Geri Dillingham, chief operating officer of North Island Credit Union, says the credit union was not involved in subprime lending but is feeling the effects of it. (photo/alandeckerphoto.com)

Like that faucet leak that was once just annoying but can no longer be ignored, the subprime mortgage crisis has been drip, drip, dripping into credit union ledgers. It’s not that credit unions got into the subprime market — executives say from years of experience they could see that “no money down and take forever to pay” wasn’t a winning lending formula — but their members did.

“It’s the spillover effect,” says Daniel Penrod, an industry analyst with the California Credit Union League. “While CUs didn’t get into these exotic mortgages, the members went after them on their own. So the CU isn’t holding that risky mortgage, but the member has credit cards, an auto loan or a personal loan with the CU. When their mortgage starts becoming an issue, all of a sudden they’re slow on the credit card payment or the car payment. We’re seeing a lot more voluntary repossessions where the member comes in to the CU and says they can’t make the payments anymore.”

The 29 credit unions headquartered in San Diego County have a combined 925,000 members, down 2.56 percent from the same period last year. At the end of the fiscal year (June 30), San Diego County credit unions’ assets grew 3.4 percent to more than $12.7 billion, an increase of $418 million over the prior year. This rate of growth is slightly higher than the Credit Union National Association’s (CUNA) 2007 forecast of 3.3 percent, and lower than the 3.5 percent growth over the last five years.

Despite the spillover effect, as of June 30, eight San Diego County-based credit unions managed to achieve an ROA (return on assets) of 1 percent or better, the same number as last year. An ROA of 1 is generally considered the mark of an exceptionally well-run financial institution. Anecdotal evidence suggests that the market took a downturn in the third quarter, so the actual result of the subprime spillover may await additional reports.

Oceanside’s Faith Based Credit Union, which has been receiving management and financial assistance from members of the San Diego Credit Union Coalition, led the pack with an ROA of 4.18, but is a relatively small player with only 335 members and its inclusion requires an asterisk. Better established ROA leaders included North Island Credit Union (1.76), San Diego County Credit Union (1.64), Escondido Federal Credit Union (1.40), Pacific Marine Credit Union at Camp Pendleton (1.39), Great American Credit Union (1.08), Paradise Valley Federal Credit Union (1.04), and Cabrillo Credit Union (1.03). (Great American will merge with $3.5 billion Wescom Credit Union in December if its 8,800 members approve. Wescom has 51 branches in Southern California.)

These are especially stellar performances, considering that credit unions are operating in an environment that includes lagging consumer confidence and a reduction in accounts as members draw down on low-cost core deposits (checking and savings). Even supposedly good news, such as the Fed’s 50 basis point cut on interest rates in September, has a double edge: credit unions may welcome any increase in traffic, but as rates trend lower they’ll make less on each loan. This means even as credit union managers look for operations efficiencies to lower costs, they must continue or expand marketing programs to attract new members.

“It’s an increasingly tougher environment,” says Geri Dillingham, chief operating officer for North Island, with more than 107,000 members and $1.51 billion in shares. “We weren’t involved in the subprime lending, but it has a residual effect facing all CUs.”

Dillingham says North Island has taken note of slower payments on auto and real estate loans, and encourages borrowers with cash flow problems to “come in earlier and talk so we can take a look at their full credit picture, including restructuring the loan, so they can continue to make payments.”

Prosperous CUs like North Island frequently have members in the stock market, so when the market performs well they’re less likely to stash their bundle in a CD at the local CU. “Gaining deposits is going to be a challenge because the stock market is performing well,” Dillingham explains. “If something were to switch in the stock market, there would be a flight to safety, but for now members diversify their investments.”

North Island is charging ahead with six new branches opening in the last three years, a new headquarters near State Route 52 and Interstate 805 scheduled to open in the fourth quarter of next year, and a dollop of optimism about the market going forward.

“We’re still involved in the largest inter-generational transfer of wealth in history, which may help home purchases,” Dillingham explains. “And the prices of homes in San Diego have obviously adjusted, so it’s a wonderful market for first-time buyers.”

Mary Cunningham, CEO of USA Federal Credit Union, says its effort to help military members with a manufactured housing loan program is problematic because mobile homes, like the rest of the housing market, aren’t selling. (photo/alandeckerphoto.com)

If credit union borrowers across the country are having some problems making ends meet, it’s not surprising that the credit crunch is falling harder on relatively low-earning military families and the credit unions that serve them.

“It’s a domino effect,” says Mary Cunningham, CEO of USA Federal Credit Union, with more than 58,000 members, most of whom have ties to the military, and about $700 million in assets. “Properties are sitting and depreciating, and even though we weren’t players in the subprime market, we’re still all feeling its effects.”

Cunningham says her CU is proud of its efforts to help military members, including a manufactured housing loan program that was supposed to address the affordable housing situation by providing loans for mobile homes in outlying areas of the county.

“That has been problematic, because just like the rest of the market, mobile homes aren’t selling either,” Cunningham says. “We’ve taken a bath on those, dragging down performance considerably.”

Another credit union serving a unique customer base is San Diego Metropolitan Credit Union, with 22,000 members and about $284 million in shares. SDMCU serves city of San Diego employees, who have been dealing with their own budget crunch, and Mayor Sanders’ plans to outsource city jobs elsewhere.

“We’ve grown deposits by 3 percent this year, but it’s been tough sledding,” says CEO Joe Schroeder. “We’re seeing some home equity delinquencies and fewer purchases of cars than at this time last year. There are more cash purchases and more cars being purchased through already existing home equity lines of credit.”

Some Financial 21 Credit Union members have prequalified for loans but are doing nothing because they are waiting for a better deal, says Gene Roberts, CEO. (photo/alandeckerphoto.com)

Gene Roberts, CEO of the Financial 21 Credit Union, with about 12,000 members and $138 million in shares, says he senses consumers who are not tapped out are sitting on the sidelines instead of signing on the dotted line.

“We have members who have prequalified for a loan, and they’re sitting there waiting for a better deal,” he explains. “They’re waiting for the Fed rate reduction to trickle down, and waiting for property values to drop further.”

As a result, Roberts says mortgages at Financial 21 are down more than 20 percent. The CU is hoping to entice members with its home equity line of credit at 5.75 percent with a 15-year payback. “If you’re a consumer, you’re in financial institution heaven because competition here is so fierce,” he says.

Understandably, credit unions have downsized visions of 2008.

“Generally, people start saving money if they’re worried about the future,” Roberts says. “But some consumers might decide to ‘go for it,’” and make a major purchase. “If you figure out who is who,” Roberts quips, “let me know.”