Arrowhead Credit Union ($876M, San Bernardino, CA) has not been one to shy away from tough choices. Based in California’s 50 plus city “Inland Empire,” the credit union saw a net income loss last year of $47 million.
With current unemployment rates of 15% and housing prices down 30-50% from their peak in some areas, the California market presents unique challenges to any financial institution. Despite these obstacles, Arrowhead has recorded an impressive 2 quarters of positive net income.
Their first quarter’s net of $2.6 million (1.2% ROA) was again bested in April with a $1.1 million net or almost 1.5% ROA, further strengthening Arrowhead’s outlook for the future.
Keeping Equity Growing
The recent positive income has not changed CEO Larry Sharp’s number one priority of building net worth. At 3.4% on March 31, the ratio was the lowest of credit unions over $500 million. Total capital of 8.5% included an allowance account that was 246% greater than total delinquency, but with capital of around $80 million, the credit union has shown itself to be well reserved.
“We found the bottom of delinquency in May 2009,” says Ray Mesler, senior vice president of strategic development, with August 2009 holding the last of large write-offs. Now with close to a year of declining delinquency, they have been able to turn a strong profit once again this quarter.
Total delinquencies as of March 31 are at $20 million, down 40% from a year before, with charge offs down by 20%.
Making some significant cuts, the credit union has reduced net operating expenses by 40%, closing four branches and reducing hours in four others. In addition the credit union has sold its property casualty business Sawyer Cook for a one time gain of close to $900,000 in first quarter 2010, along with its broker dealer.
Shares have remained relatively stable falling only 4% over the past year. More importantly for future growth, core deposits (regular shares and share drafts) are $618 million or over 75% of total shares.
Monitor, Monitor, Monitor
About a year ago asset problems peaked at Arrowhead. To stay on top of current developments, senior management decided to meet weekly, ensuring the credit union as a whole focused on the same critical indicators. In between, key trends are automated and downloaded daily on dashboards used by senior management. “Monitor, monitor, monitor” is the mindset that led to the turnaround, says Sharp, followed by quick actions when signs move in the wrong direction.
Arrowhead is also expanding their focus with loans to grow their balance sheets, targeting the uptake in autos and the bump in home purchases, a historically low priority on their books. The credit union’s portfolio of firsts has the most room for growth, compared to its outstanding HELOCs and seconds.
The credit union was aggressive in its charge offs early in the downturn and has limited its modifications to autos and some HELOCs extensions. The credit union offered modifications only in cases where the borrower is likely to have recovering prospects or their situation is likely to change.
“We took it on the chin early on” says Ray Mesler, in a move that limited future losses. This caution has paid off, with modifications re-defaulting at a rate of only 17%.
A Positive Mindset in a Recovering Market
“Constant awareness and monitoring in survival mode is key,” says Sharp. Keeping the team focused is one factor in Arrowheads success. The other is to give employees and members positive reinforcement as new trends emerge.
Arrowhead has demonstrated the ability of credit unions to look long term and streamline costs, pushing through the worst of market conditions while finding stable footing for future success.