PHOENIX — The path to positive numbers is clear: members simply need to be able to make their loan payments.
That was the message from Ron Westad, the president and CEO of Arizona Federal Credit Union. The $1.6-billion CU managed to turn around a $48 million loss in the first quarter of this year to net income of $11.7 million in the second quarter, but Westad said part of the difference can be explained by the rules that govern the books.
"Just as accounting exacerbated our results in 2009, accounting helped our numbers in the second quarter," he explained, referring to the accounting for the corporate stabilization expense. "There still is a problem with our members making their loan payments. Until that improves, we are going to go as our members go."
Given the current economic and financial "distresses" on Arizona Federal's members, the picture for the second half of the year is "break-even at best," Westad continued.
No Sustainable Improvements
"We are not seeing signs of sustainable improvement in the housing market. There is far too much inventory and far too much of the inventory is foreclosed and short sales properties, which suppresses pricing and new construction. Our local economy has quite a ways to go."
As is the case with many CUs across the country, Arizona Federal is expending a great deal of effort in propping up its members to help them survive the recession. Scott Earl, president and CEO of the Arizona CU League, singled out Arizona FCU for its efforts in that regard. Westad said more than 16% of his workforce is involved in either collections or workout loans.
"Each member's circumstance is evaluated on its own merits; we don't have a 'program,' so to speak," Westad told CU Journal. "We have a loss mitigation team that evaluates those circumstances where the members have the willingness but the impaired ability to make payments. We look and evaluate and see what we can do."
Arizona Federal currently has more than $20 million in workout loans on its books, which Westad acknowledged is better than writing off those loans. Earl recently told Credit Union Journal the Arizona League's affiliates are solid, with one exception: "Arizona Federal was hit much harder in their capital, but I have confidence they will see their way through it."
At the end of the first quarter, Arizona Federal's capital had declined to 1.95%, pushing it into the "critically undercapitalized" category. But Westad reported the CU's net worth ratio as of June 30 was 2.77%, which he attributed to four factors: an emphasis on mitigating credit risk, a reduction in the size of its balance sheet, and efforts to enhance revenues and reduce expenses.
"The biggest thing is credit risk-reducing defaults and charge-offs," he said. "There is only one thing that will allow us to dig out and that is if members repay their loans. There is nothing we can do in reducing expenses or enhancing revenues to make up for members not paying their loans."
Numerous Steps Taken
With that said, Westad noted management's emphasis is on keeping the operation "in balance." Arizona Federal has taken several steps to reduce it expanses, including modifying vendor agreements. In addition, it closed and consolidated six branches this year — two in Tucson, four in the greater Phoenix metro area.
As of its March 5300 Report, Arizona Federal had $113-million set aside in reserves for future loan losses, an amount in excess of 6% of its total assets, and 9% of its total loan portfolio. Because that $113-million is not counted in net worth, Westad said it is one reason why the credit union's numbers have been so bleak.
"Last year, we had loan losses, actual charge-offs, of $100 million, but we took a provision of $170 million to fund the reserve account," he explained. "That is why net income was such a big loss last year. If we only recognized what we wrote off, the loss would have been less."
However, Westad added, "the fact we have been very aggressive in funding our loan loss account is a source of strength for us."
Accounting issues aside, it is the economy — and its affect on members-that is the most important factor in the credit union righting the ship, he reiterated. "We need job creation, wage growth and wage creation. It comes down to whether a person can pay a debt or not. People need to make enough money to meet their obligations, loan payments included."
Arizona Fed's Numbers
Assets: $1,590,702,766
Members: 216,499
Net income before NCUSIF stabilization expense: -$22,864,820
NCUSIF stabilization expense: $13,442,505
Net income: -$36,307,325
Net worth ratio: 2.76% ("Significantly Undercapitalized")
Allowance for real estate loan losses: $28,051,149
Data as of 6.30.09
