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San Diego’s credit unions ba$king in big banks’ financial failures

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‘There’s no fat cats putting their grubby little paws all over your money,’ USA Fed tells potential members

By Joe Tash

Member-owned credit unions have long positioned themselves as an alternative to large, corporate banks, stressing friendlier service, lower fees and competitive rates on both loans and deposits.

Following a wave of major bank meltdowns and takeovers in the past two years, credit unions are highlighting those differences more than ever, and credit union executives say they have seen an influx of new customers who switched from banks.

San Diego-based USA Fed pulls no punches when it comes to banks. USA Fed’s Website bears the logo “180˚ from banking,” and tells visitors, “USA Fed’s got all the stuff those big bad banks do, except there’s no fat cats putting their grubby little paws all over your money. We’re just regular folks working together to help each other save more!”

“It’s kind of an in-your-face, very overt messaging,” designed to appeal to the credit union’s core constituency of younger adults and military members, says Mary Cunningham, USA Fed’s president and CEO.

But the approach also seems to tap into public resentment of large banks and their acceptance of billions of dollars in bailout funds from taxpayers.

Ron Araujo, chief financial officer with Mission Federal Credit Union, says credit unions in general have benefited from the fallout over banks’ financial problems. In 2009, Mission’s membership grew by 6 percent, its largest-ever annual increase.

Mission has just over $2 billion in assets and 138,000 members, and its capitalization ratio, or net worth versus total assets, stands at 9.25 percent.  The National Credit Union Administration, which regulates credit unions and insures their deposits, considers a credit union well-capitalized at 7 percent or higher.

Mission’s strong capital position, says Araujo, “gives us a lot more financial flexibility to price both loans and rates a lot more attractively. And we did it without any TARP money,” a reference to the federal government’s Troubled Asset Relief Program, which supplied billions in bailout money to major banks and investment firms.

“There’s an appetite right now.  There’s a propensity for people to say I’m done with big banks,” says Araujo.

That popular sentiment is expressed on such Web sites as moveyourmoney.info, where people can search for community banks and credit unions near their homes and workplaces. Another such
site is called breakupthebigbanks.com.

Top officials with San Diego County Credit Union and California Coast Credit Union, which along with Mission make up the county’s top three credit unions in terms of assets, say they too have seen more customers jumping ship from large banks.

Immediately after large banks began experiencing severe financial problems in late 2008, “there was kind of a flight to safety,” as customers moved their money from banks to credit unions, says Marla Shepard, president and CEO of California Coast, which has $1.8 billion in assets, 120,000 members and a capitalization ratio of just over 9 percent.

More recently, says Shepard, customers are coming from banks when they are unsatisfied with the effects of mergers or takeovers, or changes in fees.

California Coast has in the past two years completed two mergers, with First Future and Financial 21 credit unions, which Shepard says have allowed the expanded organization to reduce staffing by 110 positions through attrition, saving $6 million in operating expenses.
Credit unions are nonprofit institutions and do not have to answer to shareholders like corporate-owned banks, says Tum Vongsawad, interim president and CEO of San Diego County Credit Union, the county’s largest with assets of $4.8 billion and 207,000 members. San Diego County Credit Union’s capitalization ratio is 11 percent.

“Our customers can benefit because we can provide them with higher rates on savings accounts and lower rates on their loans,” than large commercial banks, says Vongsawad.

John Hall, a spokesman with the American Bankers Association in Washington, D.C., says that while customers may be leaving some large banks, many are opting to open accounts in smaller community banks as well as credit unions. He cited a “flight to quality,” in which Americans are pulling their money from riskier investments such as securities and mutual funds, and putting it into safer holdings such as savings accounts and certificates of deposit.

“In this time of economic turmoil, a lot of people have left the stock market and are investing in certificates of deposit at their local bank,” says Hall.

As for the advantages of credit unions over banks, he urged consumers to log onto Websites such as bankrate.com to compare loan and deposit rates for themselves.

“Community banks in your marketplace are competitive with credit unions in every way, interest rates, fees and services. And oftentimes they will have a greater variety of services,” says Hall, whose organization represents both large and small banks.

Hall says banks have been unfairly lumped in with other types of financial institutions in media accounts of the 2008 financial collapse.

“The term bank is often used as broad brush, when people are referring to AIG, Fanny Mae, Freddy Mac, Goldman Sachs and Lehman Brothers.  Those are a variety of securities firms, an insurance company and mortgage companies,” says Hall. The ABA’s members are traditional banks insured by the Federal Deposit Insurance Corp. or FDIC, he says, and, “Most community banks in the country never made a sub-prime loan and had nothing to do with the cause of the recent economic turmoil.”

A spokeswoman for the California Bankers Association adds that credit unions have an unfair advantage over banks because they do not pay taxes, but have expanded their services beyond their traditional charters in such areas as business loans.

Credit unions, however, are unapologetic about their current advantageous position.

“What our members tell us is it is very difficult to get a business loan from a bank. We’ve continued to loan,” says Shepard.  “Some banks have tightened or stopped business lending. We are getting deals that had gone to banks and we’re happy to do that.”

In spite of their successes, San Diego credit unions have not been immune to the financial pain that has afflicted the country over the past year or two.  Most have borne steep losses as their members have been laid off from their jobs or suffered pay cuts, and are unable to make payments on home and auto loans and credit cards.

“We’ve had our share of losses too. It’s been pretty painful,” says Cunningham of USA Fed.  “It just affects you when someone is out of work and can’t pay their debt.”

Before the economic downturn of 2008, USA Fed – which has $640 million in assets and 58,000 members – was well-capitalized with a net worth-to-assets ratio of 9 percent, says Cunningham.  When unemployment rates spiked, the credit union suffered “horrendous” losses in home equities and other types of loans, she says.

Those losses, coupled with USA Fed’s decision to invest in technology to serve its online customers, including those at military bases in Japan and Korea, dragged down the capitalization rate to 4.4 percent, which the NCUA considers “undercapitalized.”  The agency placed USA Fed under a “prompt corrective action” order, resulting in closer monitoring by regulators.

The 57-year-old credit union is bracing for additional losses in 2010 as the economy slowly recovers, while focusing on its core membership base.

“I don’t expect the economy to be fully recovered” a year from now, says Cunningham.  “But to see us on track to meeting our financial goals, that to me would be a very good sign.”

While credit unions have had home foreclosures, they have not been on the magnitude of those experienced by banks.

“We never got involved in a lot of sub-prime and exotic mortgages that blew up on the banks,” says Araujo, of Mission FCU.

And credit union executives say that, based on anecdotal evidence from members, they have been more open to loan modifications such as interest rate adjustments and extension of loan terms than their counterparts in the banking industry, and also quicker to deal with modification requests.

“There’s no greater feeling at the end of the day than to go home knowing you’ve helped someone stay in their home or keep their car,” says Vongsawad of San Diego County Credit Union.

San Diego County residents apparently approve of the credit union model; nationally, credit unions have a 6 percent market share among financial institutions, but in San Diego, the number is about 25 percent.

Surveys bear out, says Cunningham, “credit unions are absolutely in a love affair with their members.”

“It has really been great that credit unions are well-capitalized and they have staying power to get through difficult times,” says California Coast’s Shepard.  “This is our time to shine.”

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