The California economy and its credit unions are staging acomeback, but the Golden State doesn't glitter as brightly as itused to.

“I think it's fair to say that for years, people in Californiadidn't seem to care what the rest of the country was doing, becauseit was a special, golden place that was immune to what happenedelsewhere,” said California Credit Union League Chief EconomistDwight Johnston.

Now, he said, California is adjusting to a new reality that nolonger includes guaranteed home price increases or plentiful jobs.For instance, Johnston said, the state used to enjoy a steadystream of manufacturing jobs producing products invented in SiliconValley.

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“Now we still have those new ideas, but the manufacturing hasgone elsewhere,” Johnston said. “That was a sector of jobsCalifornia used to count on.”

That's in addition to the construction jobs lost in the statewhen the bottom fell out of the housing market.

As of December 2012, California's unemployment rate stood at9.8%, well above the national rate of 7.9%. That's animprovement over 2010 when the rate climbed to 12.4%, buthistorically, California had only seen double digits unemploymentjust once before the Great Recession, in 1980 when it climbed to10.0%. In 2006, the state unemployment rate was just 4.9%.

Despite the economic challenges that lie ahead for the state,California credit unions produced an average return on assets thatwas just below 1%, at 93 basis points, which is above the national86 basis points average. That income hasn't come from lending,though: loan delinquencies are still higher than the nationalaverage at 1.8% and loan growth is nearly non-existent at 0.6%statewide.

Mark Hawkins, CEO of the $655 million Altura Credit Union in Riverside, said his 94,000-member creditunion has adjusted to California's new economic reality and canwithstand the current economic and low rate environment for yearsto come.

Altura struggled during the financial crisis, posting lossesthat dropped net worth below well capitalized levels and increasingNCUA supervision.

But talk about a comeback: 2012 was Altura's best year ever. Thecredit union raked in $17.49 million worth of net income, more thandouble the $8.43 million earned last year. Net worth increased to10.36% as of 2012 year-end, higher than the national peeraverage.

Altura, located in the Inland Empire region of SouthernCalifornia, was hit hard during the recession after a big housingand construction boom. Losses pushed net worth below 7% in December2009 where it remained for eight consecutive quarters.

Hawkins said the Inland Empire is still struggling with 11.1%unemployment, home values still far below market peak, a sluggishjob market and no consumer purchase appetite.

With no consumer or real estate lending activity, and fewlucrative investment options, Altura managed to produce recordincome from non-interest income earned off deposit products and lowexpenses.

The credit union shuttered half of its retail branches and laidoff approximately 45% of its staff in the wake of the financialcrisis. Hawkins said the NCUA required the credit union to sell twowholly owned CUSOs – Patrion Mortgage and Patrion Insurance – andcease mortgage lending. Altura still isn't booking mortgages formembers, which makes the record income last year all the moreimpressive, considering it didn't generate any refinance feeincome.

Instead, Altura is making a go of it with auto lending,non-interest income earned off deposit accounts and a smaller,leaner organization with reduced operating expenses.

“Our expense posture is positive and our cost of funds ismicroscopic,” Hawkins said. “The only negative is consumersentiment and the fact that we're not seeing a lot of purchaseactivity from members.”

But, Hawkins said Altura has “never been stronger financially”and is structured to weather the region's sluggish economy untilthings pick back up again.

Arrowhead Credit Union, also located in Riverside, is stillbeing run under NCUA supervision after its June 2010conservatorship. However, the $700 million institution reported a$25.5 million net profit and 10.53% net worth as of Dec. 31, 2012,yet another sign the Inland Empire economy is recovering.

Up in Northern California, Credit Union Times 2010 Trailblazer CFO of the Year Scott Waite also reportedrecord earnings at his $3.9 billion Patelco Credit Union. ThePleasanton, Calif.-based Patelco reported a $55.5 million netprofit and 1.48% return on assets in 2012, and credited efficiencyimprovements and a mortgage refinance boom for the numbers.

Altura, Arrowhead and Patelco all have more than $500 million inassets, which provides them with economy of scale benefits. On theother end of the asset scale, small California credit unionexecutives are partnering to achieve scale.

Jon Hernandez runs three credit unions in Southern California:the $55 million CalCom FCU of Torrance, the $28 million Mattel FCUof El Segundo and the $7 million City of Downey FCU in Downey. Notonly does Hernandez save the three on CEO costs, he also sharescompliance, technology and marketing executives with other creditunions, and collaborates with others to save on core processingsystems, back office processing, health care benefits, marketingcampaigns and staff training costs.

The largest of the three, CalCom posted a $389,975 profit for2012, generating a 0.70% return on assets.

Because the credit union doesn't offer mortgages, Hernandezsaid, it reported a relatively high loan yield of 8.78%. The creditunion also extends loans to members with low FICO scores, whichalso drives up yield but necessarily increase losses. Hernandezsaid his delinquencies and charge offs are evenly split betweenhigh and low credit grade paper.

Loan growth was also above peer, 5.37% at 2012 year-end andpeaking at 9.76% during the second quarter. Hernandez credits alending department reorganization and revamped lending processesfor the output.

“We didn't necessarily increase the number of applicants, but wecross sell,” he said. Not only did loan staff cross sell additionalloans, they also sold add-ons like GAP and MBP, which increasednon-interest income.

Hernandez said he reduced operating expenses last year byrenegotiating vendor contracts and eliminating some underutilizedservices, dropping operating expenses to average assets below 4%during the 2^nd and 3^rd quarters beforesettling at 4.16% at year-end. That's a little higher than peeraverage, but Hernandez called the stat “considerably good” becausethe 7,423-member credit union operates four branch offices andeight proprietary ATMs.

He also signed on vendors to provide living trust and willservices, auto insurance and retirement planning, which providedmarketing agreement income. A new overdraft protection program alsoincreased non-interest income. NII to average assets was 1.29% atDec. 31.

Mattel FCU also reported a net profit last year, earning $44,025with operating expenses slightly below peer but some loandelinquencies dragging down income and the common struggle ofnegative loan growth, which was -2.91% at year-end 2012.

The smallest credit union, City of Downey, reported a $31,314net loss last year, and saw market share, loan growth, assets andmembership growth all decline.

Johnston, the leagues economist, said California's large creditunions dominate the state's overall rosy numbers, but small creditunions still struggle to produce healthy financial reports.

Many credit unions below $1 billion in assets relied uponinvestment income that has all but dried up, he said.

“The big ones feel good about certain elements of theirbusiness. It's not as bad as it used to be, but they generallystruggle to maintain stable earnings and loan demand,” he said.“That's the struggle now in California. Better than it used tobe.”