Perfect Recessionary Storm Batters California's Big Credit Unions
North Island Credit Union President/CEO John Tippets said he's cautious but positive he can turn the ailing $1.4 billion San Diego credit union around, despite dropping to 3.39% net worth at year-end 2009.
Both management and regulators anticipated the $52 million year-end net loss, Tippets said. NCUA examiners were on-site at North Island the week of Feb. 8, but Tippets said it was to conduct a regularly scheduled exam.
"The numbers were in the ballpark of where everybody thought they would be at the end of the year," he said.
So what does a significantly undercapitalized credit union, with negative 3.52% ROA and a 6.20% combined delinquency and charge-off rate, have going for it?
Tippets said he's realistic about California's struggling economy, and the increased tendency of homeowners to abandon upside down mortgages. But in addition to his 17 years in the captain's seat at American Airlines FCU, North Island has "good employees with good skill sets, high competency and dedication," he said.
And although he's tweaking the mortgage process to make it more efficient, Tippets said the processes in place are good, and, overall, the credit union "does a good job" at mortgage lending and can build on that.
North Island has also beefed up on loan-loss provisioning, with a 195% coverage ratio that's among the highest in California and its asset class, he said.
Strategically, the credit union's comeback game plan depends upon four key things: rebuilding revenue, improving efficiencies, improved collections and a continued emphasis on member business lending.
Although the NCUA has said member business lending is a problem at some California credit unions, Tippets said North Island is not among them. Rather, the credit union has an "outstanding business lending history" and must continue to develop business services, which include deposit accounts.
As of Dec. 31, North Island had $145 million in business loans, representing about 10% of total assets. The vast majority are real estate loans, about $120 million. Although the credit union's real estate loan portfolio experienced a 2.55% charge off rate, its MBL delinquency was 0.32%, an increase from 0.01%, where it had been since first-quarter 2009.
He wouldn't go as far as to say North Island's worst days are behind it, but the credit union has shored up some of its most problematic losses, including a substantial reduction in indirect and home equity charge-offs.
The institution is also being proactive in engaging the borrowers of $193 million worth of interest-only mortgages on the books before they rollover to amortized payments.
"If they have income, we can work with them," he said, "But it's beyond our control if they lose their job."
North Island wasn't the only struggling large California credit union to lose ground in the fourth-quarter.
The $2.9 billion Wescom Credit Union slipped into significantly under-capitalized territory as well, reporting 4.30% net worth and a $96.3 million net loss as of Dec. 31.
A 5.15% delinquency rate and 3.90% charge-off rate have held steady since the second quarter. Credit cards, adjustable rate and interest-only first mortgages and indirect auto loans are performing the worst. The Pasadena, Calif.-based credit union set aside $120 million in loan-loss provisions as of Dec. 31, compared to $104 million delinquent loans. In 2009, more than 1,100 Wescom members declared bankruptcy, representing 9% of charge-offs.
The $1.58 billion Kern Schools Federal Credit Union reported a $40.6 million year-to-date net loss as of Dec. 31. The Bakersfield-based institution remains significantly under-capitalized at 4.89% net worth, where it's been for roughly one year.
After writing off nearly $8 million worth of WesCorp capital in the first quarter, Kern Schools struggled with high charge-off rates in credit cards and home equity loans and credit lines, and soaring delinquencies in adjustable rate first mortgages.
The $3.5 billion Kinecta Federal Credit Union recovered its net worth slightly, posting 6.66% as of Dec. 31 but reported a $71 million net loss for 2009. Of Kinecta's $80 million in charged-off loans, $43 million were credited to real estate.
The $852 million Arrowhead Credit Union also recovered some net worth in the fourth quarter but still remains significantly under-capitalized at 3.44% net worth.
Located in the hard-hit Inland Empire suburb of Los Angeles, Arrowhead's combined delinquency and charge-off ratio is 10.43%. More than $40 million worth of other consumer loans were charged off in 2009, including $19 million in indirect loans. The credit union also wrote off $15 million in real estate lines of credit. Loan-loss provisions increased to $77 million.
In nearby Riverside, the $860 million Altura Credit Union sank to 6.67% net worth as of Dec. 31 and reported a $10.5 million net loss for the year.