State of the Credit Union

2009 First Quarter Update 

As we close the first quarter of 2009, we’re beginning to see some positive indicators that our members’ financial health, and that of our credit union, may be on the road to recovery. Given the economic and market conditions we continue to face, including the threat of rising unemployment and increased consumer bankruptcy filings, the following highlights do not guarantee any such recovery, and they could change again in future months – but they do provide a glimmer of the proverbial “light at the end of the tunnel.”

• Loans delinquent 31 days or more are at their lowest level since November, 2007.
• The rate of increase in loans delinquent 31 days or more has leveled at an average of roughly $4 million per month for the first three months of 2009, as compared to $10 million per month for the months of April through December of 2008.
• Our loan loss reserve is in excess of $113 million, which, if needed, would be sufficient to absorb losses for all loans currently delinquent by 31 days or more, plus an additional $40 million. If not needed, excess funds from this reserve will become available to us in the form of net worth.
• While the funding of our loan loss reserve has reduced our net worth reserves, as of the end of the 1st quarter our total capital and loan loss reserves are equivalent to nearly 8% of total assets.
• Loans booked in recent months carry much higher credit quality, as a result of modified underwriting guidelines.

Despite these signs of improvement, we continue to face challenges on both internal and external fronts. Our internal challenge is simply to restore and rebuild our net worth, by moving through historic loan loss levels and returning to periods of positive earnings. Our external challenges have come in the form of actions that the National Credit Union Administration (NCUA) has taken to stabilize the corporate credit union system. You may have seen headlines recently about the NCUA requiring credit unions to help stabilize the corporate credit union network, and that the NCUA has taken the two largest corporate credit unions (U.S. Central Credit Union and Western Corporate Credit Union) into conservatorship. While I won’t detail for you the background of those actions (you can click the links to read more), the net result is that all natural person credit unions (those that serve individual members, like Arizona Federal) are required to “pitch in” to provide additional capital to the credit union share insurance system as a whole.

To this point, credit unions have not received nor have we been made eligible to receive any capital infusions from the Troubled Asset Relief Program (TARP) or any other economic recovery programs. Instead, credit unions are essentially redistributing some of our capital to keep the National Credit Union Share Insurance Fund (NCUSIF) well capitalized. While we recognize the benefit of our contribution to this movement, it wasn’t something that we (or any other credit union, for that matter) had planned for – and it didn’t come at the best of times, to say the least.

These efforts, along with additional transfers to our loan loss reserve, will contribute to a bottom-line loss of approximately $48 million for the first quarter of 2009. After this loss is recognized, our total capital (i.e., net worth) and loan loss reserves will be $145 million, or 7.94% of total assets. Your funds also remain insured to at least $250,000 through the NCUSIF.

We remain as focused as ever at rebuilding our net worth and returning to the levels of performance you’ve come to expect. Many actions toward these results have already taken place including (but not limited to):

• Consolidating four branch locations
• Reducing our number of employees through attrition
• Modifying fees for certain services or activities (the majority of which are avoidable by members)
• Reducing marketing expenses and media buys
• Restricting travel, conference, and education expenses
• Modifying mailers to reduce postage expenses

Each of these initiatives is making an impact to our bottom line, and we’ll take additional measures to reduce expenses or increase revenue as necessary in the coming months. These actions, along with your loyalty and utilization of our services will see us through these challenging times. In fact, we’re projecting a positive net income for the second quarter of 2009 as a result of these and other efforts.

Some members have asked us what they can do to help their credit union during these times. Ultimately, it is your continued loyalty and utilization of our services that will help us to return to more prosperous times more quickly. Many of you trust and rely on us for your primary checking account, and many others have savings accounts, loans or credit cards with us. These have and will continue to be the core of our business, and we thank you for that business. However, we also have several other great services that are not as highly utilized, but that can be of significant benefit to you the next time a need arises, such as:

• Members’ Insurance Center – try us the next time you’re in need of auto, home, life, health, or business insurance. Or get a free quote to compare to your current provider.
• Members’ Auto Center – take the hassle out of your next car purchase, have the vehicle delivered to you, and save a bundle off the MSRP (in most cases).
• Arizona Federal Financial Solutions – explore a number of investment alternatives that vary in risk and return.
• ^NewAFLAC – beginning in May, you'll be able to purchase AFLAC products at discounted prices through our website.

These are just some of the other services available to you through your credit union. We believe that each of them has a solid value proposition that will be of benefit to most of our members, while also contributing to the credit union.

Looking ahead, we remain absolutely committed to ensuring the long-term success of your credit union. We may still encounter challenging months or quarters on an individual basis, but ultimately we believe that we will move forward from this point in a positive direction.

Good things take time. When we first started serving our members in 1936 we weren’t successful overnight, and we won’t return to our previous levels of success overnight either. But together, with our Board of Directors, we have carefully constructed a viable net worth restoration plan that will guide us toward restoring our performance levels. The plan will guide 700 of the most committed and passionate employees you could ever hope to meet, as we all work together to restore capital reserves – and to continue to provide you with financial services of value, through convenient points of access, and with the highest levels of superior service. We exist by you, and for you.

Thank you again for your membership/ownership, and for your trust in Arizona Federal.

Sincerely,

Ronald L. Westad
President & CEO