SAN BERNARDINO, Calif. — When third quarter financials are finalized, the numbers for Arrowhead Credit Union will be "pretty rugged," thanks to a substantial increase in provision for loan losses in August.
However, stressed Larry Sharp, president and CEO of the $1-billion CU, because ACU took a large provision two months ago, it eked out a small gain in September and should see a profit in Q4.
"We feel we are doing much better; that we rolled through the eye of the storm and are doing better," he told Credit Union Journal. "It is hard for someone to look at the data and see how we are coming up with that assumption, but we are indeed."
Numbers Reflect Market
Sharp said Q3 numbers are what management expected, given the numerous economic problems in Arrowhead's market area, the "Inland Empire" of Southern California. Bankruptcies in the nearby Riverside Federal Court District are up 300% over 2008. Unemployment is approximately 15% and has not yet peaked, Sharp said, adding Arrowhead's SEGs have seen job losses go down substantially even though layoffs continue. Local housing prices are down 30% to 60% in the region the last two years, but Sharp said loan modification efforts are helping to slow the pace of foreclosures.
The CU's losses largely have been driven by unemployment, he continued. Arrowhead has experienced some losses on real estate, and falling home prices initially drove the downturn, "but now it is job losses. Early in the year, most of our groups were taking pretty good hits, but now some are improving a little bit or leveling out.
"In our forecast, we predict to see gains in the fourth quarter," he continued. "It won't be burning up the world, but we do see ending the fourth quarter with a net gain. That's what we needed to do to turn the corner."
Arrowhead's YTD provision for loan losses through September was $69.8 million, with net chargeoffs through September at $46.1 million. Through September, ACU posted a year-to-date loss of $46 million, with a decline in net worth to 3.24% at Sept. 30 from 10.3% in August 2008.
"The numbers are rugged, but we have great reserves to go into a downturn we thought would be far more narrow than this. If we weren't capitalized as well as we were, I'd hate to think of what it would be like. The fact we had 10.3% capital has helped us weather this. We should be able to handle it as long as the economy stays fairly level and hopefully improves."
As reported earlier by Credit Union Journal (Jan. 12 2009), Arrowhead closed four branches effective Feb. 7. As a result of the closures, Arrowhead reduced its 558-person workforce by 29 positions.
Among other measures Arrowhead took earlier this year: it reduced its 2009 operating budget by 10% and Sharp's salary was cut by 17%. Arrowhead instituted a "top-to-bottom cost-cutting effort" that included postponing its plans for adding new branches and slashing its budgets for travel, education and community development.
Limping, But Feeling Better
According to Sharp, it has reduced its total net operating expenses to an estimated $20 million in 2009 from $30 million last year. "We've had to tighten the belt pretty substantially to get us where we are," he said.
Sharp is now optimistic.
"We've certainly limping due to what has happened, but we've been looking for the bottom of this thing for some time. From here, we think the bottom has been reached and we hope to make our way back as losses decline even more.
"If you look at the numbers by themselves it is not a pretty picture, but we've been watching our pipeline," he continued. "We are in a very good position in allowance for loan losses-we have double in allowance what we had in actual losses, so we should get some of that allowance back into earnings and equity. From what we've been living with for the last nine months, things are getting better."
