Rising loan demand is forcing credit unions to scrounge for liquidity.

Although the industry's loan-to-deposit ratio is only 65% -- relatively low for credit unions -- a large portion of its surplus funds are tied up in intermediate-term investments.

Until those investments mature, cash-strapped institutions will have to pull money out of short-term investments and possibly borrow from corporate credit unions and banks.

They're also expected to boost loan and deposit rates.

"Credit unions are in a liquidity scramble, but one that will solve itself" by the end of next year, when investments mature, said William F. Hampel, chief economist for the Credit Union National Association.

Credit unions have been stretching their investments since the early 1980s, after loan-to-deposit ratios fell sharply and failed to rise, Mr. Hampel said. This trend picked up in the past two years, thanks to a steep yield curve.

At midyear, 55% of the industry's investments were due to mature in less than a year, while 30% were due to mature in one to three years and 15% in more than three years.

In 1984, by comparison, 84% of investments matured in less than one year, Mr. Hampel said.

Some credit unions have been withdrawing short-term money from corporates as well as borrowing from the liquidity centers.

"Since midsummer, we've seen a big drawdown in deposits and an increase in loans," said Gerald Murphy, president of Garden State Corporate Central Credit Union, Hightstown, N.J:

"I haven't seen anything like this since the early '80s. I've seen credit unions we haven't lent to in nearly a decade."

The $500 million-asset corporate's loan portfolio has increased to $12 million from $1 million in July, and it should continue growing,

Mr. Murphy said. Meanwhile, deposits have fallen by one-third.

Don W. Finn, chief operating officer of Mid-States Corporate Federal Credit Union, also has seen institutions seeking funds.

"Since May of this year I've been noticing credit unions accessing overnight accounts to keep up with loan demand," said the president of the $1.7 billionasset corporate, located in Naperville, Ill.

Deposits at Mid-States have fallen by about $400 million, to $1.4 billion, since May, he said. Loans outstanding have increased from about $500,000 to between $30 million and $40 million.

"I think that shows the stress on credit union liquidity," Mr. Finn said.

Some credit unions that previously would have liquidated investments rather than borrow aren't doing that now, due to the Financial Accounting Standards Board's new mark-to-market rule, Mr. Hampel said. Under the rule, known as FAS 115, if a credit union were to sell an investment out if its "held to maturity" category, other similar investments probably would have to be marked to market value as well.

Credit unions also are at a turning point in the rate cycle. The industry has held the line on loan and deposit rates this year, even as the Federal Reserve has boosted short-term interest rates.

For example, the industry's average new car rate in September was 7.3%, only a 30-basis-point increase from February -- a period in which the Fed cranked up short-term rates by 175 basis points.

That's expected to change.

"In light of the Federal Reserve Board's [latest] 0.75% increase in short-term interest rates, standing firm on rates may no longer be possible for credit unions," said Charles W. Filson, president of Callahan & Associates, a Washington-based consulting firm.

Fueled in part by low rates, the industry's loan portfolio grew 11.5% to $119.1 billion during the first nine months of this year, according to Callahan. Deposits grew 4.7% to $181.6 billion in the same period, and were stagnant last quarter.

Mr. Hampel said he expects both loan and certificate-of-deposit rates to increase by 100 basis points in the next couple of months.

Higher loan rates are needed for credit unions to make money during a time of tightening spreads, and savings rates must be higher to attract more deposits.

Mr. Hampel and Tun Wai, chief economist for the National Association of Federal Credit Unions, said loan growth will outpace deposit growth next year.

"As long as the loan rate adjustments of banks are faster than those of credit unions, expect that to continue," Mr. Wai said.

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