SAN JOSE, Calif. -- Valley Credit Union, known for its innovative on-site child care program, made headlines last week when the California Department of Financial Institutions placed the $257 million cooperative under conservatorship and handed it over to the NCUA.
It is the third Northern California credit union to require regulatory action this year, following Sterlent Credit Union of Pleasanton and Cal State 9 Credit Union of Concord, which were both liquidated by the NCUA in July.
Former California Credit Union League executive Matt Davidson was selected by the NCUA to take the Valley CU conservatorship CEO position. Davidson was most recently chief operating officer at $4.2 billion San Diego County Credit Union.
The community-chartered institution with a Pacific Bell history is not insolvent, Davidson said, and the NCUA hopes to get it back on its feet. He said the DFI had been working with the credit union to avoid corrective action, but Valley couldn't do it alone. Former CEO Anthony Jones left in March.
"This particular credit union still has some capital left," Davidson said. "It's not an insolvent situation, and they have been increasing loan-loss reserves, so we'll see. I haven't had a chance to analyze the numbers yet, so I don't know if it will be enough; but, in this case, they'd been working with the DFI, so I would imagine it is."
Davidson said he doesn't think a particular loan or program is to blame for the losses. Rather, Valley is another victim of the struggling California economy.
"If you look at the 5300 reports, I think you'll see the same issues many credit unions are facing in California, like steep increases in loan loss provisions," Davidson said. "Truly, I haven't seen enough yet to say if it's HELOCs or first mortgages or auto loans that are the problem. In this case, though, I think it's more the general economy in this area."
Increased loan loss provisions do appear to be the primary source of balance sheet trouble. Second-quarter NCUA numbers show that Valley earned $8.4 million in interest income, not too far off second-quarter 2007 numbers. However, the loan loss provision entry gained a nasty comma, up from $670,000 in second-quarter 2007 to $7.8 million in second-quarter 2008.
Charge-offs, particularly in indirect lending, also indicate trouble. Annualized second-quarter 2008 numbers show Valley charging off nearly $1.2 million in indirect loans, which represents almost 13% of its indirect lending portfolio. Indirect delinquencies are also high, with 4.32% of them past due 60 days or more. Nearly 17% of all charge-offs were due to bankruptcy, an increasingly common problem in California, where upside-down mortgages make personal insolvency easy to demonstrate.
Noninterest income increased over the past year, but it wasn't nearly enough to offset provisions. Valley posted a $5.8 million second-quarter year-to-date net loss, following nearly $7.0 million in losses at year-end 2007.
The credit union has lost half its equity in the past year, falling from $26.3 million in undivided earnings to $12.5 million. However, the credit union did beef up its regular reserves, socking away $827,500 over the past three quarters.
Valley has also lost $50 million in assets, falling from $308 million as of June 2007 to below $257 million as of June 2008. The capital ratio fell from 8.55% to 5.17% during the same period. Return on average assets was negative 4.22% as of June 2008 and has been negative since September 2007.
Davidson is a visible figure among California credit unions, having served as an executive with the California and Nevada Credit Union Leagues for 15 years, and then taking the top operational position at SDCCU, the nation's 13th largest credit union by assets. He also previously served on the American Share Insurance board and as superintendent of the Ohio Division of Credit Unions from 1988 to 1991.
Davidson left SDCCU in July after only 10 months on the job. He said he left on good terms and credited his decision to leave to a tough commute from Los Angeles to San Diego as well as the desire to advance his career to the corner office.
"San Diego County Credit Union is an extremely healthy credit union, and I learned an awful lot there," Davidson said, "and hopefully they got some good out of me, too."