PHOENIX — In what is being seen as both a surprising and disquieting disclosure, the $1.9 billion Arizona Federal Credit Union last week reported $42.5 million in midyear losses, one of the largest of its kind among recession-scarred CUs in California and Arizona.
The Phoenix CU, second largest in the state, blamed the losses on delinquencies and charge-offs in its home equity, credit card and auto lending portfolio, much of it a fallout from the economic malaise and real estate slump gripping some of its 230,000 members.
While acknowledging "the numbers are ugly" as the CU took a hit with delinquencies at 3.4%, the president/CEO of Arizona FCU, Ronald L. Westad, stressed in public statements that the CU retains solid financial underpinnings, with net capital at 8.23% and more than 10% gross capital. He pledged additional capital would be raised during the remainder of 2008 and in the future.
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Westad said the CU's members, many of them from police and fire departments and city and state government employees, have struggled for more than a year under the weight of the real estate slump marked by record foreclosures.
Using its Web site www.azfcu.org and member letters to reveal its negatives while still conveying a positive safety and soundness message, Westad wrote that the loan losses during 2007-2008 reflected a trickle down effect from the state's weak mortgage market.
"A small percentage of our members are facing financial difficulties brought on by mortgage loans they obtained elsewhere," wrote Westad. "Combine this with rising fuel prices, wage or job loss, falling home values and/or other economic forces, and this same group of members have been unable to fulfill their financial obligations related to car loans, credit card balances and equity loans."
In a Web site section titled "State of the Credit Union" containing the "President's Message," Westad, without spelling out the $42.5 million loss, noted that the CU suffered "short-term losses" for the first half of this year.
He stressed, however, that "as a member, be confident in our financial strength and the fact that Arizona Federal is here to stay" concluding, "We have multiple layers of protection that ensure the safety and soundness of Arizona Federal."
In the message updated early last week with a section giving members a chance to e-mail their opinions and concerns, the Phoenix CEO emphasized that the CU's problems are in no way related to extending subprime loans.
"Most of the financial institutions making headlines recently are institutions that participated in subprime or alternative mortgage products," he wrote.
To lenders, "these products offered considerable reward–at an equally considerable level of risk," which they considered worth taking but not Arizona FCU, he wrote.
"We choose to not directly participate in these mortgage products, and thus we aren't facing the same type of risks as other financial institutions," he said. He added that the CU's loan portfolio "is a solid mix of traditional equity products, vehicle loans and personal/credit card loans."
"However," he continued, "that doesn't mean that we are not facing challenges in today's economy."
Indeed, Westad said the CU first witnessed the surge in delinquencies in March 2007, ending the year with $54 million in loans 60 days past due at year end, a figure that has since dropped to $48.3 million following charge-offs.
The CU's $42.5 million loss for the first half contrasts with the $10 million in net income for the same period a year ago. The CU ended the year with a $9 million profit.
The CU's provision for loan losses has been at $68 million, giving it a 7.35% ratio as compared to average assets. A year ago the ratio was 1.11%
As part of its program to turn around its negative lending performance, CU officials said last January it added to its executive staff Randy Baldwin, former president/CEO of Tucson Old Pueblo CU, "to assist the lending and risk management team." At the same time, the CU also hired additional credit counselors and loan underwriters to work with members.
Westad, joined by other members of management as well as the leadership of the Arizona Credit Union System, strongly emphasized last week what they said were Arizona FCU's strong financial condition despite the big mid-year loss.
The chairman of the Arizona system, Stephen Dunham, president/CEO of the $150 million Canyon State CU of Phoenix, maintained the severe real estate slump has created a difficult climate for a number of Arizona CUs.
"If you take a look at Arizona Federal's numbers as well as some of the others going through a difficult time, you have to see they are well-capitalized," said Dunham.
The management of these Arizona CUs reported what he said were modest losses. And yet the Arizona economy, with soaring foreclosure rates, has a similar pattern to the California experience, though not as severe.
Nonetheless, he said, "We aren't seeing any Norlarcos here because Arizona credit unions have not engaged in anything strange" referring to the faulty out-of-state loans extended by the defunct Fort Collins, Colo., CU in 2007.
Scott Earl, the president/CEO of the Arizona system and former CUNA executive, also reaffirmed what he said was the Arizona FCU's long, secure history of outstanding management and community service, but like other CUs in the state, Arizona FCU is "having to weather some rainy days."
"I have every confidence" in Arizona FCU's ability to re-group quickly, he added. "This is exactly why credit unions build capital to prepare for these rainy days."
Correspondent-at-Large Heather Anderson contributed to this article.
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