Attacking Inefficiencies, 18-Mo. Plan Boost Patelco
SAN FRANCISCO-Despite Patelco Credit Union's turnaround from a $14.6-million loss in 2009 to $9.4 million in net income for the first quarter, Ken Burns is far from ready to declare victory over the recession.
Burns, CEO of the $3.7-billion CU, noted its net worth ratio had climbed to 9.27% thanks to the "momentum" Patelco started in the fourth quarter of 2009.
"We continued that trend into the first quarter of this year and beyond," he said. "In April we had another $5 million in earnings and in May it was $2.5 million. The problem is, there is another assessment coming from NCUA, which will wreak havoc with those numbers."
Just days after speaking those words, credit unions were hit with what is to be the first of two assessments by NCUA. Burns said he and his management team had budgeted 30 basis points for the year to address both the corporate stabilization assessment and the yet-to-be-determined natural person credit union assessment looming this fall.
"While Patelco has realized strong earnings of $16.9 million year-to-date, June 2010 monthly earnings may very well be negative following Patelco's recognition of $4.4 million from the June 0.134% corporate assessment."
According to Burns, Patelco's positive numbers are attributable to a number of factors, "but certainly we are seeing the fruits of our labors," he said.
Among the changes is a rarity during a recession: Patelco made some staff hires in key departments of the CU, such as credit risk and delinquency management.
"We revamped those areas to understand where the credit risk lies and how to improve our delinquencies," he explained. "We have reduced chargeoffs by $1-million a month due to operational efficiencies. We had been terribly inefficient in a number of areas, so we did an in-depth analysis of the people and the processes."
But despite these process improvements, Burns continued, "overall, because of the economic environment, we are fighting an uphill battle. Things have stabilized, but they haven't really improved. The unemployment rate is still above 12% in California, meaning we are still seeing people having trouble making their payments. We are taking things one quarter at a time. We have had two good quarters, but, like buying a stock, that is no guarantee of future performance."
Burns attributed much of the improved numbers to an improved housing market in the Bay Area, as well as Patelco's increased concentration on margin and/or spread management.
"That has become really critical in terms of sound business management to generate sound spreads while keeping operating expenses low," noted Burns. "Each of those is contributing to the credit union's overall success. These are not normal times, but we have been very effective in righting the ship to get through these tough times.
Burns said loan payoffs are being made at a "faster clip than we can get new loans on our books. Our fixed-rate loans we sell into the secondary market, but retain servicing. As a result, our loan portfolio declines when we sell those loans to Fannie. Last year our loan runoff was 16%. So far this year it is 8%. We have lowered the rate, but it is a concern because it is not sustainable in the long term."
Patelco is investing in marketing, said Burns, and working to develop a sales-and-service culture as well as a better connection with its members, especially with its loan products.
As for what's ahead, Burns is projecting it will be another 18 to 24 months before the credit union returns to looking beyond such a time frame.
"We put together a strategic plan of 18 months rather than the usual three years to five years, because there is so much instability. Right now no forecast past 18 months is reliable in terms of the interest rate environment, what is going to happen in Europe, will we have a double-dip recession? All of those factors are up in the air."
For credit unions, he noted there are the additional "uncertainties" of ongoing losses by both natural-person CUs and corporates, the yields the share insurance fund can earn on its investments, and the ongoing deposit growth within credit unions-and need to CUs to pay 1% of that to NCUA.
"I think we are going to bump along for the foreseeable future-18 months to two years," Burns said. "There won't be any substantial changes because in California the unemployment two years from now might have dropped from 12% to 8% or 9%, which is still very high. We will continue to minimize credit risk, enhancing revenue and controlling operating expenses."
Patelco's "fourth initiative" remains building greater operational efficiencies, said Burns, noting that is not the same as cutting costs. "It is possible to cut costs by cutting into the muscle of the organization and becoming inefficient," Burns observed. "We have cut our marketing budget, but we have become more focused in our marketing to become more targeted. We used market research to address members that are more likely to respond rather than mass mailings. Bottom line: it just takes good people, and at Patelco we have good people that are working really hard."