PHOENIX – As with the CEOs of other problem credit unions, Arizona FCU’s Ron Westad has a dilemma – should he continue to reduce his size to improve his net worth ratio, which might hurt his credit union’s chances to take full advantage of an economic rebound when it comes?
Over the last 18 months, the state’s second-largest credit union has closed branches, reduced its workforce and shed more than $400 million in assets as it struggled with a staggering $150 million in losses. The reduction in size, a strategy increasingly approved by NCUA for its large, problem credit unions, has enabled Arizona Federal to retain a 2.5% net worth ratio, even as its total net worth continues to decline, pointed out Westad. "So we continue on this path of asset reduction," he told The Credit Union Journal.
But Westad, whose credit union is one of 10 billion-dollar credit unions operating under NCUA net worth restoration agreements, worries what long-term effect the shrinkage – which entails the run-off of tens of millions of dollars in deposits – will have on his credit union. "We’re not attracting member deposits. Our rates are in the lower end of the market," he said.
Steve Renock, the new president of Kern Schools FCU, which is working with NCUA on a net worth restoration plan, acknowledged the problem at his credit union, which has shrunk by $175 million over the past 18 months. That has allowed the one-time $1.8 billion credit union to retain a net worth ratio of just less than 5% even as it lost more than $60 million during that period.
Other large credit unions on NCUA’s special case list are undergoing similar shrinkage. Suncoast Schools FCU has shed $700 million over the last 15 months. Kinecta FCU has reduced its size by almost $600 million. Wescom Central CU has cut its size by more than $600 million. GTE FCU has shed almost $200 million. North Island Financial CU almost $300 million.
¡¡
"I don’t know if it is the best way to restore the net worth ratio; it certainly is an effective way to restore the net worth ratio," said Kern Schools’ Renock, who succeeded the credit union’s long-time CEO Vince Rojas last week. "You have to be careful of the effects on members," he said. "So that when we start to see that pick-up in loan demand that these members will stay with us." Even in the face of lower rates paid on dividends, Kern Schools is offering to find members better rates in hopes it will retain their business.
Sarasota Coastal CU’s Thomas Randle, who this week was forced to merge his 56-year-old credit union because of diminished capital, chafed at the net worth restoration plan enforced on the one-time $240 million credit union by state regulators before the merger into Achieva CU. “What am I going to do? I’ve cut staff, stopped contributing to their 410(k)s, cut rates, cut $16 million from my operating budget, cut my cost of funds by $2 million" said Randle, who is retiring after leading the former teachers’ credit union for 20 years. The combination of cost-cutting amounted to a death spiral, he suggested, even as it restored his credit union’s net worth ratio to just below 5%.
