The Business Press: Credit Unions see mortgages as part of return to profitability

By Chris H. Sieroty 

Contributing Writer

California credit unions originated more than 12,500 primary mortgages, including purchases and refinances, in the second quarter of 2009, the highest level since the second quarter of 2004 and almost 2,000 more than the first quarter, according to a report by the California Credit Union League.

Based in Ontario, the CCUL said California credit unions originated more than $7.3 billion in loans in the second quarter, up from $7.1 billion in the first quarter of the year.

In Inland Southern California loan volumes were mixed as credit unions in San Bernardino County originated 92 primary mortgages in the second quarter for more than $16.2 million, compared to 108 loans for more than $12 million in the first quarter. In Riverside County both primary loan numbers and capital outlay were down in the second quarter. The CCUL reports 542 loans were made in the second quarter for more than $9.3 million, compared to 708 loans for more than $12 million in the first quarter.

“We are still seeing credit unions approving primary loans in the region,” said Daniel Penrod, senior industry analyst with the CCUL. “I expect the number of home sales will increase but home prices will continue to decline because there are still a lot of foreclosures and short-sales available. Things will level off near the end of the year.”

Despite, the region’s high unemployment rate and stagnant real estate market, Penrod told The Business Press that credit unions are seeing an increase in deposits as customers view credit unions as conservative and a safe lending institution compared to major financial institutions.

But Inland credit unions have not been immune to the financial problems brought about by sour real estate loans that have forced the Federal Deposit Insurance Corporation to seize local banks and sell their assets to more stable financial institutions.

In the High Desert, the National Credit Union Administration has seized two credit unions and sold their assets and liabilities to Alaska USA Federal Credit Union.

In June, Alaska USA purchased certain assets and liabilities of High Desert Federal Credit Union in Apple Valley in a deal valued at about $100 million, according to a company executive. The sale came after the NCUA had been overseeing the operations of High Desert since Oct, 16, 2008, when the federal agency placed the struggling credit union into conservatorship.

Three months after it acquired High Desert, Alaska USA took over The Members’ Own Federal Credit Union in Victorville in a deal valued at approximately $80 million, according to the NCUA. The Anchorage-based credit union now owns five local branches, servicing a combined 22,000 members.

“The acquisitions are part of our strategy of expanding our business into areas where we feel like there is an opportunity to grow our business model,” said Dan McCue, Alaska USA’s senior vice president, corporate administration. “San Bernardino County is a good sized area with lots of opportunities.”

McCue said the credit union’s business model was based on attracting deposits along with offering other business lines, including mortgages, trust services, business services and insurance.

In terms of originating primary mortgages, McCue said even in a recession Alaska USA would continue to do business in the Inland Empire.

“We are looking for loans,” he said. “We are making decisions on a case-by-case basis, but we are trying to offer mortgages and other loans to our members. I’ve been told that customers are happy we are in the region, because some credit unions had stopped lending money.”

While Alaska USA is relatively new to the two-county region, Altura Credit Union and Arrowhead Credit Union are well known brands locally.

Mark Hawkins, president and chief executive of Altura Credit Union, said the loan totals seemed low and attributed the CCUL’s figures to loans made by local credit unions and placed on their books and not packaged and sold on the secondary market. Based in Riverside, Altura is a state-chartered credit union with 14 branches, 110,000 members and $908 million in assets.

“So far this year, we’ve made about $100 million in loans,” Hawkins said. “In most cases we are not putting the loans on our books. We are packaging them and selling them on the secondary market. We can do a lot more business by packaging our loans.”

Altura Credit Union is expected to issue $11 million in primary mortgages in October. Hawkins said most of the mortgages approved have been for “purchase activity” and not refinances.

“It’s a tough time when it comes to refinancing,” he said. “Most people can’t qualify for refinancing, because they’ve lost the equity in their homes.”

It’s also been a difficult time for Altura in terms of loan losses, which has forced the credit union to use staff to modify mortgages to keep people in their homes. Hawkins said the credit union lost money for the first five months of the year but in each of the past five months has reported a profit.

For the six months that ended June 30, Altura reported a loss of $3.5 million, but for the third quarter it reported a $1.8 million profit.

