At the close of 2011's second quarter, a handful of creditunions located in the sand states, where a teetering economy hasmade it most difficult for financial institutions to thrive, sharedhopeful bits of news: net worth ratio improvements, net incomeincreases, loan loss reductions and operating expense cutbacks.

But there's still a long road to recovery ahead for CUs in thesand states of California, Nevada, Arizona and Florida, say severalcredit union CEOs based in those regions. And another state, Utah,has become the newest member of the sand state club. In February2010, Utah League of Credit Unions President/CEO Scott Simpson declared Utah a sand state, stating it had caughtup with the bankruptcies and foreclosures the original four stateshad suffered.

Callahan & Associates' current state-by-state return onassets data shows several of the sand states lagging behind therest of the nation. Of all 50 states plus Puerto Rico, Guam, theU.S. Virgin Islands and the District of Columbia, Nevada ranks rockbottom with a return on assets of negative 0.33%. Florida ranks38th with 0.59%, Utah comes in at 35th with 0.60%, California ranks19th with 0.79%, and Arizona is 14th on the list with 0.85%.

The economy in Nevada, which relies heavily on gaming revenue,has shown few signs of improvement, said Brad Beal, president/CEOfor the $677.5 million, Las Vegas-based Nevada Federal CreditUnion. The statewide unemployment rate is still high at 12.9%, realestate values continue to slip, and while tourists are visiting LasVegas, Beal said they're traveling on a budget.

“The local economy is giving mixed signals, with no real signsof recovery and small positives,” Beal said. “It's a mixed bag. I'd say it's less bad.”

He said foreclosures have moderated slightly, and while low realestate prices have led to strong first-mortgage activity at NevadaFCU, the drawn out that often accompanies short sales andforeclosed properties has made it tough to buy a home in Nevada.Auto loans have been slow and second mortgages are nonexistent atthe CU. But the credit union did launched a successful auto loanrefinancing campaign, Beal said.

“This is the new reality, and we need to adjust and adapt,” hesaid. “It's not going to get better any time soon. Nevada's economyis contingent on the economy nationwide. Once the national economyimproves, Vegas will see a bigger cash flow.”

The California and Nevada Credit Union Leagues report “a bit oflight at the end of the tunnel” for CUs in the Silver State.Compared to the end of 2010's second quarter, 2011's second-quarterdata show a delinquency decline of 1.3 percentage points (from 5.6%to 4.3%) and a charge-off decline of 1 point (from 4.18% to 3.18%),said Daniel Penrod, the league's senior industry analyst. While thereturn on assets is still negative 0.33%, the number improved fromnegative 1.20% in the second quarter of 2010, and savings depositsgrew by almost 8.5% in the past year, which indicates Nevadamembers have turned to their CUs in uncertain times, Penrodsaid.

“Delinquencies remain elevated above 4%, but the steady drophints that credit unions could see modest stability in the comingyear,” Penrod said.

One hard hit Nevada CU in particular is the $712 millionSilver State Schools Credit Union of Las Vegas, which suffereda $2.8 million loss in the first half of 2011. But President/CEOAndrew Hunter has remained positive, stating that the CU expects torestore its loss by the end of 2011 and attributing itssecond-quarter net loss to an increase in reserves set aside forpotential loan losses.

The $1.1 billion North Island Credit Union has reported goodnews out of its San Diego headquarters: a year-to-date net incomeof $11.92 million, a net worth ratio of 6.43% and total capital,including reserves for future loan losses, of $103.3 million.

President/CEO John Tippets said North Island CU's turnaround isdue to a number of efforts, including a focus on balance sheetmanagement, an operating expense reduction of $27 million since2007, a reorganized fee structure and the addition of a new tenantin the CU's headquarters building.

“We're finally past the fear and fog of 2008 and 2009 and weknow where we are, but we still can't control our environment,”Tippets said. “We've gotten our arms around delinquencies, whichhas partially been influenced by a reversal of excess reserves, butnow we are making money aside from that reversal of excessreserves.”

