Linda Baughman, CEO of University and State Employees Credit Union, says her institution will be keeping a careful eye on member spending because of rising energy costs and gas prices. (photo/alandeckerphoto.com)

One minute she’s partying on home equity loans and low-interest financing, when suddenly a hurricane blows through Louisiana, gas goes to $3 a gallon, and now she just wants to stay at home and watch Jim Cramer’s “Mad Money” on CNBC.

Consumer confidence is just one of the challenges facing San Diego credit unions in the upcoming year. Big ticket, bread and butter CU loans for houses and cars may be less popular. The home market is cooling and consumers have slowed their purchases of autos now that manufacturers have halted so called “employee pricing” discounts.

In addition, rising interest rates are having a buzz saw effect, forcing credit unions to increase the amount of interest they pay on deposits while resisting similar increases on loans to remain competitive.

“Rising interest rates are affecting all financial intermediaries including credit unions,” says Bill Hampel, chief economist for the Credit Union National Association. “As the Fed has increased short-term rates it put more upward pressure on what credit unions have to pay on deposits.”

This takes a direct bite from credit union net income which comes mostly from the spread between what credit unions can charge on loans, and what they pay customers for their deposits.

Although total U.S. credit union assets are nearing $700 billion, growth is anemic. “Credit union assets come from (investing and lending out) savings or deposits,” Hampel says. “Deposits aren’t going up because the household savings rate (a measure of how much consumers have to save after expenses) has been negative for the last few months. They’re not saving much, so credit union deposits are hardly growing at all.”

Consumers may have stopped saving, but they continue to borrow. Thus, nationally deposits are up only 3 percent, but loans have increased this year by 10 percent.

Perhaps because of San Diego’s unique position in the market (see “Consumers Hail The Savings-Account Home” sidebar), the top local credit unions were able to maintain or exceed their performance in 2004. As with banks, a return on assets of 1 percent is considered exemplary for credit unions.

San Diego County Credit Union, with market-leading assets approaching $3 billion, turned in a better than exemplary performance with a return on assets of 1.97 percent as of June 30, up from 1.92 a year ago. SDCCU’s assets grew by 13.8 percent, more than four times the national average. Paradise Valley Credit Union retained the number two spot with a 1.39 ROA, but this was a 27 percent decline from last year.

Pacific Marine Credit Union has almost no asset growth, but managed to increase its return enough to move up one spot to No. 3. Escondido Federal Credit Union rose from ninth to fourth with a 1.28 percent ROA (up 37 percent) and San Diego Medical Federal Credit Union edged into the top five with a 1.2 ROA.

Among San Diego credit unions with more than $1 billion in assets, results were mixed. North Island Financial Credit Union’s ROA was flat at 0.7, but that was enough to move up from No. 16 to No. 12. Mission Federal Credit Union grew its asset base by 7 percent, to $1.9 billion, but earned 33 percent less, slipping to 0.9 percent ROA.

Credit union executives say they will have their eyes on consumer spending in 2006.

“With rising gas prices and energy costs going up, we’re going to be watching carefully to see if members will be spending as much,” says Linda Baughman, CEO of the $726 million University and State Employees (USE) Credit Union.

USE’s asset base and ROA retreated slightly over the last year. Baughman says USE is focused on improving the quality of its relationships with members “more than aggressive growth.”

Paradise Valley Federal Credit Union CEO John Pressler credits a higher than average loan to assets ratio for his CU maintaining a higher than 1 percent ROA, but says credit unions are being squeezed by interest rates, and figures growth is going to be less this year than last.

Sensing that 2006 could be a squeeze for consumers and credit unions, the industry is looking for new programs to lure potential savers. North Island participated in a recent product innovation workshop presented by the Filene Research Institute and came away with a pilot program called “MatriMoney,” a wedding registry that accepts cash gifts for newlyweds.
North Island Chief Executive Mike Maslak says he’s also looking at slower growth in 2006, but that’s not stopping North Island from embarking on an ambitious agenda to obtain a bank-like branch network. With a goal to grow branches from 13 currently to 25 by 2010, Maslak says North Island will add three branches this year in Carlsbad, Santee and Rancho San Diego.

Why order more brick and mortar? “Because credit unions have always been at a competitive disadvantage in terms of convenience as defined by branches. Where banks may have had too many branches,” Maslak explains, “credit unions have always had too few. So we’re catching up.”

More credit union branches are yet another reason for friction between banks and credit unions in the coming year.