CAPITOLA, Calif.-Bay Federal Credit Union is a stronger CU today than when it entered into the recession.

That is the message from Carrie Birkhofer, CEO of the $601-million CU in this seaside town near Santa Cruz. Birkhofer said the key word for Bay FCU in coping with the economic downturn has been "proactive," including tightening credit, implementing loan modification programs and reducing expenses.

Credit Union Journal: Bay FCU lost $9.9 million in 2009, but reported $703,000 in net income for the first quarter of 2010. Is this a trend or an accounting blip?
Birkhofer
: The credit union has posted profitability for nine months as of May 31 as a result of proactive changes we implemented to reduce our cost structure and increase fee income starting in early 2009. In addition, starting in the first quarter of 2009, we conservatively funded the allowance for loan losses. We have experienced an overall decline in delinquencies in 2010, which has resulted in less provision expense this year compared to last year.

CUJ: How much of Bay FCU's improved numbers are due simply to the fact the economy is turning around? What are the big developments in your market?
Birkhofer
: The economy definitely plays a role in our economic well-being. We have taken action in the areas we have control over to improve the financial strength of the credit union. We were very proactive to take these measures early on-in the first quarter of 2009.

Fortunately, we have seen stabilization in the local economy. We are no longer seeing steep job losses, but we have not seen significant job growth yet. Home prices have stabilized somewhat, but there are still many people who owe more than their homes are worth. We implemented loan modification programs in early 2009 which we continue to fine tune. We have been successful in quickly modifying loans, both auto loans and mortgage loans, for members who can afford reduced payments. Our loan modification defaults have been very low, especially compared to national bank averages.

CUJ: What steps did Bay FCU take during the recession to control the things it could control? What worked and what didn't?
Birkhofer
: We were very proactive and took a lot of action early on. In 2008, we modified our lending guidelines to tighten credit. At that time we were (had more than a) 100% loan-to-share ratio, so we focused on liquidity.

In early 2009 we reorganized and reduced headcount by 13% at the same time. We also tightened credit again during 2009 and dramatically slowed down lending to allow us to analyze where the losses were coming from and to re-engineer the lending processes.

We closed one branch. At the same time, we expanded the mortgage loan program by increasing the loans sold to the secondary market and applied for approval to sell FHA guaranteed loans, which we recently received.

Overall we focused on expense reduction and non-interest income opportunities, such as selling mortgage loans and increasing investment services. We did all of this simultaneously which was sometimes complicated, but this is what made a significant difference for us.

Throughout the year, and to date, we operate, plan and budget on a quarter-by-quarter basis. This provides us with the ability to act quickly to change and take advantage of opportunities as they arise.

In addition, we analyze expenses closely and have eliminated or reduced most non-essential expenses. In the fourth quarter of 2009, we closed another branch due to the lease coming due and our long-term desire to relocate the branch.

We also reduced employee benefits and renegotiated contracts where feasible. We enlisted the employees to share ideas and came up with deeper cost cuts than originally anticipated due to their support and input.

In early 2010, we launched new lending initiatives with a redesigned process, including the separation of the sales function from underwriting. Once again, we reorganized the branch structure to create sales positions and we introduced a new incentive pay program. Additionally, in 2010, we have set more aggressive goals for investment sales and introduced insurance products to the membership.

CUJ: What does the rest of 2010 look like both for your local economy and your CU?
Birkhofer
: Instead of trying to predict the future, we continue to examine different scenarios to anticipate changes we need to make going forward based on what does happen. I believe we will have challenges for many years ahead due to home prices dropping so rapidly: more than 50% in some of the areas we serve. We have learned to operate quickly and decisively and that has served us well. We are a stronger credit union today than we were as we entered into the recession.

One area I am extremely proud of is our employees. Despite all of the challenges we went through and the changes that went along with it, the employees remained loyal to the members and the community.

CUJ: Do you expect the Durbin interchange amendment to the bank reform bill will have a significant impact on earnings for Bay FCU?
Birkhofer
: At this time we have concerns about the amendment, mainly because the final impacts are unknown. It has the potential to have wide scale impacts on the financial industry, certainly including smaller institutions such as credit unions. It could affect the services offered to members, and importantly, members' ability to get the best and most cost effective services from their institution of choice.

Bay Federal will be watching the implementation and outcomes very closely. We have always been proactive and will continue with this management strategy to address the known issues as they arise.

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