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Credit Unions Were Well Capitalized Leading Into The Recession

Arizona credit unions are weathering the rocky economy fairly well, but not without some bumps and bruises along the way. More than 20 of the 55 credit unions in the state have seen their bottom lines slip into the red. Even so, conservative and prudent lending policies that steered them away from the risky subprime market, and the fact they are well capitalized, have put credit unions on solid financial ground.

Insiders say the No. 1 measure of solvency is capital, and credit union capital ratios are considered quite healthy.

Credit unions, which are not-for-profit institutions and do not have stockholders to satisfy, nevertheless are feeling the pain of their members who have lost jobs or might even be in danger of mortgage foreclosure or bankruptcy.

Michael Hollar, vice president of business financial services for the 68,000-member Arizona Central Credit Union, describes the percentage of its loans that are in delinquency as “fairly high.” As of late last year, 1.67 percent of Arizona Central’s loans were in jeopardy, compared to 0.5 percent 12 to 18 months earlier.

If a payment is 11 days late, the credit union contacts the member to find out what the problem is. If the payment is 60 days late, steps are taken to ease the member’s financial pain by extending the amortization and lowering the interest rate.

“From a bottom line perspective, we were well into the red in 2008, roughly $6.5 million,” Hollar says.

“The reason is that we put a significant amount of money into reserve for loan losses. Every time we write something off, we put that much into reserve.”

Through 11 months of 2008, Arizona Central had put $10.6 million into its reserve fund, compared to $1.6 million for the corresponding period in 2007, reflecting the result of troubled loans.

“People walk in with the car keys and say they can’t make the payment anymore,” Hollar says. “It’s amazing. We’re lucky to get 50 cents on the dollar on that vehicle when it is sent to auction. Values are down. We’ve had a fair number of home equity loans that we wrote off. There’s no equity in the home anymore. The first mortgage is probably more than the house is worth.”

The goal was to pack as much bad news into 2008, so Arizona Central could hit the ground running in 2009, Hollar says.

Most credit unions have a very strong capital base. Any capital ratio to total assets in excess of 7 percent is considered by the National Credit Union Association to be well capitalized. In the past year, Arizona Central slipped to more than 10 percent from 11 percent, still well above the 7 percent plateau.

“We’re still north of 10 percent,” Hollar says. “As far as long-term stability, there are no issues. We’re not panicking by any means.”

The sinking economy, however, led to some changes in Arizona Central’s already conservative lending policies. Home equity loans that were offered for 100 percent of a home’s value, now are limited to 80 percent.

Steve Dunham, CEO of Canyon State Credit Union and board chairman of the Arizona Credit Union League and Affiliates, assesses the industry’s status: “I think we’re doing pretty well.”

He cites such factors as credit unions being not-for-profit organizations chasing quarterly profits, and avoiding higher-risk activities, including subprime and no-documentation lending.

“That helped protect us,” Dunham says. “Capital at credit unions was at an all-time high going into the recession. Credit unions started out with very good capital, and we still have very good capital at this point. By and large, I think credit unions will weather the recession very well.”

At Canyon State Credit Union, the 20th largest in the state with $140 million in assets, the number of members who are encountering financial difficulties is accelerating somewhat, Dunham says.

“As they have difficulty, so do we,” he adds. “As unemployment rises, more members are losing their jobs or having their hours cut. Real estate loans that everybody thought were well collateralized, with the drop in real estate values, now we’re discovering they are not so well collateralized. We’re very conservative as far as identifying what that real estate value is.”

Like other credit unions, Canyon State works with its members to help them through tough times on a case by case basis.

Even though some credit unions are operating in the red, Scott Earl, CEO of the Arizona Credit Union League and Affiliates, doesn’t expect consumer members to see much difference when it comes to borrowing. However, credit unions might require more documentation before awarding a loan than they did a year or two ago, he says.

At First Credit Union, where defaulted loans have increased mostly for autos, Carolyn Cameron, vice president of business development, says membership actually rose slightly in 2008 to nearly 60,000.
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“We stepped up our relationship building, our marketing efforts, working hard to attract new members and retain our current members,” Cameron says.

On the financial side, Cameron says, “Our very strong capital position prepared us to weather fluctuations in economic conditions. We also added provisions for dealing with increased loan losses. We eliminated construction loans, and we came out with an assistance program for members having trouble.”

Assistance may involve deferring or reducing payments, and reducing interest rates to help borrowers get back on their feet, she says.

