Closing In on $1 Billion: First City CU and SCE FCU Announce Strategic Merger
LOS ANGELES -- The boards of the $356 million First City Credit Union and the $430 million SCE Federal Credit Union have signed letters of intent to merge the two institutions. Dennis Huber, CEO of SCE, will head the surviving First City, which will have more than $785 million in assets.
First City has been without a permanent CEO since Steve Punch left in October for $1 billion Pacific Service Credit Union. Longtime CUNA Western Management School Dean James Likens chairs First City's board of directors.
"I knew they'd always had mergers and acquisitions as part of their strategic plan, and whenever a CEO vacancy occurs, it opens up an opportunity for a merger," Huber said.
As word spread about Punch's departure, Huber contacted Likens and told him if he was looking for a merger partner, SCE would like to be considered. A few weeks later, more serious discussion was underway.
Although both credit unions experienced significant first quarter drops in ROA, both are also well capitalized: SCE's net worth is 10.79%, First City's is 13.35%. SCE has higher delinquency and charge-off ratios--1.18% and 1.22%, respectively for first quarter 2008--and a higher provision for loan losses compared to assets at 1.12%.
First City saw an increase in delinquencies late last year but is bucking the balance sheet trends by reporting both a reduction in delinquency and charge-off ratios for the first quarter, with 0.40% delinquencies and 0.86% charge-offs. Loan-loss provisions to assets also fell in the first quarter to 0.38%.
"I don't think our financials are too different from everybody else's, we've had a couple of real estate loans pop up," Huber said of SCE's portfolio. "And even though we don't have any subprime loans, that doesn't mean our members didn't get them somewhere else."
Huber said most of SCE's real estate loans have nice loan-to-value cushions and said since his team is very conservative when figuring loss provisions, he's not concerned his the portfolio numbers will suffer much further.
"We haven't been as aggressive as other credit unions in actively pursing a merger, but we've always had our eyes and ears open in case something came up," Huber said.
"I'd like to think we're selective, what made them attractive was we knew a lot about them. I knew Likens, I knew Punch, I knew he ran a tight ship over there, and the numbers were solid. When we put it together, it looked like an attractively combination."
Merger consultant David Bartoo, of the Forest Grove, Ore.-based Bartoo Associates, agreed the proposed merger provides benefits for both memberships.
"SCE provides a focus on income development and First City has a much lower expense per member ratio," Bartoo said, adding, "With First City needing a CEO, integration with just one leader will make the post-merger organization chart much easier to assemble."
Huber said the merged institution will retain all board members but one. The new 15-seat board will eventually be whittled down by attrition.
SCE is an acronym for Southern California Edison, the greater Los Angeles area's primary gas and electric provider, and Huber said a sizeable percentage of his members are securely employed by the utility company. SCE also works with a number of SEGs and serves some underserved communities.
First City Credit Union originally served Los Angeles County employees, and also completed a couple of mergers with major sponsor partners. In 2002, the credit union adopted a state community charter.
Huber said First City and SCE share similar strategies, so he won't have too many changes to make to the combined institution. However, he did say he'd like to strengthen the credit union's ties with L.A. County employees, increase business services, and beef up the mortgage lending CUSO SCE owns with four other credit unions.
First City and SCE are aiming to integrate the two institutions by the end of the year, though Huber said one group of employees would have to convert to a new core processor, which would interfere with year-end processing.