SAN DIEGO-North Island Credit Union continued one of the more remarkable turnarounds of troubled CUs in 2011, when it posted $19.6 million in net income, excluding assessments.
The $1-billion credit union paid $1.8 million to the Corporate Stabilization Fund last year, leaving it with net income of $17.8 million. Its net income for 2010 was $11.4 million, including $3.1 million in assessments.
Those two years of black ink followed two tumultuous years for the credit union. Losses finally forced North Island to comply with Prompt Corrective Action requirements before NCUA moved to bring in a new CEO after it lost $52.3 million, including $9.6 million in assessments in 2009. That loss came on the heels of an equally ugly balance sheet in 2008, when North Island reported $50.1 million in negative numbers.
The numbers reported in 2011 were almost unimaginable not too long ago. NIFCU closed out 2011 well-capitalized at 7.33%, up from an undercapitalized 5.25% in 2010 and a "significantly undercapitalized" 3.39% in 2009. Like many CUs, the loan write-offs have meant a bottom-line boosting reduction in its Allowance for Loan Losses, which was $29.2 million in 2011, compared to $41.9 million in 2010, $62.4 million in 2009 and $40.8 million in 2008.
John Tippets, the former CEO of American Airlines FCU in Texas whom NCUA brought in out of retirement to run North Island, told Credit Union Journal a number of factors have contributed to the CU getting back to health. A "challenging" local economy has not helped much, however.
The reduction in ALL played "a big part" in the improvement of North Island's numbers, Tippets acknoweldged, but he said the drop in ALL was not driven by the economy so much as it is driven by "good management" by the CU's staff.
"Our people in collections have done a great job of managing the delinquencies," said Tippets, adding he counts loans as "delinquent" when a payment is just one day late. One of the moves Tippets made in 2010 was to double its collections staff. "Two years ago our delinquent loans were over $100 million; today, the number is half that."
Similarly, Tippets noted two years ago North Island was adding $2 million in loan losses per month, which he said was "unsustainable." That figure is now less than $1 million per month. He credited "getting workout loans done" for part of that improvement.
Controlling Expenses
"Another big effect on the bottom line is we have really controlled operating expenses," he reported. "Before the crisis hit we had $60 million in operating expenses. Last year we were at $33 million, or almost half."
To cut expenses, North Island has closed seven branches (it now has 10), and reduced headcount to less than 300 from more than 500. "That was difficult," he admitted about letting go of so many employees.
"Another source of expense reduction is we talked to every single vendor, every third-party expense, every person that sold us or rented us anything," said Tippets. "We worked with most of them to reduce the cost of the service, and most reduced their prices. Some took some negotiation, such as competitive bids with alternative suppliers, but just about everybody helped with this shared burden."
NIFCU has also "substantially reduced" its cost of funds. It has discontinued a leveraged position it had with the Fed, and discontinued some shorter-term certificates.
Even North Island's office space was affected by the search for ways to reduce costs. Tippets said where it formerly leased one floor of its headquarters building, it added two more floors to the market and now leases out three floors.
To Tippets, the reduction in ALL is not a "repeatable" number. What he considers important to the health of the CU going forward is sustainable income.
"You can look at the numbers and once you take out ALL changes, we are making $300,000 to $400,000 per month. That is repeatable," he declared. "We hope to continue that and even make it bigger. Moving money from the allowance to capital is not repeatable."
Tippets was particularly pleased with the fact North Island made $4.2 million in core net income, doubling projections.
In an earlier interview with Credit Union Journal, Tippets had noted that the credit union could not "hunker down" and make no new investments. So in 2011 North Island upgraded its ATMs and rolled out new products, including an Island Rewards MasterCard and a new HELC. In 2012, Tippets said, the plan is to continue to hold down expenses while "turning around" negative growth numbers in loans outstanding in the consumer, auto and business categories. The CU has "enough" mortgages, he added.
"We have had a good start to lending with a strong January," he said "Our January auto lending was twice what it was a year ago.
"I wish we were going to have more help from the economy, but it will be slow not only in our area but nationwide," he continued. "That said, I think we have a shot of moving that $4 million in income from operations to $5 million and we can start growing loans. We have increased advertising a little bit, but we have to grow loans-that is mandatory."
