Arrowhead Credit Union is in a tight spot, but executives claim a recovery is coming soon.

This $850 million-asset institution was "significantly undercapitalized" as of Sept.30, according to public filings with the National Credit Union Administration.

Nonetheless, President and CEO Larry Sharp says the credit union is coming into the light at the end of a tunnel.

"We've made the third quarter look worse, with the prospect of making the fourth quarter look a whole lot better," Sharp said.

Instead of writing off the last big batch of bad loans in late 2009 or early 2010, Arrowhead wrote them off in the third quarter - about $21.5million worth, which means it's written off more than $88 million between January 2007 and September 2009.

Arrowhead, sporting 24 branches, never dished out subprime mortgages, but it's still burdened by borrowers who can't repay car loans, RV loans and home equity lines of credit. The credit union lost $75 million between January 2008 and September 2009, according to its filings.

The good news: It seems Arrowhead is coming into the black. It expects to earn almost $1 million in the fourth quarter of this year and $4.5 million in all of 2010, said CFO Daniel Marciante.

"And this is pretty conservative," Marciante said about 2010 projections. "We have to look at things from the perspective of regulators."

Arrowhead Credit Union's key capital ratio plunged to 3.23percent in

September, putting it one notch above "critically undercapitalized." Well capitalized - the level credit unions strive to stay at or above - is 7percent.

The ratio will probably stay in the "mid threes" before slowly creeping up in early 2010, Marciante said.

"We had to get our feet at the bottom - if you will - to start rising towards the top," Marciante said.

To raise its capital ratios, a bank can attract private capital, sell new stock or issue debt to raise money, but credit unions are stuck with cutting costs or selling assets because they are nonprofit.

Arrowhead closed four branches and laid off almost 60 employees earlier this year, an effort that's helped cut one-third of its operating expenses.

Sharp doesn't foresee cutting more branches or jobs.

Keith Leggett, senior economist with the American Bankers Association, said Arrowhead's survival ultimately depends on how good its strategic plan is.

"Arrowhead is shrinking their institution to rapidly improve their capitalization," he said. "The danger you run into is you may be losing productive assets."

It's a Catch-22. Arrowhead uses customer deposits to makes loans, essentially borrowing money to make money.

But with four fewer branches, the credit union has lowered its ability to attract deposits - the fuel for making a profit.

Arrowhead executives, no doubt, believe the benefits of wiping those branches off the map outweigh the benefits of keeping them open.

Leggett thinks Arrowhead's chances of being taken over by regulators and brokered to a larger credit union are slim, but not impossible.

Other area credit unions weren't so lucky.

In September, The Members' Own Credit Union, based in Victorville, was taken over and brokered to the Anchorage-based Alaska USA Credit Union, a $4 billion institution.

Because of other acquisitions, Alaska USA now has 24,000 members in the High Desert.

"If Alaska (USA) is looking at building its franchise, (Arrowhead Credit Union) could be an attractive option to them," Leggett said. "But Arrowhead is a large institution. We're talking about $850 million in assets. Alaska (USA) may not be able to do that without significant support from NCUA."

Alaska USA had already entered the Inland Empire market in July when it bought the Apple Valley-based High Desert Credit Union. Regulators had taken over High Desert Credit Union in October 2008 and managed it for nine months. It had too many home construction loans that went sour.

The combined assets of both credit unions that Alaska USA acquired were less than $200 million.

In Arrowhead's case, the credit union is also selling repossessed cars to salvage anything it can to put toward its bottom line. It's established a lot at the site that once was Center Chevrolet in San Bernardino and a Web site, MyArrowheadMotors.com.

Sharp and Marciante said several cars have been sold, but Arrowhead still has at least 150 it needs to get rid of.

Leggett says the move is becoming more popular with troubled credit unions these days.

"They're going to try and move quickly to sell them," Leggett said. "They're not interested in being car dealers. But the regulators would frown upon them if they just sat there and held onto this inventory."

He said Arrowhead will likely repossess plenty more cars in the near future, given the state of the Inland Empire's economy.

Sharp said Arrowhead is working with its regulators at the California Department of Financial Institutions after receiving an order to recapitalize.

If his earnings projections are correct, Arrowhead may start transferring some of the $53 million it has in its loan loss reserves back to the credit union's bottom line in the next one or two quarters.

"We think we're going to work our way out of this in a reasonable period of time," Sharp said. "That's our goal."

Credit unions' hard times

In September, The Members' Own Credit Union, based in Victorville, was taken over by regulators and brokered to the Anchorage-based Alaska USA Credit Union, a $4 billion institution. The Victorville credit union was holding too many risky construction loans gone bad, along with other delinquent loans.

Alaska USA had already entered the High Desert market in July when it bought Apple Valley-based High Desert Credit Union. Regulators had taken over the credit union in October 2008 and managed it for nine months. It was seized because it had too many home construction loans that went sour.

San Dimas-based WesCorp Credit Union, a corporate credit union that provided liquidity and services to non-corporates, fell victim to its investments in mortgage-backed securities and was seized by regulators in March.

A Corona branch of Wescom Credit Union closed in August 2008, along with 10 other California branches of the Pasadena-based institution. It had to make budget cuts after suffering from unpaid credit card and auto loans.