this week said the not-for-profit cooperatives continue to guard against potential future problems with loan delinquencies by boosting reserves. However, they also noted that Inland conditions have so far been improving in the second half of 2009, compared with earlier in the year.

Arrowhead President and CEO Larry Sharp said the co-op's three biggest areas for problem loans in the first half of the year -- recreational vehicle, home equity and auto -- have improved in the second half, with delinquencies falling and recovery of past losses accelerating, especially for car loans.

One result is that Arrowhead's current loan-loss reserves are more than twice the total of actual loan losses -- $51 million versus $23 million. While Arrowhead will remain cautious through at least the first half of 2010, patterns of August through October suggest the credit union may be able to lower the amounts it places in reserve as the economy improves.

"Right now I'm very pleased with where we're heading," Sharp said.

LENDING DEMAND LOW

Daniel Penrod, senior industry analyst for the California Credit Union League in Ontario, said co-ops of all sizes in the state remain generally well-capitalized and insured. However, their opportunities to generate income through lending have been diminished by a virtual standstill in nearly all types of new borrowing.

"Lending demand has decreased across the board -- heavily in auto lending," Penrod said.

Co-op members are looking to cut down their debt and avoid new expenses amid concerns over job stability, he said.

Still, he said, recent small upticks in local employment suggest credit unions should see their finances looking up as 2010 progresses. "It's going to be very slow but steady improvement," he said.

For now, local credit unions anticipate that Inland unemployment will continue to weigh heavily on customers for several more months.

Visterra CEO Robert Cameron said that co-op is now seeing fewer auto repossessions than earlier this year. But August and September saw a noticeable rise in homeowners heading off foreclosure on their mortgage loans, by either turning over the deed to the home, or doing a short sale with the credit union's approval to essentially walk away from the property.

Cameron said homes being surrendered are getting multiple offers and selling quickly -- in days or weeks, not months like a year ago. That has helped Visterra, like other credit unions, minimize losses on home loans.

HELPING BORROWERS

Credit union operators said they continue to work with borrowers to help families meet certain expenses.

For instance, Altura recently started a low-interest loan program for employees of UC Riverside, some of whom were forced to take unpaid furloughs because of state budget cuts.

Altura CEO Mark Hawkins said loan production at the co-op has been trending up since the middle of the year. Also, delinquencies have recently been declining in areas where late payments were rampant in the first half, such as home equity loans and credit card accounts.

Still, Altura will continue to add to pre-emptive reserves, planning for the contingency that the 2010 loan climate ends up mirroring that of 2009.

"It's a very tough economy out there," Hawkins said. "People are holding back and making sure they're going to keep their jobs before they spend a lot of money and take on new debts."

Reach Lou Hirsh at 951-368-9559 or lhirsh@PE.com

Newstex ID: KRTB-0174-39536739