Home Value Declines Drive Big CU Losses and Point to Trouble Ahead
Just a couple of years ago, Arizona was among the top states in the nation when it came to job growth, employment, housing starts and wage growth statistics, said Arizona Federal Credit Union President/CEO Ron Westad. Now, the state sits at the bottom of the list in the same categories and is projected to lose jobs this year for the first time in at least 20 years.
"Everything in Maricopa County is related to housing, so the housing downturn has developed into this general economic malaise," he said.
The $1.7 billion AFCU's net worth slipped to 4.75% as of Dec. 31, after beginning the year at almost 11%. It recorded almost $116 million in losses for 2008 and placed $174.5 million in loan-loss provisions, waving a red flag that Westad doesn't expect 2009 to be any better. Of the credit union's $64.7 million delinquencies, $50.7 million are in real estate.
In Southern California's Inland Empire, a suburb of Los Angeles so large it represents the nation's 14th largest metropolitan statistical area, home values have dropped 50% since peak; like Phoenix, it had previously been touted as one of the hottest growing areas in the country.
The $890 million Altura Credit Union, based in the I.E.'s Riverside, posted a $6 million net loss thanks to $14 million in charge-offs and $24 million for loan-loss provisions. Altura is known for extraordinary noninterest income, and CEO Mark Hawkins said his 2008 revenue came in on budget, and he managed to reduce expenses by 11%, which allowed the credit union to absorb the heavy line items without too much damage to the bottom line.
However, Hawkins had discouraging words for his 2009 expectations, saying the destruction of real estate values, coupled with rising unemployment, is driving his members' psyches.
"We heard so much about the wealth effect when prices were going through the roof," Hawkins said. "Well now, we're on the downside of that, and it is not pretty. You know the pattern the bigger they are, the harder they fall? We certainly basked in the glow of being the fastest growing area in the country for years, but we're under a cold, wet blanket now."
Farther west in Los Angeles County, property values haven't dropped nearly as far as they have in Riverside; however, homes are worth more, minimizing actual dollar-loss differences, and unemployment and underemployment has flattened residents' wallets.
The Pasadena-based Wescom Credit Union was among the first high-profile institutions to report losses, taking a $35 million net loss in 2007, and a $53 million net loss for 2008.
Executive Vice President of Finance and Financial Services Keith Pipes said dramatic property value declines dissolved loan collateral, which impacted the performance of his $2.7 billion loan portfolio.
Pipes said that of the charge offs at his credit union, the greatest spike was in real estate-backed loans.
"Was that a surprise? Not really, because 2008 saw the most dramatic downturn in the real estate market, so we knew that trending was there," he said. The $3.2 billion Wescom hasn't put a new mortgage loan on the books in months, he said, instead sending all approved applications straight from the pipeline to the secondary market.
Even in coastal Manhattan Beach, where homes have retained relative value, the $4.2 billion Kinecta Federal Credit Union closed its 2008 books with a $44 million net loss. Chief Financial Officer Karen Christensen said her revenue could have absorbed the institution's $36 million in charge-offs without running into the red. However, another $84 million in loan-loss provisions was too much.
"We do not expect the economy to get better in 2009," she said. "But, we also don't think it's going to get significantly worse."
According to Westad, his institution's commitment to serving the underserved was its undoing.
"Our member demography is a lower income and a younger membership base, and so where we are at currently is reflective of our commitment to serve these individuals, as they've been the ones hardest hit by this economic downturn," he said.
Arizona's job losses are typical with those suffered in the Sunbelt thus far, in the construction, retail and service industries, which are typically filled by young and poor workers.
AFCU has always managed higher delinquency and charge-off rates as a consequence of serving that market, Westad said, but up to this point had successfully offset credit risk by managing interest rate risk and following other asset liability management strategies. Historically, AFCU's combined delinquency and charge-off ratio had run as high as 4% without affecting the bottom line. As of Dec. 31, that ratio stood at 13.04%.