USA Federal Credit Union CEO Mary Cunningham hopes her prize-based savings plan will encourage customers to save money. (photo/alandeckerphoto.com)

Loaned out” is a sign that one never expects to see in the window of a financial institution, but local credit union executives say a low savings rate and strong loan demand are draining their vaults of funds.

This is surprising because many say San Diego County is in the midst of an economic slowdown that might be expected to curb consumers’ appetite for credit. For example, the San Diego Regional Chamber of Commerce reports the county’s gross regional product grew by only 2.9 percent in 2006, lagging California growth of 3 percent and national growth of 3.2 percent. The slowdown in real estate should be putting the brakes on one of the credit union lending engines, the mortgage loan.

Instead, many credit unions find themselves in the 90 percent range in their loans to shares, or members’ savings, ratio. Some credit unions are taking out loans themselves to keep up with consumer demand.

“We are loaned out at about 98 percent and the budget for 2007 looks the same,” says Mary Cunningham, CEO of the USA Federal Credit Union, which has about 61,000 members and $711 million in shares. “We’re trying to work on that consumer crisis which is that we Americans are no longer saving except for 401(k)s and we’re just a bunch of credit-a-holics.”

California Coast Credit Union might add a micro business loan product, says CEO Jim McPheters. (photo/alandeckerphoto.com)

This isn’t news to Jim McPheters, CEO of California Coast Credit Union.

“We’ve been loaned out since 2005,” says McPheters, leader of a lender with about 73,000 members and $900 million in member shares. “We’re in the low 90s in our loans to shares. We’ve borrowed to fund loans, and if it’s costing us 5 1/2 percent, it’s difficult to lend it out to members at a reasonable rate and expect to make much margin on that.”

A similar story is told by Ted Dennis, CEO of Point Loma Credit Union. “We’ve been at 97 percent loans to shares,” says Dennis, who helms a 62,000-member lender with about $500 million in member shares. “We’ve borrowed some for liquidity needs.”

Banks have the option of issuing stock to raise working capital, but credit unions must fall back on the same crowd who’s raiding the cash drawer — members. The solution is for credit unions to find a way to entice members to save, and with savings rates nationally the lowest since World War II, this can be a tough sell.

“Our biggest emphasis in 2007 is to do whatever we can through programs and services to get people saving again,” says Cunningham. Since Cunningham’s CU primarily serves members of the military, many of whom are in the household formation stage of spending, the odds would seem to be against her. So she’s come up with a game of sorts to tilt the odds in savings’ favor.

“We’re going to be introducing prize-based savings deposits,” she says. “This account will award cash prize giveaways. The way it works is the more they deposit to the account, the more chances they’ll have to win cash prizes. It’s sort of a lottery system.”

Cunningham says the prizes could be in the thousands of dollars, with awards of two or three a month. Although the exact formula hasn’t been worked out yet, Cunningham says, “For each deposit members make they’ll get so many chances. We’re looking to encourage saving any way we can.”

Asked if her base of young families is likely to bite, Cunningham says, “They’re more in need of a savings program than anybody. And this is the same generation that loves to take their chances on the lottery. That’s why we think the program will work. Instead of wasting their money on a lottery ticket, they’ll be putting it into an account for themselves.”

Another way to bring in deposits is to attract new members. USA Federal is coming off what Cunningham calls an excellent year, attracting close to 5,000 new members, more than double the goal of about 2,000.

“We have two advantages in San Diego, being a border town and a military town, in terms of having the opportunity to attract un-banked individuals, or people who haven’t had a relationship with a financial institution, and taking young consumers by the hand and teaching them what’s good about credit unions,” she says.

While USA Federal embarks on its novel lottery savings plan, other local credit unions are looking at more traditional avenues that are nevertheless new to them.

One way commercial bankers attract deposits is by offering business loans, and Cal Coast Credit Union, whose affinity group is educators, is looking at getting into the business arena, says CEO McPheters. Many of McPheters’ colleagues in the $700 million category and up are already offering some form of business lending.

“We keep hearing from our members that they have (business loan) needs that aren’t being met, so we’re definitely looking at it,” says McPheters. These might start out in what is considered the micro business loan category below $100,000, he adds.

Point Loma Credit Union, which has 14 branches in San Diego and Riverside counties, is planning to add a new branch in Palm Desert this summer, which CEO Dennis hopes will attract new members and deposits. “You not only have retirees, but all of the people that support the retirees, so that appears to be an area that would be good for us,” he says.

Banks traditionally use high rates on certificates of deposit to attract savers, but competition, not only from banks but from other big foot credit unions, makes it difficult for credit unions to compete.

“We price our certificates at or near the top of the market,” Dennis says. “Still, it’s hard to compete nationwide with some of these internet banks, but we continue to price our rates aggressively to meet our members’ needs.”

Personal service is Financial 21 CEO Gene Roberts’ best growth strategy. (photo/alandeckerphoto.com)

Point Loma is in the “infancy stage” of its business lending efforts, Dennis says.

Smaller CUs, such as the Financial 21 Credit Union with 12,000 members and assets of about $135 million, are banking on personal service to attract members and deposits and to fend off defections to larger competitors.

“In San Diego, you’ve got about 26 credit unions and all the banks and S&Ls, so it’s difficult if not impossible to get Joe Consumer to move his account to any other institution,” says Financial 21 CEO Gene Roberts. “Chances are they’ve already established a relationship, loans, and credit cards, so it’s really tough to get them to switch.”

So, Roberts says his CU is investing in service. “If you call some of the larger financial institutions today, it’s a challenge to talk to a real person, so we’re trying to maintain personal contact, which costs more, and still pay competitive rates,” Roberts says. “We feel that for the members who have been with us for a long time, they’re not going to move their funds for 10 basis points, so we’re looking for that balance between investment in service and competitive rates.”

Roberts’ vision for gathering new members involves homeowners associations. “We’ve already been in contact with some,” he says.

Even the largest CUs, such as North Island Financial Credit Union with 112,000 members and $1.5 billion in member shares, are looking for ways to fatten their deposits.

“The markets are strong, so that makes it hard for us to get savings,” says Geri Dillingham, chief operating officer of North Island FCU.

Geri Dillingham, CEO of North Island Financial Credit Union, is counting on four new branches to grow deposits. (photo/alandeckerphoto.com)

North Island has been in the forefront of innovative savings programs, such as MatriMoney, which deals with a practical problem faced by newlyweds: how to find a tactful way to tell well wishers they’d rather get a check than a set of dishes. MatriMoney runs like a bridal registry; North Island provides gift cards so guests can make a deposit to the couple’s MatriMoney account. North Island will also kick in a $100 donation to match the first $100 in gifts.

“We’re also looking at health savings accounts,” says Dillingham. “With health care costs rising, we think there’s an opportunity.”

Although Dillingham says programs like MatriMoney and health savings accounts are niche programs, they offer customers a concrete reason to save, which brings in deposits.

In 2006, North Island began offering 7(a) working capital SBA loans, in addition to the real estate 504 loans that the CU has been offering over the last few years.

“Business loans have been a growth area for us and we have a good core base in San Diego,” Dillingham says, “but it is just a portion of our overall business.”

And, larger credit unions have the resources to build branches to grow deposits. North Island opened its Carlsbad branch in 2006 and has a slew of openings scheduled from the second quarter on.

“We have four new branches on the horizon,” Dillingham says. “We’re opening Temecula in April, Eastlake in June, Rancho San Diego in August and we’re relocating our Imperial Beach branch in October. Each time you open a branch you gather new deposits.”