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.

CREDIT UNION INDUSTRY BRIEFING

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.

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