SAN JOSE, Calif. -- Valley Credit Union, known for itsinnovative on-site child care program, made headlines last weekwhen the California Department of Financial Institutions placed the$257 million cooperative under conservatorship and handed it overto the NCUA.

It is the third Northern California credit union to requireregulatory action this year, following Sterlent Credit Union ofPleasanton and Cal State 9 Credit Union of Concord, which were bothliquidated by the NCUA in July.

Former California Credit Union League executive Matt Davidsonwas selected by the NCUA to take the Valley CU conservatorship CEOposition. Davidson was most recently chief operating officer at$4.2 billion San Diego County Credit Union.

The community-chartered institution with a Pacific Bell historyis not insolvent, Davidson said, and the NCUA hopes to get it backon its feet. He said the DFI had been working with the credit unionto avoid corrective action, but Valley couldn't do it alone. FormerCEO 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 beenincreasing loan-loss reserves, so we'll see. I haven't had a chanceto 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 wouldimagine it is."

Davidson said he doesn't think a particular loan or program isto blame for the losses. Rather, Valley is another victim of thestruggling California economy.

"If you look at the 5300 reports, I think you'll see the sameissues many credit unions are facing in California, like steepincreases in loan loss provisions," Davidson said. "Truly, Ihaven't seen enough yet to say if it's HELOCs or first mortgages orauto loans that are the problem. In this case, though, I think it'smore the general economy in this area."

Increased loan loss provisions do appear to be the primarysource of balance sheet trouble. Second-quarter NCUA numbers showthat Valley earned $8.4 million in interest income, not too far offsecond-quarter 2007 numbers. However, the loan loss provision entrygained 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 indicatetrouble. Annualized second-quarter 2008 numbers show Valleycharging off nearly $1.2 million in indirect loans, whichrepresents almost 13% of its indirect lending portfolio. Indirectdelinquencies are also high, with 4.32% of them past due 60 days ormore. Nearly 17% of all charge-offs were due to bankruptcy, anincreasingly common problem in California, where upside-downmortgages make personal insolvency easy to demonstrate.

Noninterest income increased over the past year, but it wasn'tnearly enough to offset provisions. Valley posted a $5.8 millionsecond-quarter year-to-date net loss, following nearly $7.0 millionin 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, sockingaway $827,500 over the past three quarters.

Valley has also lost $50 million in assets, falling from $308million as of June 2007 to below $257 million as of June 2008. Thecapital 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 hasbeen negative since September 2007.

Davidson is a visible figure among California credit unions,having served as an executive with the California and Nevada CreditUnion Leagues for 15 years, and then taking the top operationalposition at SDCCU, the nation's 13th largest credit union byassets. He also previously served on the American Share Insuranceboard and as superintendent of the Ohio Division of Credit Unionsfrom 1988 to 1991.

Davidson left SDCCU in July after only 10 months on the job. Hesaid he left on good terms and credited his decision to leave to atough commute from Los Angeles to San Diego as well as the desireto advance his career to the corner office.

"San Diego County Credit Union is an extremely healthy creditunion, and I learned an awful lot there," Davidson said, "andhopefully they got some good out of me, too."

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