SAN DIEGO-Although James Harris sees banks as the main competition for $742-million USE Credit Union, he acknowledges the nature of the hyper-competitive San Diego market means other CUs must also be reckoned with.

"Banks are the primary competition, from market share to product pricing," said Harris, CEO of the former University & State Employees CU since 2004. "The opportunity is in offering better price and quality. But yes, we compete with other credit unions on a field of membership standpoint with so many community charters."

The San Diego market is challenging, Harris said, adding he is used to a competitive environment having been with CEFCU in Illinois as part of his 30 years in CUs.

"Needs change more quickly these days, so it is important to be adaptable," he said. "From talking with our members, our real competition is not credit unions, but banks. Certainly this is a strong credit union market with five $500-million or larger credit unions besides us. Members benefit from heightened delivery of products, services and delivery channels. On channels such as home banking and mobile banking, we are all very competitive. Technology is an equalizer for credit unions against the bigger banks. We cannot always compete on the brick and mortar but we can certainly compete on the electronic front."

Harris said that an evaluation conducted by Cornerstone Advisors of how USE CU stacks up against its major competitors left him "happy to be told we can compete with the best of them. Technology is changing our industry. Technology helps us even through our branch network."


Where The People Focus Begins

USE CU had its beginning serving university and state employees, which Harris said continues to be its primary segment, but it also has a community charter. He said it has a "people focus" that starts with employees.

"We treat our employees well and they treat the members well," he said. "Satisfaction means loyalty, and a great deal of our new members are from referrals. We see this even in the case of an existing member who hears about the value of a USE checking account."

Prior to the recession it was "relatively easy" to bring in new members, Harris said, and USE became accustomed to that atmosphere. But since the recession, member viewpoints have changed. Harris said the CU had to be "much more business savvy" and "more astute" in operating efficiency.

"In retrospect, it has been beneficial because we are better business people today," he said. "We are more efficient and more able to adapt to changing member preferences. Previously members were heavier borrowers and lighter on savings. We know we have to define what members want and deliver that.

"The pace of change is faster today," he added. As the recession took hold on its members and prompted loan charge-offs, and assessments from NCUA started kicking in, USE CU's net worth ratio dropped below 7%. Harris said it had $850 million in assets at one point, but dropped by design to $700 million.


Regulators Get Happier

"We reduced our reliance on CDs, but maintained our member base and our core deposits," he explained. "We are back over 7%, which keeps the regulators a little bit happier. The pre-recession thought was 8.5% to 8.75% was a good number [for net worth ratio], but now I'm sure that is not high enough. The recession raised the bar."

In 2011 USE CU had $9.6 million in net income prior to assessments. It paid $1.6 million to the NCUSIF, leaving it with $8 million in net income. Its net worth ratio was 7.28% ("well capitalized").

In 2010 it lost more than $4 million, including paying $1.6 million in assessments. Its net worth ratio was 6.23% ("adequately capitalized"). In 2009 it eked out $97,141 in net income, but that disappeared thanks to $5.9 million paid to the NCUSIF. Its net worth ratio was 6.62% ("adequately capitalized").

In 2008 USE lost $13.1 million, with a net worth ratio of 6.3% ("adequately capitalized"). In 2007 it had $499,370 in net income and a net worth ratio of 7.77% ("well capitalized").

Today, lending is "still weak," Harris noted, adding the credit union is slightly expanding its real estate portfolio as consumers loans remain hard to come by.

"Our capital is up, but we do not think we are out of the woods yet," he said. "We will feel much better when consumers start spending again and borrowing again, and unemployment drops. It will be some period of time before we see meaningful improvement in employment, home values or consumer confidence. There is still a lot of insecurity, which is impacting spending. Consumers are deleveraging their personal balance sheets and paying down debts, which is good for them if not necessarily good for financial institutions."


Struggle In The Second Half

The Second Half of 2012 will still be a "struggle," Harris predicted. He said USE CU is looking for ways to generate earnings through both a marketing focus and a lending focus.

"We are looking for ways to not to turn down a loan, but to make a loan," he said. "We are evaluating our underwriting criteria. As delinquencies rose, many financial institutions looked to higher credit scores, which helped to stabilize delinquencies in loan portfolios, but that left out a lot of credit-challenged people who needed loans. We are designing and pricing loan products to address this type of consumer. They were the ones hit hardest by the recession, perhaps lost their job for a while, but if they have income we will try to work with them. It is important they can afford the loan-we don't want to place people into loans they cannot afford."

USE made several changes in recent years to cut expenses-most dramatically by purchasing its building.

"Buying this facility changed us from lessee to owner," said Harris. "We are landlords, which creates rental income, and the costs are less. We are looking to increase penetration of debit cards. We instant issue, so anyone who walks in to open an account doesn't walk out without one. We have programs in place to encourage use of debit cards."


Few Opportunities For Collaboration

USE CU has not done much advertising in the last year or two since it gets so much of its referrals via word of mouth. Harris said it has placed some billboards, especially for its real estate program, plus some direct mail.

According to Harris, the one area where San Diego CUs show collaboration is in the "very active" PAC, in which most area credit union CEOs participate. He said political fundraising is "very important" to the credit unions of San Diego, which hold regular chapter meetings he described as educational.

"The type, number and size of credit unions helps build awareness in the market. It is a good market," he observed. "It is a very diverse market, with groups ranging from military to biotech to universities. Collective advertising would be a challenge. Even from an ATM standpoint with multiple credit unions participating in a network, it is hard to have a common brand. The largest credit unions would get less benefit from such an effort."

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