SACRAMENTO, Calif.-The region around the Golden State's capital continues to struggle with a fractured housing market, rising unemployment and myriad other woes, and the head of one of California's largest credit unions believes conditions are worsening.
That said, Teresa Halleck, CEO of $6.5-billion The Golden 1 Credit Union, is not entirely pessimistic. Asked what it is like to run a credit union in California these days, the first words she used were "very exciting."
"It is an environment that presents enormous challenges while at the same time presenting tremendous opportunities, so I consider it a very exciting time to be in this business," Halleck told Credit Union Journal.
CUJ: What are the biggest challenges?
Halleck: The biggest challenge for any credit union is finding quality loans in this environment. Credit unions, including us, must make sure they are booking quality loans and not stretching for yield or credit risk at this point.
Of course, the other side of that is maintaining deposits in a stable manner. That largely may be situational-our market is intense in CD competition. We have many big banks in our area that have had problems, and they are offering extremely high CD rates that are not conducive to earnings if you book those dollars in your organization, and yet you don't want to lose deposits or member relationships for those members who are rate sensitive.
There is a balance there of trying to remain competitive but also practice good asset liability management. It is being competitive in the market without allowing your deposit costs to be driven up substantially given the fierceness of the banking competitors-who are seeking retail deposits for liquidity purposes.
It is just an unusual environment we are in right now, especially given the flight to quality which has driven down the yields on safe investments.
CUJ: What direct and/or indirect effects is your CU feeling from the housing market?
Halleck: In Sacramento, everyone in our region is feeling a significant impact from the decrease in home values. We are down in our region about 40%, which makes it very difficult for our members to sell homes when needed. We have a high incidence of foreclosures-according to RealtyTrac the first quarter number was one in very 55 households in Sacramento was in a foreclosure proceeding.
Several of the Top 10 foreclosure cities in the nation are in California and some are very much areas in which we have membership and do business in, including Stockton, Riverside, Bakersfield, Sacramento, San Diego and Oakland.
Even though the banks were the drivers of the subprime meltdown, the reality is it has impacted all homeowners. It has impacted our members' ability to sell a home, even if they weren't a borrower from a bank or a subprime borrower. If people need to relocate for a job or they get a divorce, or any kind of relocation, they are impacted.
We also see in some communities where people move down the street and chop down their loan price from $800,000 to $450,000. They are restructuring their debt.
Those aren't people who necessarily cannot afford their homes; those are just people who have decided there is an opportunity. We are seeing those kind of dynamics in the market, and it has affected all of us, but we have fared fairly well because fortunately we were conservative in our lending practices. But we have been impacted by the broader market.
CUJ: Have the failures of IndyMac and WaMu allowed you to gain members and/or deposits?
Halleck: We have seen an inflow from Washington Mutual customers. IndyMac is primarily Southern California and is not in Sacramento, so we haven't seen anything to speak of from their customers.
What we are doing for the Washington Mutual customers-and it typically is the CD customers who are moving because they are the ones who get nervous, not the checking account people who don't care anyway because they are insured-our staff tries to cross-sell them into also moving their checking with direct deposit.
We offer some incentives for members who have checking with direct deposit with us, which should help us hold some of those CDs long term.
For the month of September 2008, we had more than 4,700 new member accounts, which was pretty good growth. Our 12-month average had been 3,700 accounts per month, and in September 2007 we had 3,400 accounts, so last month was a significant increase.
As far as deposit inflow, we are not looking to grow deposits, we are looking to maintain deposits at this point. We are using that inflow of generally lower-cost funds to offset some of our higher-cost CDs that are maturing. This allows us the opportunity at this point to not have to compete as strongly as we might otherwise have to with those high-cost CDs that are on the market right now from the banks that are struggling a bit.
CUJ: Are economic conditions in your market still worsening, or have things already hit bottom and are improving?
Halleck: Definitely I do not see things as having hit bottom. From my perspective in Sacramento, economic conditions in California continue to worsen.
Housing devaluation is significant and not yet over, select auto dealers have closed, some restaurants struggle and a few have closed, layoffs continue, retail sales are down, tradesmen and related businesses also have significantly less income since new home construction and home improvements are substantially down and in some instances stalled, and consumers are generally uncertain and fearful about the future as well as their personal economic stability.
CUJ: How is lending going?
Halleck: With home values down substantially-as much as 40% in our markets, and with further devaluation anticipated-home equity loan volume is significantly lower. Mortgage shoppers continue to apply for loans in strong numbers, but then sit on the fence awaiting further decreases in market interest rates and home prices, hoping to hit bottom on both.
This environment translates into strong volume in mortgage applications without a corresponding volume of booked mortgage loans because members don't follow through to make a home purchase.
Golden 1 proactively partnered with local Realtors and did home bus tours with approved buyers, but they were generally wary of home values and are awaiting further declines.
We have seen similar results with our Mortgage Repair product-even those who lost homes to bank foreclosures and are now potential buyers are holding back in hopes of hitting home values at the bottom before repurchasing.
Auto loan sales remain stalled compared to prior years, yet Golden 1's strong dealer relations has resulted in increased market share over the past year. Golden 1 recently was the No. 2 auto lender in both Sacramento and Placer Counties, following behind only Toyota Financial (Sacramento) and Wachovia (Placer). On a comparative basis, our Sacramento County auto loan penetration for September 2008 was 9.9% versus 4.04% for September 2007; and in Placer County, our September 2008 auto loan penetration was 8.64% versus 3.68% for Sept 2007.
Golden 1 proactively strengthened its auto loan underwriting criteria back in September 2006 and we have seen tremendous benefit from that proactive credit-risk management initiative. As a result, we book top-quality auto loans and are a solid and reliable source of funding for our auto dealer partners in this difficult environment.
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