What is it going to take to turn the economy around? Dunham, chairman of the Credit Union League, says the answer is simple.
“In Arizona, we need to absorb the excess real estate that’s available and get home building started again.”

Small Businesses getting help in down economy

Despite Weak Economy, Credit Unions Are Providing Financial Assistance To Small Businesses

When talking about credit unions and business loans, the key word is small. The percentage of business loans to credit union assets nationally is about 2 percent; business loans in Arizona average about $240,000, compared to $180,000 nationally. And because the loans are relatively small, the focus is on small businesses. Federal law caps credit union business loans at 12.25 percent of total assets.

“With business loans hovering at around 2 percent, it tells you that a lot of credit unions are not doing business loans. But they have plenty of room to assist businesses,” says Scott Earl, CEO of the Arizona Credit Union League and Affiliates.

One of the reasons that a majority of credit unions, especially smaller ones, don’t dabble in business lending is because of the level of expertise required.

“You need to be fairly sophisticated,” Earl says. “Traditionally, larger credit unions have the ability and staff support to make business loans.”

Of course, not all business loans require a lot of sophistication. Perhaps a teacher has a summer job doing yard work and needs a trailer to haul things around. In fact, many of the loans go to sole proprietors, and some involve small-business owners who were turned down by a bank.

“We hear stories like that all the time,” Earl says, “and not because of economic conditions.”
Traditionally, a credit union gets involved in business loans because some loans are too small for the average bank — not worthy of their time and effort. That’s probably a bigger issue during an economic boom, Earl says.

“We’re making business loans. You hear about banks pulling out of business lending. But we have not done that,” says Mark Olague, assistant vice president of business lending for Desert Schools Credit Union.

He tells of a business prospect who had a construction loan with a bank and was having difficulty getting timely advances. Not only did the credit union make the construction loan, refinancing was approved for commercial loans on several of the client’s other Phoenix area properties, as well.

“We were able to step up and do the construction loan for that small business, making our member happy,” Olague says. “The key regarding the credit union world is that not only are we here to service business loans, we’re looking for relationships. We are relationship-oriented.”

In addition to providing an attractive interest rate on a business loan, credit unions offer such services as a checking account, credit card options for sales and purchases, and a 401(k).
“We’re like a one-stop shop,”

Olague says. “We can make loans for an overdraft line of credit for as small as $2,000 or for the purchase of a business vehicle for $30,000 to $40,000. Generally our footprint is from $25,000 to $2 million.”
Desert Schools’ business members generally seek loans for purchasing a fixed asset to start a new business.

“We’re not entertaining startups,” Olague says. “Normally, we’re looking at businesses that have been in existence for at least two years.”

All, however, is not rosy among credit union business members. A few have had bankruptcy issues and cash flow difficulties.

“We’re here for them in good times and bad times,” Olague says. “We may modify their loan to make payments easier for the interim.”

At First Credit Union, which has been making business loans for four years, Joe Guyton, senior vice president of credit, says he’s not seeing startups like he did a year earlier.

“The economy is clearly having a big impact on the capital needs of beginning a business,” Guyton says.

“There are not many people out there with the confidence to start a business. Our business members are coming in to maintain their borrowing relationship. They are concerned about losing that relationship. The amount of inquiries regarding new projects has almost dried up — anything with construction dollars on it.”

Although some business members have filed for bankruptcy, because First Credit Union is relatively new to business lending, the impact on it is considerably less than it would be on a major bank, Guyton says. Fewer than 1 percent of the credit union’s 60,000 members are businesses.

“We’re in a good position to continue to help them,” he says.
Michael Hollar, vice president of business financial services for Arizona Central Credit Union, says most of his business members are struggling. Last year, when gas prices skyrocketed, business members making deliveries took a huge hit. They were looking for alternate sources of fuel and were not seeking loans to buy new vehicles. They repaired what they had.

“A few of the savvy ones, when interest rates started dropping on the real estate side, came in to refi a loan with lower rates,” Hollar says. “We accommodated most of them. We charged a fee, but they were OK with that, rather than staying with the same payments.”

The volume of loan requests dropped considerably during the last three-to-four months of 2008. There were a few startups, mainly from people who had been laid off and were trying to go into business for themselves.

“In this environment, there is very little interest in businesses buying a new piece of equipment or looking for a building,” Hollar says. “They’re hunkering down to ride out the storm, hoping that 2009 brings a brighter day.”