SAN BERNARDINO, Calif. -- In a hotly competitive California banking marketplace, Arrowhead Central Credit Union ranks number-one in 2006 return on assets (ROA) for credit unions with of more than $1-billion in assets, closing the year with an ROA of 1.73%.
Based on end-of-year NCUA data, as a newcomer to the $1-billion-plus club, Arrowhead Central was the highest of the 116 credit unions of more than $1 billion in assets collectively returning .86% on assets during 2006. The credit union's bottom line performance improved from a .97% during 2005 (1.16% if non-operating gains and losses are excluded)-compared to their NCUA peer group of .92% during the same period.
Offsetting Shrinking Net Interest Margins
At a time when most credit unions struggle to offset shrinking net interest margins with operating efficiencies, Arrowhead Central has been able to do just that. With a net high interest margin attributable to both higher yielding loans and significantly lower costs of funds, Arrowhead Central's margin dropped by a relatively small 16 basis points during 2006. The margin decrease was favorably offset by a 94 basis point improvement in its net operating expense to average assets ratio, vaulting them to the top return spot for 2006.
According to Arrowhead Central CEO Larry Sharp, a mid-2005 core system conversion to a new core system from Symitar Systems, San Diego, provided them with an opportunity to re-examine all credit union processes and procedures. An operational team was formed to focus on streamlining business processes and staffing optimization and the results have been impressive.
Start With The Low-Hanging Fruit
The Arrowhead team started with the low hanging fruit implementing strategic paperless initiatives and automated new account opening processes, while continuing to implement additional improvements this year.
Additional benefits are also being realized through a new Internet banking system. All of these efficiency gains are reflected in the fact Arrowhead Central is now able to do more with less. At the end of 2004, prior to the conversion, the credit union had 616 full-time equivalent employees and, through attrition, had shrunk to 520 FTEs at the end of 2006. Sharp noted that the credit union's pay for performance program further encourages expense efficiency as one of the key focus areas, with the other three being overall profitability, growth in assets (loans and shares) and member satisfaction.
Several factors contribute to Arrowhead Central's strong net interest margin. The credit union's marketing strategy is to lead with checking accounts-considered the core product. At the end of 2006 nearly 70% of ACCU members had a checking account with an average balance of more than $2,500.
Sharp said the CU efficiently manages all of the related checking account expense areas. Loan yields and fees are higher than a typical credit union due to successful business banking and indirect lending programs. Arrowhead is a game competitor on the business services side with more than $85 million in outstanding business loans. Its Member Business Services CUSO (launched in 2003) provides complete business banking services for numerous credit unions. At the end of the year the credit union held nearly $400 million in indirect loan balances generated through its Dealer Direct program.
The Arrowhead Central management team has also sought to adeptly manage capital to leverage their asset growth and maximize earnings. Asset levels for 2006 grew by 8.5% on a capital base that was 8.3% at the end of the year, compared to an NCUA peer group average of 6.7% growth in assets.
It also posted a whopping 11.2% capital-to-assets ratio at the end of 2006. While the objective of Arrowhead is to manage capital to a 9% level in the long run, Sharp is among many credit union executives who is hopeful credit union capital requirements will be changed to a more equitable risk-based capital requirement structure.
Despite intense marketplace competition (FDIC data shows more than 500 bank branch locations in San Bernardino County alone), Arrowhead Central added more than 6,000 members through 25 branch locations during 2006. With 3,000 SEGs driving at least half of this new member growth and another healthy chunk joining through the Dealer Direct program, the credit union believes it is sitting on a goldmine with less than 5% of their membership potential tapped. In addition to the comprehensive business banking and indirect lending programs, Arrowhead also offers private banking and trust as well as insurance and investment services-further enabling the credit union to compete head-to-head with the area banks.
Sharp is convinced Arrowhead Central will do even better by continuing to focus on service, branch expansion, and community visibility initiatives-driving additional new members and asset growth.
Arrowhead Central CU By The Numbers
2006 2005 ROA 1.73% 0.97% Capital to Assets 8.32% 7.23% Total Assets $1.04B $960MM Total Asset Growth 8.5% 13.6% Members 159,990 153,124 Members/Potential Members 4.1% 10.2% Net Interest Margin/Average Assets 5.38% 5.54% Net Operating Expense/Average Assets 4.85% 5.79% FTE Employees 519.5 549.5 Average Assets per FTE $2.0MM $1.8MM Average Assets per Branch $41.7MM $38.4MM Members/FTE 308 279 % of Members with Checking 68% 67% Source: Dec. 31, 2006 NCUA Data
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