SAN FRANCISCO—As credit unions from California and Nevada converge here for the Annual Meeting and Convention of their two state CU leagues this week, the answer to the question "How are you doing?" will depend greatly on which state is called home.
That's because the Golden and Silver States are "very different in their [economic] recoveries," said Dwight Johnston, chief economist for the California and Nevada Credit Union Leagues. While both were "hit harder" by the recession than other states, California has been faster to recover
California's economyhas been buoyed by an improving employment picture. Johnston said over last year and a half non-farm payroll jobs have increased by 25,000 per month in the Golden State. However, the balance of jobs still is down by about 800,000 non-farm payroll jobs from the high water mark recorded in 2006. "The good news is the majority of the 800,000 recovered jobs are in higher-paying sectors, professional jobs," he said. "We are just beginning to see some turnaround in construction. There has been an increase of about 60,000 jobs in the last year and a half, but the construction sector still is down 300,000 jobs and will not get those back."
Helping the California housing market is the fact vacancy rates are low across the region, meaning rents are going up especially in the more desirable places to live. Tax receipts are also up due to a better economy, Johnston noted.
"California always has to worry about global economy, due to large number of trade and transportation jobs," he said. "As the global economy improves, things get much better for California."
As for its neighbor to the east, Johnston said construction has been the biggest drag on Nevada's economy. Travel and leisure employment is "not too far down" from the height, he noted, as the sector's peak employment was 340,000 and now is at 324,000.
"Travel and leisure is Nevada's biggest industry, so those numbers are pretty good. But at the peak construction employment was 146,000, or more than 10% of all non-farm jobs, and now that is down to 50,000. Trade and transportation has largely recovered, but there are big holes in the non-farm jobs because of construction."
Housing Recovery... Sort Of
As in California, Nevada's housing no longer is a "significant negative," especially after investors scooped up large numbers of foreclosures, he added.
"We are seeing it more in California than Nevada, but demand for housing is there and people just have to adjust to mortgage rates to decide how much house they can afford," he said. "The housing market in California should be stable going forward. In Nevada there are a tremendous number of rentals on the market. There are a lot of investors who have stopped buying in Las Vegas since prices have risen. The Nevada market will have a little more volatility in prices. If mortgage rates do start going back up after the federal budget battle is put away, and go over 5%, we will have to see."
According to Johnston, Nevada will continue to recover, but he warned there are "more potential pitfalls" there than in California. In particular, he warned there are a large number of rental properties on the Nevada market that could turn into for sale properties. Also, the Silver State remains very dependant on travel and leisure.
"California is going well, it just needs to continue the trends that got started at the beginning of 2012," he said. "Assuming no disruptions globally, California may start adding 20,000 to 30,000 jobs per month, which would be good, solid growth. It will not go nuts, but should be sustainable growth."
What Next?
Dr. Brandi Stankovic, partner at Las Vegas-based credit union consultancy Mitchell, Stankovic & Associates, said CUs talk about "getting back to normal," but she warned the community now is in "a new normal."
"We are not going to have the same numbers we had pre-crash, because the numbers were inflated leading up to the crash," Stankovic said. "Also, people are forever changed by the recession."
What credit unions need to focus on, according to Stankovic, is the core that makes them what they are-making members feel special and good about the relationship they have with their credit union. "The credit union needs to be top of mind, so when people have an issue they come to the credit union to help them solve it," she said. "A lot of credit unions say our members love us, but if members do not come to the credit union when they need help or they need loans, it does not matter."
As for why Nevada's recovery is so different from California's, Stankovic said Nevada has been four main challenges:
1. The overall statewide economy. Employment "still is not there," she noted, and the housing market still is recovering.
"California has pockets that were hit hard and are recovering more slowly, such as San Bernardino and Riverside counties, but all of Nevada was hit hard."
2. Membership growth for Nevada CUs is negative. According to Stankovic, this is due in part to the nine mergers since 2007, six of which saw Nevada CUs acquired by out-of-state credit unions-meaning the numbers are credited to other states.
3. Loan growth vs. net loan growth. She said several credit unions have not seen positive net loan growth because the members are paying off very high loans.
"The net is not positive yet due to large numbers of loans that needed to be charged off or paid down."
4. Consumers in post-recession Nevada have become more cautious. "Because the state economy was hit so hard, people are just slow to spend," she said. "In 2014 casinos will be increasing spending on construction and refurbishment, which will help. With casino construction come jobs, and construction was hit really hard."
In addition to the differing recoveries of California and Nevada, Stankovic said the "Great Divide" Credit Union Journal has spotlighted throughout 2013 will be evident.
"The differences of small credit unions vs. large credit unions will continue to be an issue," she said. "Regulators are watching numbers so closely it is hard for small credit unions to be aggressive. Even though many credit unions shrank, operational numbers do not go down."
According to Stankovic, merger is "almost a necessity" for some small CUs, except for the strong ones that are affiliated with a company or a hospital and have strong relationships.
But if a small credit union does not have the margin to work with, "the picture is bleak," she said. "One loan can have such an impact on their books due to interest-rate risk, they are hesitant to make those loans."
A possible solution for small CUs is cooperation-and lots of it, according to Stankovic. She pointed to the example of Jon Hernandez, who is the CEO for three small credit unions in California, as a model that might work. Other possibilities include joint resources, such as one IT person for multiple small CUs. "Sharing can help with operational costs, and small credit unions must be creative in lending," she advised.
Generational Outreach
With all the talk about reaching out to younger members, Stankovic warned CUs they need to "quit writing off" a portion of their membership. Some CUs are "overly focused" on the youth segment because of the conception that young people are the ones who take out loans, ignoring the 60-year-olds who are buying second homes or looking for investment opportunities.
"There are off-balance-sheet opportunities to maintain a relationship and generate non-interest income," she said. "Credit unions need to serve and improve the lives of their members, and that gets overlooked sometimes. They need to examine their business model and make sure every demographic they are going after they serve well, rather than forcing an awkward relationship. Instead of sideways hats and playing hip hop in the branches they need to know exactly what young people are doing and create a business model to serve them."
No Magic Potion
According to Johnston, CUs in both California and Nevada are above the national average in exposure to real estate loans because they had so much refi activity the last two years. He suggested they will have to be "cautious" on home loans.
"Credit unions in Nevada do not have a magic potion," he said. "They are really trying to boost auto lending, but for credit unions that offer credit cards, consumers are not spending as much because their incomes are flat."
Another suggestion from Johnston: CUs should be doing more targeted loans, methodically targeting sections of their membership with specific products.
The overall outlook for the two states, Johnston said, is "pretty good." For next year and a half CUs will struggle with net interest margins, he predicted, because many big credit unions boosted their earnings with refinancing.
"Many credit unions also benefitted from a pullback in loan loss reserves, but those are down to where they will be," he said. "Some big credit unions posted ROAs in the 1.5% to 2% range, but that probably will not be repeated. More likely ROAs will be about 1% going forward. Small credit unions that rely heavily on net interest margin are really struggling."