“We will be profitable for the fourth quarter, but we expect to report a loss for the fiscal year,” Hawkins said. “But any positive trend is extremely welcome.”

Larry Sharp, president and CEO of Arrowhead Credit Union, said his company would not be profitable this year because of heavy loan losses.

“Last month we reported a $94,000 profit, though it won’t be enough to make up for earlier losses,” Sharp said. “We will be profitable in 2010 and 2011 on a year-to-year basis. We have turned the corner, and things are beginning to stabilize.”

Despite reporting loan losses, Sharp said Arrowhead was actively lending and putting those loans on the firm’s balance sheet.

“We are not going to the secondary market,” he said. “We feel like it’s a good time to be making home loans, especially with yields down in other lending. Since December, delinquencies have been going down, but consumers are still skeptical about how slow things are turning around.”

Gene Shabinaw, Arrowhead’s senior vice president of lending, said the company had set aside $68 million for loans, with a portion designated for real estate transactions. In terms of returning to making a profit from home loans, he acknowledged the company had “dipped into the red and is starting to come out the other end.”

Sharp agreed, saying Arrowhead will benefit from working with some of the region’s largest employers, from local school districts and county governments to Stater Bros.

“Our members are mostly employed by some of the largest employers in the area,” he said. “Many of these agencies and companies have begun to settle down in terms of layoffs, while the general community hasn’t settled yet. We will benefit from (that stability).”

Based in San Bernardino, Arrowhead Credit Union, a state-chartered institution, operates 24 branches, with more than 162,000 members and $979 million in assets.


During a recent hearing held by the U.S. Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions, Debbie Matz, chairwoman of the National Credit Union Administration, said it was a challenging time for credit unions, and predicted that the number of troubled credit unions would probably increase through at least early 2011.

“Credit unions have not been spared harsh effects of the economic downturn and have a difficult road to travel in 2010 and beyond,” Matz told lawmakers at the Oct. 14 hearing on the condition of the financial services industry. In response to the challenging environment, she said the “NCUA has enhanced our supervision, shortened the examination cycle, increased the number of examiners and upgraded risk-management systems.”

She said that as of Sept. 30 there were 66 credit unions with assets over $100 million with a CAMEL 4 or 5 rating, compared to 12 in 2007. Overall, there are 326 such credit unions, representing 4.9 percent of all credit union assets.

According to the NCUA, a CAMEL rating is an internal rating system used for evaluating the soundness of credit unions on a uniform basis, the degree of risk to the National Credit Union Share Insurance Fund (NCUSIF), and for identifying those institutions requiring special supervisory attention or concern.

Matz said one of the bright spots is the “savings flight to quality” caused a 16 percent annualized increase of member deposits during the first half of 2009.


The Business Press: Community banks seek gain in market share from fallen

By Chris H. Sieroty

Contributing Writer

A steady stream of financial institutions nationwide have collapsed over the past year as a result of the country’s economic crisis and millions of dollars in soured real estate loans. As of Oct. 2, the Federal Deposit Insurance Corp. had taken over 98 banks both large and small across the country.

That figure compares with 26 banks seized last year and just three in 2007, according to statistics compiled by the FDIC. In Inland Southern California, four community and business banks — 1st Centennial, PFF Bank & Trust, Temecula Valley Bank and Vineyard Bank — have been shuttered since November 2008, and analysts expect additional small and midsized financial institutions to be taken over by the federal agency before the two-county region’s economy begins to recover late next year.

“California banks have probably been hit harder than banks in most other states due to the decline in the real estate market,” said Beth Mills, vice president of communications with the Sacramento-based California Bankers Association. “Additional banks being seized by the Federal Deposit Insurance Corporation is inevitable. It’s going to be a tough environment over the next year to year and a half.”

Mills said despite the adverse economic conditions, the majority of community and business banks in the Inland Empire “are well-capitalized and have enough capital to withstand the downturn.”

In total, the four Inland Southern California community banks seized by the FDIC cost the federal agency $1.897 billion. But those financial institutions that remain have been looking to take advantage of the fallout to increase their market share and total assets, according to several bank presidents interviewed by The Business Press.

“The recession wiped out a lot of the competition,” said Gary Votapka, president and chief executive officer of Temecula-based Mission Oaks National Bank. “I’m not happy about that. It’s not the way you’d like to increase your market share.”

