Mike Maslak, CEO of North Island Credit Union, says the appointment of new Federal Reserve Chairman Ben Bernanke has raised his hopes of a possible break in interest rate hikes. (photo/alandeckerphoto.com)

Callers to Linda Baughman’s KOGO financial advice show have money on their minds. And it’s not 401(k)s and portfolio diversification. “They’re concerned about what’s in their credit report, their credit score, identity theft, interest rates and how to buy a house in San Diego,” says Baughman, who has a day job as chief executive of the University and State Employees Credit Union with about $726 million in member deposits. “I wish I could tell them there’s a silver bullet.”

Credit unions pride themselves on being close to their memberships, and in 2006 what’s worrying consumers is also what’s causing concern among the leaders of credit unions. Rising interest rates, bankruptcy reform legislation, lack of saving and debt/credit anxiety already are conspiring to keep consumers’ credit cards in their wallets. Throw in wild card security issues like identity theft and there’s a recipe for a meal that might make consumers lose their appetite for spending.

Credit union trade groups such as the National Association of Federal Credit Unions are warning members to expect sluggish growth in 2006.

NAFCU data compiled over a 12-month period ending in October reveals that share or deposit growth dipped from 6.3 percent to 6.2 percent while loan growth slowed from 14.9 percent in September to 14.8 percent in October.

Bankruptcy reform legislation, which in general makes bankruptcy a less attractive option, resulted in an October flood of filings under the old law. The increase in filings is reflected in charge-offs due to bankruptcy, which rose from 46.3 percent to 48 percent of total charge-offs. “Credit unions should expect increased charge-offs due to bankruptcy over the next few months as the increased filings in October are processed and discharged,” says NAFCU Senior Economist Jeff Taylor.

That means reduced profit for the member-owned institutions.

Linda Baughman, chief executive of the University and State Employees Credit Union. (photo/alandeckerphoto.com)

“Credit unions will make less money this year,” Baughman says. In a rising interest rate environment, credit unions will be obliged to pay higher rates on deposits, Baughman says, but will drag their heels on passing along the increase to choosy consumers.

“We’re in a rising interest rate environment with a flat yield curve,” says Mary Cunningham, CEO of the USA Federal Credit Union, a CU with a mostly military membership. “We anticipate less net income and modest growth.”

Interest rates hikes especially in the real estate sector, are expected to cut into loan growth, says Jim McPheters, chief executive of the California Coast Credit Union, with about $875 million in member shares. “Auto loan demand is going to feel the impact of the (2005 auto makers’) employee discount program,” says McPheters, because “everybody has already bought.” Home refinancing is “tapped out” for the same reason, McPheters adds.

Borrowers also have soured on the variable rate loan. “People who have equity lines of credit that adjust would be smarter to start looking at a second trust deed product instead of a line of credit product because the second trust deed product will fix their rates,” Baughman says.

A somewhat sunnier scenario for 2006 is offered by Mike Maslak, CEO of North Island Credit Union, with a deposit base of about $1.5 billion. “We have cautious optimism about the economy,” he says with economic indicators “heading to the positive.”

The appointment of new Federal Reserve Chairman Ben Bernanke also has raised hopes in Maslak for a possible break in interest rate hikes and an index that would tie future rate hikes to the rate of inflation. An index would operate “more mechanical in nature,” Maslak says, as opposed to the quarterly guessing game that financial institutions go through now.

Onshore Loans And Deposits

USA’s military oriented member base provides the $680 million plus CU with unique market advantages. Many of USA’s retired military members are looking to start businesses and embark on second careers. They provide a built in base for USA business loans through SBA. “We think business loans are going to be a strong draw for us next year,” says Cunningham, in a “sweet spot” ranging from $50,000 to $3 million.

USA also has a savings rich, offshore source of deposits, about 20,000 accounts in Japan and Korea of retired military personnel. “Our deposit programs are better than what they can get there,” Cunningham says. “These might be military personnel that married nationals and chose to remain there. They fund the loan demand we have stateside.”

For USA, prospects for growth will be tied to a renewed effort at attracting new membership through advertising and “smart branch deployments.” At Cal Coast, CEO McPheters hopes to deepen relationships with existing customers by reminding them of the value in credit union services. North Island is offering “ID theft insurance” that assists policy holders in the restoration of their identities fora few bucks a month Maslak says.

Branch Fever

Jim McPheters, chief executive of California Coast Credit Union, says auto loan demand will feel the impact of automakers’ employee discount program. (photo/alandeckerphoto.com)

Credit unions also must continue to branch to attract new members. USE, for example, recently opened in Carmel Mountain Ranch and is planning on an early January opening of a new branch at San Jose State University. USA plans 2006 openings in National City and Temecula. Cal Coast will open in Murrieta in the first quarter.

“Murrieta is a hot spot for financial institutions because of the number of young families,” says McPheters, “and because in theory they have lower cost homes, but the cost of homes up there is accelerating too.”

North Island, with 15 offices, is opening in Carlsbad and Rancho San Diego this year and is looking for another office in the South Bay. The goal is 22 offices by 2010. “Branch locations are generally determined by household formation” in the search for new accounts, Maslak explains.

Although economic conditions may play a major role in a CU’s performance this year, Baughman says she believes credit unions can do a better job of selling themselves. “We do a lot of wonderful things in the community and we should talk about that more,” she says. “CUs are among the best kept secrets and people don’t understand which CUs they’re able to join.”

And while commercial banks and credit unions have been at odds as nonprofit CUs have begun acting more like full-fledged banks, Baughman says she would like to see the new year “bring banks and credit unions together on a project that would help the community as a whole.”

Baughman says the lack of large homegrown banks and support for victims of Hurricane Katrina has siphoned off funds that formerly found their way to nonprofits in San Diego. “The (bigger community) banks used to fund a lot of community support, and they are gone so a lot of the organizations in town are going to be hurting because a lot of charitable donations are going to hurricane victims and away from the community.”

However the New Year unfolds, Maslak jokes one must discount the value of predictions. “Half of us will be right and half will be wrong,” he says.