By HEATHER ANDERSON

CU Times Correspondent-at-Large

RANCHO CUCAMONGA, Calif .– With nearly one-third of all California credit unions reporting negative ROA during the first quarter, and relatively healthy credit unions announcing mergers, some are wondering just how bad things will get in the Golden State.

Terrin Griffiths, economist for the California Credit Union League, said nothing has changed in California, except that the subprime lending plotline has progressed as predicted.

“I think most folks would agree that California and Florida are among the hardest hit housing markets, and it's being reflected in the numbers,” Griffiths said.

Rising gas prices have also cut deep into the budgets of California commuters, who drive 26 minutes one-way on average, according to a 2005 U.S. Census survey.

The league economist said from what she's heard, most credit unions are opting for the safest route and taking their lumps up front, making big loan-loss provision increases during the first quarter, rather than making gradual increases over time. The move has resulted in nasty ROA statistics, but shouldn't be cause for alarm, she said.

“California credit unions are still paying dividends on shares, which actually increased last quarter, and they still have healthy capital ratios. The fact that they're able to take these big provisions up front speaks for their strength. Often, it's the struggling institutions that have to parcel it out,” she said.

Despite the rosy outlook, Griffiths admitted that she, nor any other economist, for that matter, can predict when the state's economy will turn around.

That uncertainty was enough for SCE Federal Credit Union CEO Dennis Huber to propose merging with $356 million First City Credit Union. The $430 million SCE isn't hurting, Huber said, but the merger that will nearly double assets for both institutions, and elevate them into a stronger financial position in case times get tougher.

“The larger credit unions, obviously, are doing well, and some of really small credit unions with a strong niche will do just fine. But for credit unions in that mid-tier range, from $100 to $500 million, it can get difficult to compete in Southern California,” Huber said. “Even with a good sponsor like we have, you never know what the future will bring.”

David Bartoo, a merger consultant based in Forest Grove, Ore., said he's seen an influx of credit unions, both healthy and struggling, inquire about their merger options. The Merger Solutions Group principal said competition and economic uncertainty are fueling the frenzy.

“Southern California is the most hyper competitive financial services market in country,” Bartoo said. “For example, there are 190 credit unions based in Los Angeles County alone. So, even though L.A. is very big, once you start factoring in competition, the sliding economy and foreclosure rates, a lot of credit unions are recognizing they are better off at least considering the merger option.”

Proposed accounting changes are also pressuring credit unions to close merger books before the end of the year. Bartoo said from what he's heard, nobody is really sure how the changes will impact mergers, except that “many California credit unions are concerned it will affect them adversely.”

So many California credit unions are talking merger these days, Bartoo said he thinks those who wait might miss out.

“If you're in Southern California, or even the Bay Area, and you wait until the fourth quarter to decide to look for a merger partner, you may find that most of the good ones you'd want to engage with are already taken,” he said.

In fact, Bartoo said he thinks interstate mergers will increase in popularity if the performance of California financial institutions continues to slide.

Teresa Halleck, CEO of $6.7 billion The Golden 1 Credit Union, said neighboring credit unions looking for a merger partner have approached her, but based on what she's seen in loan portfolios so far, she's not interested. The Golden 1 is currently finalizing a merger with a $6 million credit union, Halleck said, and even though the credit union is small, it's no bail out.

“So far, the subprime meltdown has been so severe, it wouldn't make sense to absorb any of the ones we've seen without NCUA assistance,” Halleck said. “Cal State 9 is a good example of the severity we've seen, and why it doesn't make sense, generally, to merge in a credit union without assistance from regulator, if they have that type of portfolio.”

Halleck said the best move she made to protect her cooperative from real estate losses was to keep equity lending in-house, turning away offers

to underwrite equity loans or provide second

mortgages behind partners that hold the first

mortgages.

However, the leader of the second largest credit union in California said billions of dollars in assets allowed her more options.

“I think some of these credit unions we've read about in the news had dedicated management with their hearts in right place, who were doing the best they could, given the resources at their disposal,” she said.

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