Votapka said Mission Oaks has seen a fair amount of new business since Temecula Valley Bank was seized by regulators on July 17 and was taken over by First Citizens Bank of Raleigh, N.C. He explained that many of their new clients wanted to continue doing business with a smaller, independent business bank.

Ralph Wiita, president and chief executive officer of Golden State Bank in Upland, agreed, saying they’ve had a good opportunity to increase market share, particularly following the collapse of PFF Bank & Trust and Vineyard Bank.

“Our opportunity to increase our market share lies with attracting customers who want to work with a community bank and not a large financial institution like the banks that have taken over several local banks,” Wiita said. “We also have a one-on-one marketing effort. We have been calling offices and soliciting business, while following up on referrals and participating in networking opportunities with social organizations, chambers of commerce and rotary clubs.”

For the second quarter, Mission Oaks National Bank reported a net loss of $3.84 million, or 85 cents per share, compared with net earnings of $158,000, or 4 cents per share, for the same period a year earlier. In the first six months of 2009, Mission Oaks lost $6.39 million, or $1.42 per share, compared with net income after taxes of $461,000, or 10 cents a share, in the corresponding 2008 period.

Results from the second quarter and year-to-date of 2009 are exclusive of any credit for income taxes while the results from the second quarter and year-to-date of 2008 included tax provisions of $80,000 and $261,000, respectively, the company said in a regulatory filing with the U.S. Securities and Exchange Commission.

The earnings decline was primarily attributed to increased contributions to loan loss reserves, which totaled $3.61 million in the second quarter and $5.97 million year-to-date. That compares with provisions for loan losses of $534,000 in the same quarter and $786,000 in the year-to-date results a year ago, the company said.

Votapka said second-quarter results were impacted by a $3 million write-down on a secured real estate loan that became “impaired” during the quarter.

As of June 30, the company had total assets of $218 million, up $6.8 million, or 3.2 percent, over what was reported a year ago. Total deposits in the second quarter were $182.3 million, a 13.8 percent growth from the same period a year earlier.

He said the bank remains well-capitalized under regulatory guidelines. Mission Oaks National Banks has $25.5 million in equity capital, according to the FDIC.

“The biggest issue for our bank and banks in the Inland Empire is the devaluation of real estate holdings and the effect it’s having on our balance sheets and earnings,” Wiita said.

Golden State Bank has $160 million in assets and operates two branches in Upland and Brea. The collapse in real estate values has caused the company to swing from a profit of $600,000 in 2007 to a loss of $9.2 million from January 2008 through June, he said.

“The bank is padding its capital fund internally,” he said. “Our losses are all related to our real estate portfolio. We don’t see any more losses and our (third quarter) earnings are much improved.” Golden State Bank was scheduled to release its third-quarter earnings on Oct. 19.

Wiita stressed that the company’s “core operating earnings are profitable and have been profitable all along.”

The bank, which was founded in 2003, has a diverse loan portfolio with about one-third small-business loans; one-third commercial, office, industrial and real estate construction loans; and one-third real estate business loans. He said real estate business loans were dominated by specialty loans to fast-food restaurants, convenience stores and gas stations, all businesses that tend to do well in recessions.

Wiita said Golden State Bank has been more selective in making loans because the risk exposure is “bigger” in a recession.

“One of the challenges in this economy is to maintain higher reserves and capital level,” said Kevin Farrenkopf, president and chief executive of the Bank of Hemet. “Our goal has been to increase our capital reserve level, which we did through earnings. As of June 30, we had earnings of $3 million for the first six months of the fiscal year.”

The bank has $37.8 million in total capital, according to the FDIC. Based in Hemet, the bank has six branches and focuses on lending to small businesses and income-producing real estate.

Farrenkopf said the bank opened a permanent branch in Beaumont in September but will likely not expand this year or in 2010.

“We’ve been there for over a year, but we just recently opened a new, permanent branch,” he said. “Our company was originally attracted to Beaumont because there were no other community banks in the area. We also thought in was an underbanked area.”

Both Wiita and Votapka said that Golden State Bank and Mission Oaks, respectively, have no plans to expand their companies through opening of new branches.