Long, Winding Road to Recovery
At the close of 2011’s second quarter, a handful of credit unions located in the sand states, where a teetering economy has made it most difficult for financial institutions to thrive, shared hopeful bits of news: net worth ratio improvements, net income increases, loan loss reductions and operating expense cutbacks.
But there’s still a long road to recovery ahead for CUs in the sand states of California, Nevada, Arizona and Florida, say several credit union CEOs based in those regions. And another state, Utah, has become the newest member of the sand state club. In February 2010, Utah League of Credit Unions President/CEO Scott Simpson declared Utah a sand state, stating it had caught up with the bankruptcies and foreclosures the original four states had suffered.
Callahan & Associates’ current state-by-state return on assets data shows several of the sand states lagging behind the rest of the nation. Of all 50 states plus Puerto Rico, Guam, the U.S. Virgin Islands and the District of Columbia, Nevada ranks rock bottom with a return on assets of negative 0.33%. Florida ranks 38th with 0.59%, Utah comes in at 35th with 0.60%, California ranks 19th 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/CEO for the $677.5 million, Las Vegas-based Nevada Federal Credit Union. The statewide unemployment rate is still high at 12.9%, real estate values continue to slip, and while tourists are visiting Las Vegas, Beal said they’re traveling on a budget.
“The local economy is giving mixed signals, with no real signs of 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 real estate prices have led to strong first-mortgage activity at Nevada FCU, the drawn out that often accompanies short sales and foreclosed properties has made it tough to buy a home in Nevada. Auto loans have been slow and second mortgages are nonexistent at the CU. But the credit union did launched a successful auto loan refinancing campaign, Beal said.
“This is the new reality, and we need to adjust and adapt,” he said. “It’s not going to get better any time soon. Nevada’s economy is contingent on the economy nationwide. Once the national economy improves, Vegas will see a bigger cash flow.”
The California and Nevada Credit Union Leagues report “a bit of light at the end of the tunnel” for CUs in the Silver State. Compared to the end of 2010’s second quarter, 2011’s second-quarter data 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 the return on assets is still negative 0.33%, the number improved from negative 1.20% in the second quarter of 2010, and savings deposits grew by almost 8.5% in the past year, which indicates Nevada members have turned to their CUs in uncertain times, Penrod said.
“Delinquencies remain elevated above 4%, but the steady drop hints that credit unions could see modest stability in the coming year,” Penrod said.
One hard hit Nevada CU in particular is the $712 million Silver State Schools Credit Union of Las Vegas, which suffered a $2.8 million loss in the first half of 2011. But President/CEO Andrew Hunter has remained positive, stating that the CU expects to restore its loss by the end of 2011 and attributing its second-quarter net loss to an increase in reserves set aside for potential loan losses.
The $1.1 billion North Island Credit Union has reported good news out of its San Diego headquarters: a year-to-date net income of $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 is due to a number of efforts, including a focus on balance sheet management, an operating expense reduction of $27 million since 2007, a reorganized fee structure and the addition of a new tenant in the CU’s headquarters building.
“We’re finally past the fear and fog of 2008 and 2009 and we know where we are, but we still can’t control our environment,” Tippets said. “We’ve gotten our arms around delinquencies, which has partially been influenced by a reversal of excess reserves, but now we are making money aside from that reversal of excess reserves.”
Another California credit union, the Riverside-based, $693.6 million Altura Credit Union, shared a second-quarter success story: a net gain of $3.1 million following a first-quarter net loss of $1.6 million, plus a net worth ratio of 6.26%, an increase from the second quarter of 2010’s net worth ratio of 5.23%. Altura CU previously suffered a net loss of $4.1 million in the second quarter of 2010 and a number of layoffs and branch closings, the CU said.
According to Penrod, credit unions in the Golden State, where unemployment is at 12%, “appear to be headed back to sustainable profitability.” He cites a 50% decrease in provisions for loan losses from the second quarter of 2010 to the second quarter of 2011, which led to a 160% improvement in net income. Additionally, delinquencies dropped by 37 basis points to 2.04% and charge-offs by 46 basis points to 1.38%. Total membership has fallen, however, and the state’s CUs experienced loan losses of more than $3.2 billion.
“Even though fewer loans are in delinquent status, low demand has caused the portfolio to decline,” Penrod said.
In Arizona, where the unemployment rate is slightly lower at 9.4%, the $404 million, Phoenix-based Arizona Central Credit Union has seen improvements in loan demand, including upticks in first mortgages and new and used auto loans, President/CEO Todd Pearson said. Total delinquent loans have fallen from $13.9 million in the second quarter of 2010 to $4.09 million in the second quarter of 2011, and current total charge-offs fell to $3.05 million from last year’s $4.76 million.
“Overall, it’s slow and steady, but it’s been a bit of a grind for a lot of credit unions,” Pearson said.
Like Nevada, Arizona is a “fabulous buyer’s market,” but purchasing foreclosed homes and short sales is a slow process, Pearson said. He added Arizona’s economy relied heavily on newcomers to the state, but the migration leveled off due to the faltering job market. He does, however, see improving conditions ahead.
“I’m cautiously optimistic that things will continue to improve and loan volumes will pick up,” he said. “But you have to take one day at a time and manage your existing portfolio the best you can.”
AEA Federal Credit Union, a Yuma, Ariz.-based, $229 million credit union that NCUA conserved in 2010, also reported a small triumph: year-to-date net income of $2.2 million, which follows a 2010 loss of $31 million. AEA FCU said it’s slashed expenses by 41% since 2010.
Florida’s credit union league, the League of Southeastern Credit Unions, noted that in the first six months of 2011, the state’s credit unions saw a 107 basis point reduction in loan-loss provisions and a 36 basis point reduction in both delinquencies and charge-offs.
The real estate market also demonstrated a slight improvement this year–first-mortgage loan and total mortgage loan activity at Florida credit unions is just slightly behind national averages, said Patrick La Pine, president/CEO of the League of Southeastern Credit Unions. He said member demand for mortgages still remains flat, however.
“What we’re seeing right now is that the worst may be behind us,” La Pine said. “Our credit unions are making better loans and members are able to pay off those loans. And many of the poorer quality loans that were written prior to and during the Great Recession have been charged off.”
Utah’s current unemployment rate is 7.5%, lower than the four original sand states’ (Florida’s is 10.7%) and the national rate of 9.1%, but negative trends in bankruptcies, foreclosures and delinquency filings have plagued the state’s credit unions, according to the league’s Simpson.
John Steck, former board chairman for the Salt Lake City-based Utah Central CU and chairman for the National Association of Credit Union Chairmen, pointed out that Utah’s national CU presence is small, with the majority of the state’s CUs having $25 million or less in assets. But he shared optimism on the subject of Utah’s economy, stating, “There is a lot of new construction in Utah, and a lot of new commercial buildings. I don’t think we got hurt as badly as Vegas or Phoenix did.”
Sand state credit unions are leveraging the tools they have to pull their heads out of the water, but as Tippets said, certain factors are out of reach. During the financial restoration process at North Island CU, Tippets said he’s kept in mind that many factors affecting the CU’s health are out of its control, such as consumer attitudes and decisions, local competition, unemployment, the housing market, competition from big banks, new regulations and interest 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. I don’t see a lot of encouraging signs. Our losses are moderating due to our members’ circumstances, and that’s the most positive trend I see right now.”