Conservative Strategies Helped Big California CUs Remain in the Black
California's 28 credit unions with more than $1 billion in assets vary widely in such key measures as net worth, profitability and loan quality. Three are undercapitalized, with less than 6% net worth: the $3 billion Wescom Credit Union, the $1.64 billion Kern Schools Federal Credit Union and the $1.45 billion North Island Federal Credit Union.
But 23 of the 28 credit unions apparently took the conservative route and remain well-capitalized. Twelve even reported net profits as of Sept. 30 despite California's well-documented real estate, state government and overall economic problems.
Wood said she's most concerned about the negative effect real estate loans continue to have on the state's credit union balance sheets. Property values have suffered significant declines, she said, and when combined with high unemployment, they prevent credit unions from making loan modifications.
California's DFI hired 14 new examiners last year and added two new portfolio managers this year, Wood said. Examinations are risk-focused in both scheduling and scope, which also gives the state a leg up on losses.
NCUA spokesman John McKechnie said the agency is prepared to manage 2010's losses, saying the regulator factored in California's poor economy and losses when it prepared its budget and planned the year's activities.
Of those California credit unions under prompt corrective action,
expense control is a key commonality in net worth restoration plans,
"Operating expenses are the one component of a credit union's income statement that is wholly within management's control," he said. "Many credit unions also review fee income to determine if they are adequately charging members for the cost of services used."
The old standby strategy of stabilizing or reducing assets to restore net worth is also common, he said. This is most often achieved by establishing at or below market dividend rates.
Both regulators predicted a tough 2010 for California credit unions, with McKechnie predicting more loan losses, and Wood anticipating property value declines and credit losses, particularly in commercial real estate.
"Clearly this is a challenging period for California credit unions," McKechnie said. "NCUA recognizes the stress being experienced in many fields of membership. Credit unions are encouraged to analyze the ability to repay, work with members to modify loans when needed, and minimize the absorption of capital to ensure sufficient reserves are available to support long-term viability."
California credit unions with $1 billion or more in assets are concentrated primarily in the San Francisco, San Jose and Sacramento metropolitan areas of Northern California, and Los Angeles, Orange and San Diego Counties in Southern California.
Many have education, military or government employees as legacy sponsor groups, like other billion-dollar-plus credit unions across the country. Those with a history serving aerospace, technology and telecommunications sectors reflect California's large economy, which despite the recession was still ranked the world's eighth largest according to the U.S. Department of Commerce.
Not only is California's economy struggling, but a number of large California credit unions were members of Western Corporate Federal Credit Union and posted capital losses similar in size to the NCUSIF's corporate stabilization assessment.
Like other credit unions in the state, the $7.8 billion SchoolsFirst FCU, Santa Ana, has experienced a decline in members' ability to repay loans due to high unemployment rates, the state budget crisis and severe home devaluations. However, the credit union has been modifying loans and has also deepened its analytics "to identify pressures and seek mitigating strategies to prevent or limit losses," said Erin Mendez, executive vice president and chief operating officer.
"The reversal of the NCUA's charge for the corporate credit union stabilization assessments positively impacted our earnings this year," she said. "We also have a razor sharp focus on efficiency and effective management of expenses, as shown by our third-quarter operating expense ratio of 1.63% [which excludes the positive impact of the NCUA adjustment]."
However, the profitable credit union hasn't adopted a "slash and burn" approach, either. Mendez said SchoolsFirst began the year by creating a list of services that were "non-negotiable," and at the top of the list was commitment and service to members.
"Our team continually advocates for our members and is dedicated to making our members lives better. Because we have a great field of membership, a fantastic team and an unwavering focus to serving our members, the hard days have been easier to handle," she said.
San Diego County Credit Union CEO Irene Oberbauer said her credit union avoided the loan losses plaguing other California credit unions because the experienced management team and staff "saw the writing on the wall very early on." SDCCU's real estate and business lending staff have decades of experience through several economic cycles, she said.
"I would suggest this [recession] is the worst I've ever seen, but early on, we started changing our real estate and consumer loan underwriting standards, I'm not so sure everyone else did," she said.
The credit union's board and former CEO carefully analyzed the balance sheet and stuck to what Oberbauer called a "balanced growth effort," which included maintaining a higher capital level than its more growth-oriented peers.
"Anyone can tweak numbers so your assets will grow, but it's better to grow consistently," she said. "Who wants to be greedy in any market? The equation comes out to what are you going to do to grow in a balanced way."
The credit union's nearly $5 billion in assets offers significant economies of scale, but Oberbauer said she's thankful she instituted a culture of thrift when times were good, which has kept SDCCU among the nation's most efficient credit unions.
"It's too late to cut expenses when times are tough," she said. "But, having said that, I give kudos to my peers who have cut expenses and shrunk assets and turned things around. We're all in it together, good or bad."
The Palo Alto-based Addison Avenue FCU's financial strength is rooted in strong capital, a diversified business model and an exceptional membership base, said CEO Benson Porter. While the macroeconomic environment as touched all sectors, including technology, it's also reinforced that "relationships matter."
"As our members' financial partner, we are being proactive with various outreach and assistance programs. It is exactly this time where our cooperative model of 'people helping people' shines," he said.
In planning for 2010, the $2.4 billion credit union anticipates another difficult operating environment, but the CEO said his team recognizes "these are the times that we must continue to invest not retrench to best serve our members."
An active and engaged board of directors, a very strong management team and a loyal membership base have created a credit union with a risk-management culture that's strong enough to withstand today's economic challenges, said Mission FCU CEO Debra Schwartz.
"Mission Fed's members have not been immune to the decline in real estate values," Schwartz said. "Although we didn't offer subprime loans and our members have not been hit with adjustable-rate loan payment increases, they have been hurt by job losses." The $2 billion San Diego-based Mission Fed takes an individual and proactive approach to working with members who need modifications, she added.
Yesterday's decisions to stick to conservative real estate lending practices and maintain high net worth have allowed the credit union to put aside a "very high level" of loan-loss reserves while maintaining a 9% capital ratio. "This protects us to a large extent from the loan losses that virtually all financial institutions are experiencing," she said.