Another California credit union, the Riverside-based, $693.6million Altura Credit Union, shared a second-quarter success story: anet gain of $3.1 million following a first-quarter net loss of $1.6million, plus a net worth ratio of 6.26%, an increase from thesecond quarter of 2010's net worth ratio of 5.23%. Altura CUpreviously suffered a net loss of $4.1 million in the secondquarter of 2010 and a number of layoffs and branch closings, the CUsaid.

According to Penrod, credit unions in the Golden State, whereunemployment is at 12%, “appear to be headed back to sustainableprofitability.” He cites a 50% decrease in provisions for loanlosses from the second quarter of 2010 to the second quarter of2011, which led to a 160% improvement in net income. Additionally,delinquencies dropped by 37 basis points to 2.04% and charge-offsby 46 basis points to 1.38%. Total membership has fallen, however,and the state's CUs experienced loan losses of more than $3.2billion.

“Even though fewer loans are in delinquent status, low demandhas caused the portfolio to decline,” Penrod said.

In Arizona, where the unemployment rate is slightly lower at9.4%, the $404 million, Phoenix-based Arizona Central Credit Union has seen improvements in loandemand, including upticks in first mortgages and new and used autoloans, President/CEO Todd Pearson said. Total delinquent loans havefallen from $13.9 million in the second quarter of 2010 to $4.09million in the second quarter of 2011, and current totalcharge-offs fell to $3.05 million from last year's $4.76million.

“Overall, it's slow and steady, but it's beena bit of a grind for a lot of credit unions,” Pearson said.

Like Nevada, Arizona is a “fabulous buyer's market,” butpurchasing foreclosed homes and short sales is a slow process,Pearson said. He added Arizona's economy relied heavily onnewcomers to the state, but the migration leveled off due to thefaltering job market. He does, however, see improving conditionsahead.

“I'm cautiously optimistic that things will continue to improveand loan volumes will pick up,” he said. “But you have to take oneday at a time and manage your existing portfolio the best youcan.”

AEA Federal Credit Union, a Yuma, Ariz.-based, $229 millioncredit union that NCUA conserved in 2010, also reported a smalltriumph: year-to-date net income of $2.2 million, which follows a2010 loss of $31 million. AEA FCU said it's slashed expenses by 41%since 2010.

Florida's credit union league, the League of Southeastern CreditUnions, noted that in the first six months of 2011, the state'scredit unions saw a 107 basis point reduction in loan-lossprovisions and a 36 basis point reduction in bothdelinquencies and charge-offs.

The real estate market also demonstrated a slight improvementthis year–first-mortgage loan and total mortgage loan activity atFlorida credit unions is just slightly behind national averages,said Patrick La Pine, president/CEO of the League of SoutheasternCredit Unions. He said member demand for mortgages still remainsflat, however.

“What we're seeing right now is that the worstmay be behind us,” La Pine said. “Our credit unions are makingbetter loans and members are able to pay off those loans. And manyof the poorer quality loans that were written prior to and duringthe Great Recession have been charged off.”

Utah's current unemployment rate is 7.5%, lower than the fouroriginal sand states' (Florida's is 10.7%) and the national rate of9.1%, but negative trends in bankruptcies, foreclosures anddelinquency filings have plagued the state's credit unions,according to the league's Simpson.

John Steck, former board chairman for the Salt Lake City-basedUtah Central CU and chairman for the National Association of CreditUnion Chairmen, pointed out that Utah's national CU presence issmall, with the majority of the state's CUs having $25 million orless in assets. But he shared optimism on the subject of Utah'seconomy, stating, “There is a lot of new construction in Utah, anda lot of new commercial buildings. I don't think we got hurt asbadly as Vegas or Phoenix did.”

Sand state credit unions are leveraging the tools they have topull their heads out of the water, but as Tippets said, certainfactors are out of reach. During the financial restoration processat North Island CU, Tippets said he's kept in mind that manyfactors affecting the CU's health are out of its control, such asconsumer attitudes and decisions, local competition, unemployment,the housing market, competition from big banks, new regulations andinterest rates.

“The local economy is imperceptible,” he said. “It isn't better,and it isn't worse, and it's the same with the housing market. Idon't see a lot of encouraging signs. Our losses are moderating dueto our members' circumstances, and that's the most positive trend Isee right now.”