By Henry Wirz SAFE Credit Union ended 2008 with just over $2 million in net income. As you know California and the Central Valley in particular have been very hard hit by the decline in housing prices, rising unemployment and rising consumer defaults on all types of loans. We heard a fair amount of criticism when we raised our allowance for loan losses in December of 2007 in anticipation of higher loan losses in 2008. The critics felt we were moving loan losses from one year to the next to make 2008 look better. It turns out that our estimate for net charge-offs in 2008 was within less than one percent of actual. In 2007 we had about $7.2 million in net charge-offs. That climbed to $15.5 million in 2008. We predict net charge-offs of $26 million in 2009 and $24.5 million in 2010. We don't see any significant improvement in either the housing market or unemployment until 2012. Therefore we are preparing for a long and difficult recession. Our financial goal is to maintain positive net income. The credit union has a lot to gain from keeping net income positive; * SAFE has $100 million of state deposits which renew every six months. Those deposits would likely be withdrawn if we had negative net income because the state uses a rating system that gives a lot of weight to net income. * SAFE has a four star rating from Bankrate.com. Many of our members use third-party rating systems to evaluate the credit union. We want to retain at least a three star rating. * SAFE has lines of credit with our corporate, WesCorp, and with the Federal Home Loan Bank. We want to retain those lines of credit. * SAFE wants to retain the confidence of our regulator, Calfornia's Department of Financial Institutions. Our forecast for 2009 is to have positive net income. We are doing that by keeping our net interest margin steady; we are controlling operating expenses; we are making prudent loans and investments and we are keeping member service at a high level so that we continue to get new members and encourage our members to make SAFE their primary financial institution. We have priced our shares and loans to be competitive, but we are not using rates to buy business. Our members have easy access and quick service and we have told our members we are ready to lend and that we will help them improve their financial well being. We have installed Financeworks by Intuit to help members manage their money and keep more of what they earn. Credit Union staff have been on television, radio and done news interviews to educate our members and the public. We added staff to our call center to provide Web chat services and added service level agreements that assure that our Web service is as fast and responsive as we can make it. We are a community credit union so we have continued to fund community events and community charities to support our community. We have used technology and employee suggestions funded by an innovative reward program to become more efficient. In 2008 we were able to reduce 22 FTE positions. The change to check imaging reduced staffing in our check processing center. The credit union automated our branch courier system and eliminated branch couriers to our 20 branches. The elimination of couriers reduced our FTE count but it also improved member service by reducing the time needed to resolve member service requests and fund branch loans. We improved a number of branch work flows. We made it easier for branches to instant issue VISA debit and credit cards; we improved the safe-deposit box procedures; we improved our check approval process and the check imaging change made branch closing procedures much easier. We cut all non-essential expenses for 2008. We won't have our usual holiday party and we have cut back on travel and conferences. We have rescheduled meetings so that we don't have meetings at lunch to eliminate catering costs. The janitorial service cleans three days a week rather than every evening. But we retained many important things as well. We have kept a three percent merit increase; we have eliminated incentive bonuses for management but retained them at a lower level for front-line member service staff. We continue to fund 100 percent of employee health insurance and 50 percent of dependent coverage even though our health plan costs go up each year. We cut our capital budget to $1 million dollars. In prior years we have added new branches that cost on average about $2 million each. We won't add any new branches in 2009. We are using our capital to support our paperless record storage system; we are investing in our Web site to continue adding improvements; we are adding coin machines so members can count and deposit their coins without a fee at our branches; and we have budgeted money to upgrade our core data processing system to provide members with better service. We retained money in our budget to regularly mystery shop all our branches and call center as well as those of the top five market share institutions in our service area. We know that if we continue our brand promise, to provide our members with exceptional experiences, best solutions and professional experts to help them improve their financial well being, we will help each other weather this storm. The last big recession hit in 1980 just after I started at SAFE. I expect this to be a longer and deeper recession. We are prepared to outlast this recession and then compete for new business. It is unfortunate that the bailout has saved the very institutions that caused most of the problems. In any other business the bad players are now failing and the good players are able at some point to pick up the business. That doesn't apply in financial services. Unfortunately TARP has saved Citicorp and other banks that should have failed, and the bailout money has allowed other "too big to fail banks" to pick up WAMU, Wachovia, Merrill Lynch, etc. I would be more optimistic about the future, but it appears that the bailout solutions are setting the stage for the next disaster. The usual switch to credit unions of bank customers when banks consolidate or fail won't happen this time. It is an odd time. Capitalism for the smaller banks and credit unions and socialism for the big banks seems to be the rule. We really are setting the stage for the next disaster. Henry Wirz, a CUES member, is president/CEO of $1.3 billion SAFE Credit Union, North Highlands, Calif.
