NORTH HIGHLANDS, Calif.-Despite continuing sluggishness in the housing market and high unemployment in greater Sacramento, SAFE CU CEO Henry Wirz is projecting black numbers in 2010.

"We remain profitable," he said of the $1.7-billion credit union. "We had a lull in September because we booked the NCUA assessment. We had accrued all but about $700,000 of it. We had negative net income of about $300,000 in September but the first two months were profitable and there is no doubt the quarter will be profitable. We should finish the year on a profitable basis, as well. Next year and the year after we expect to finish positive $3 million to $4 million."

In SAFE's September Call Report its net income through the first nine months of the year was $4 million, despite its $1.8 million expense for the NCUSIF.

The big variable for 2011 will be the ongoing corporate CU and share insurance premiums, to which Wirz said SAFE has budgeted 40 basis points. In addition, he anticipates interchange income will decline 30%. "The range could be 30% to 60%, but we are hoping to manage it at the lower end," he said.

California remains in the midst of a "very significant downturn in housing," Wirz noted. In SAFE's local market, which includes the state capital, "the shoe has not dropped" on state employment. There is a structural budget deficit in the Golden State that Wirz said will need to be solved by some budget cutting and some raising of taxes. "And that combination will affect our membership. There will be fewer public employee jobs."

Some Good News, Some Bad

Wirz said he has seen "marked improvement" in the credit quality of SAFE's auto and real estate portfolios. But real estate remains on a negative trend.

SAFE has enjoyed better foreclosure rates in 2010 compared to 2009, but that figure has risen in recent months. Wirz said the lending department is identifying members who are upside down or have other problems and is contacting them.

"Some banks tell people to call them when they are delinquent, but we think it is better to get to the member before they have a big problem. If you wait until they are delinquent it is difficult to work out solutions."

Defaults have declined in auto lending and credit cards, which Wirz said will allow SAFE to pull $1 million out of its ALL "We have a slight overfunding. We could take out more if the state budget finally gets resolved. The lesson we should all learn is this crisis shows you cannot look at historical performance. Instead, make reasonable projections based on the current situation. We can project there will be layoffs in state employees next year, which will have a ripple effect in the area."

SAFE has made changes, including hiring commissioned real estate loan officers to drive mortgages, and investments in mobile banking, home banking and other web-based products. "The pie is going to be smaller, so we need a bigger slice of the pie," he said. "Members are borrowing less because they borrowed too much before. Borrowing is essential borrowing only and there is a lot less of it. We have seen a ray of sunshine in business lending. We are now the No. 2 volume SBA lender in our area to Wells Fargo."

During the recession, SAFE eliminated 401(k) matching and incentive pay as it pared expenses, "but you can only ride that horse for so long," Wirz said. "We have built money into the 2011 budget to restore that, plus we will do profit sharing, incentives and merit bonuses. You can't cut your way to success, and some of our cuts went into the muscle of the credit union. We don't want to do this on the backs of our employees."

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