By HEATHER ANDERSON

CU Times Correspondent-at-Large

RANCHO CUCAMONGA, Calif .– With nearly one-third of allCalifornia credit unions reporting negative ROA during the firstquarter, and relatively healthy credit unions announcing mergers,some are wondering just how bad things will get in the GoldenState.

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

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

Rising gas prices have also cut deep into the budgets ofCalifornia 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 creditunions are opting for the safest route and taking their lumps upfront, making big loan-loss provision increases during the firstquarter, rather than making gradual increases over time. The movehas resulted in nasty ROA statistics, but shouldn't be cause foralarm, she said.

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

Despite the rosy outlook, Griffiths admitted that she, nor anyother economist, for that matter, can predict when the state'seconomy will turn around.

That uncertainty was enough for SCE Federal Credit Union CEODennis Huber to propose merging with $356 million First City CreditUnion. The $430 million SCE isn't hurting, Huber said, but themerger that will nearly double assets for both institutions, andelevate them into a stronger financial position in case times gettougher.

“The larger credit unions, obviously, are doing well, and someof really small credit unions with a strong niche will do justfine. But for credit unions in that mid-tier range, from $100 to$500 million, it can get difficult to compete in SouthernCalifornia,” 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 andstruggling, inquire about their merger options. The MergerSolutions Group principal said competition and economic uncertaintyare fueling the frenzy.

“Southern California is the most hyper competitive financialservices market in country,” Bartoo said. “For example, there are190 credit unions based in Los Angeles County alone. So, eventhough L.A. is very big, once you start factoring in competition,the sliding economy and foreclosure rates, a lot of credit unionsare recognizing they are better off at least considering the mergeroption.”

Proposed accounting changes are also pressuring credit unions toclose merger books before the end of the year. Bartoo said fromwhat he's heard, nobody is really sure how the changes will impactmergers, except that “many California credit unions are concernedit 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 youwait until the fourth quarter to decide to look for a mergerpartner, you may find that most of the good ones you'd want toengage with are already taken,” he said.

In fact, Bartoo said he thinks interstate mergers will increasein popularity if the performance of California financialinstitutions continues to slide.

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

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

Halleck said the best move she made to protect her cooperativefrom 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 inCalifornia said billions of dollars in assets allowed her moreoptions.

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

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