Joe Schroeder, CEO of San Diego Metropolitan Credit Union, says the amount of money in members’ checking accounts is going down and credit unions need capital to keep up with changing conditions. (photo/alandeckerphoto.com)

Credit unions were founded in the 1930s to help improve cash-strapped consumers’ access to capital. Now it’s the credit unions that need capital to keep up with conditions that the CEO of one local credit union likened to a “perfect storm.”

Take the lowest savings rate nationally since World War II, add in a cooling housing market, and throw in a flat yield curve in which the cost of funds is roughly equivalent to the anticipated returns, and the result is another rough year for credit unions, marked by flat and in some cases falling shares (member savings, to a credit union) and dwindling returns on assets.

“Many people had home equity lines of credit that were adjustable rate,” says Joe Schroeder, CEO of the San Diego Metropolitan Credit Union. “As their rates went up, so did the payments, then the price of gas went up, and it’s been a tough year for our members (city employees). We’re noticing the amount of money in members’ checking accounts is going down. It’s kind of the perfect storm.”

The 29 credit unions headquartered in San Diego County have a combined 936,000 members. At the end of the fiscal year, they held about $12.29 billion, $4.6 million more than a year earlier. While pedestrian by credit union standards, the rate exceeded the Credit Union National Association’s 2006 forecast of 3.1 percent. It was sharply off the five year average of 8.7 percent.

Outstanding And An Asterisk

Return on Assets, or ROA, is a popular way to gauge how well a financial institution is investing its money. An ROA of 1.0 or greater is considered very good performance. In San Diego, eight credit unions surpassed that mark, a group that includes the Chula Vista City Employees Credit Union (2.39 ROA), Faith Based Federal (2.39), the Metropolitan Credit Union (1.71), San Diego County Credit Union (1.66), Paradise Valley Credit Union (1.47), Pacific Marine Credit Union (1.34), Cabrillo Credit Union (1.13) and San Diego Medical Federal (1.03). Each of these eight also bested the Credit Union National Association 2006 national ROA forecast of 0.82, while Escondido Federal tied the mark.

Metropolitan was the biggest gainer, moving from No. 17 on last year’s list of top ROA performers to No. 3 this year. CEO Schroeder, who took over the top job last year, attributes the gain to operating expense management and improved lending quality. Oceanside-based Faith Based Credit Union’s inclusion on that list requires an asterisk. Despite the high ROA, Faith Based is experiencing tough times. Helping it get through is a group of San Diego Credit Union Coalition members, headed by Max Paul, chief executive of Miramar Federal Credit Union.

“We started helping them out about a year ago,” says Paul. The assistance included about $50,000 in donations from San Diego member credit unions reported as income, which “artificially inflated” Faith Based’s ROA, Paul says.

For the most part, however, San Diego credit unions struggled with increasing competition for deposits, an existing consumer base often described as “tapped out,” and competition for branch space and new members in outlying suburban areas.

San Diego County Credit Union added $362 million in assets in its last fiscal year, growing 12.1 percent to more than $3.34 billion. Other credit union members of the billion dollar club are finding a challenging market.

“It’s a very tough environment for growth,” says Jim Miller, chief financial officer of Mission Federal Credit Union. “Since the end of June, we’ve slowed down considerably. It’s also a very competitive market for deposits, since people have a lot of choices.”

Those choices include higher-rate certificate of deposit accounts, or CDs. Competing for them by raising interest rates subtracts from CU returns.

Declining Savings Rate

Jim Miller, CFO of Mission Federal Credit Union, says credit unions are facing a tough environment for growth. (photo/alandeckerphoto.com)

Miller says the “big phenomenon” he’s watching is a drawdown of savings among credit union members to cover routine expenses. “A lot of people are living on their savings,” Miller adds. “That’s an economic fact, especially with the summer increase in gas, and mortgage costs.”

Mission Fed’s ROA fell from 0.91 to zero. Miller says the plunge is attributable to “getting out of specific loan programs that were no longer profitable,” and discounts on asset sales. Even with these issues, Mission Fed managed to grow 2 percent in assets, approaching $2 billion.

North Island remained a steady performer with an ROA of 0.57, off 17 percent, and a 1 percent growth in assets, topping $1.5 billion.

“We’re not seeing the refinance activity of a couple of years ago,” says Geri Dillingham, chief operating officer for North Island. “But new home purchases are coming in. We’re investing in delivery channels such as branches and online, so you see that impact on earnings.”

Geri Dillingham, CEO of North Island Credit Union, says refi’s are down but new mortgages are still drawing business. (photo/alandeckerphoto.com)

First Future Credit Union had hoped to join the billion dollar club this year, but the weak second half put that milestone on hold until perhaps the second quarter of 2007. As of June 30, First Future’s ROA had declined 33 percent, but its assets were up 8 percent to about $890 million.

“Loans are tied to long-term rates. Deposits are tied to short-term rates, so when there’s not enough spread between the two, you have a problem,” says CEO Marla Shepard. “At the same time, CUs are not growing deposits, and that’s causing competitors to be aggressive on rates. We were pretty aggressive, and we’ve just decided this is getting too expensive.”

First Future is looking to make its bread-and-butter auto loans more attractive by offering members no payments for the first three months — “a little breathing room,” says Shepard — and by sending members “pre-approvals” for auto loans depending on their credit record and other relationships with the CU. The customer can take the preapproval to a dealer.

Suburban Expansion

Marla Shepard, CEO of First Future Credit Union, says the credit union hoped to join the billion dollar club this year, but a weak second half delayed that until perhaps the second quarter of 2007. (photo/alandeckerphoto.com)

A solution for credit unions able to compete is branching into suburban and/or underserved areas of the county.

“The hope is we’ll get new members and new business,” says Shepard. The price is steep, in the $750,000 neighborhood for each new branch. Although the recent downturn gave the CU pause, Shepard says First Future is going ahead with plans to bring on three new branches: Hillcrest for a Thanksgiving opening, with Poway and Murrieta coming in spring of 2007.

North Island also has plans for branches in Eastlake, Rancho San Diego and Temecula, after opening in Carlsbad this year. Mission Fed recently opened in San Marcos, and looks to put a branch in Eastlake in 2007.

Good branch locations are at a premium.

“It’s tough to find branch locations,” says Metropolitan’s Schroeder. “First, in any area you have the early adopters, the WAMU (Washington Mutual), BofA, Wells and Union, and they gobble up the property. Then you have the large credit unions like County and Mission, and then you have the second tier of credit unions. I was interested in Four S Ranch which is not even built out yet, and (the property) was already filled up. You’ve got to get in two years early, and get to know the developers.”

For 2007, credit union executives are looking for a turnaround. Miller says the Fed might cut rates 25 or 50 basis points, which could stimulate consumer spending. In its 2007 forecast (see Comfort, Page 38), CUNA estimates member savings growth will increase from 3 percent this year, including negative savings growth in the second and third quarter, to 7 percent in 2007.

Miramar’s Paul sees a second half upturn, starting in August of 2007. In what Shepard calls the most competitive market in the nation, credit unions are banking on modest gains in 2007. For most, any improvement would be welcome.