By Ray Birch
SACRAMENTO, Calif.–Even a billion-dollar-plus credit union needs to look to the future and consider if it has the scale to remain viable, according to the CEO of one such CU that has just made a big merger move.
As CUToday.info reported, $1.9-billion Schools Financial CU here and $15.2-billion SchoolsFirst FCU, based in Santa Ana, Calif., have announced they intend to merge. The combined credit union will operate under the SchoolsFirst Federal Credit Union name and charter.
Tim Marriott, CEO of Schools Financial, who will join the SchoolsFirst FCU executive leadership team, told CUToday.info that setting a number on an asset size that secures a CU’s future simply can’t be done.
“If you look at NCUA 5300 data, it’s evident as you move across the spectrum in CU asset size, there are clear benefits to having greater economies of scale—whether that is $3 billion, $5 billion, or whatever the magic number happens to be.”
As CUToday.info reported, several analysts have forecast 2019 and beyond will be marked by mergers among larger-asset credit unions as they seek even reater scale, not only to create greater efficiencies but to compete against banks more effectively.
“Merger is a consideration for every credit union,” said Marriott. “If you look at the competition out there—not only from banks, but from fintechs and all other players in our space—in order to provide the best technical solutions and convenience members are increasingly expecting, it’s important to have the horses to do that.”
Positive Financials
The merger is not being driven by lagging financials. Schools Financial has been performing well. Net income steadily grew over each of the last five years—the CU made $20.7 million in 2017 and $20.5 million through September of 2018, according to Call Report data. The credit union also posted strong ROA over the last five years—1.12% in 2017 and 1.41% through September of last year.
Meanwhile, some 420 miles to the south, SchoolsFirst made $119 million in 2017 and $119.1 million through September of last year, according to NCUA data. The CU’s ROA stood at .88% in 2017 and 1.10% through September of last year.
Bill Cheney, CEO of SchoolsFirst, acknowledged some credit unions will view the mega-merger as simply a big credit union wanting to get bigger.
“But that is not the case,” Cheney told CUToday.info. “I think if it’s in the best interests of both credit unions—if they are aligned well in who they serve and how they serve them, then a merger makes sense no matter the size. SchoolsFirst and Schools Financial have come together to better serve each of our memberships.”
Not Part of Broader Strategy
Cheney emphasized SchoolsFirst does not have a strategy of pursuing mergers.
“We do not,” said Cheney, whose CU has come under fire in recent years, as CUToday.info has reported, from educational credit unions saying it’s difficult for them to compete against the CU giant. “We are very restricted in who we serve—we can only serve school employees and their families—and that won’t change with this merger. But I have said that if there is another school employees credit union that is interested in combining, and if it makes sense for our membership, we will talk with you.”
Cheney said that’s how the merger with Schools Financial happened.
Bill Cheney, Schoolsfirst
“Tim approached me about potentially merging in May of last year,” said Cheney.
“Bill and I tend to be at a lot of the same events and at one of these events we started talking about our organizations and what the future looked like for both,” said Marriott. “From there we talked further and eventually brought our executive committees and boards into the discussions. And here we are today.”
Expansion for 2 Reasons
Asked where the key economies will come from with the combination, both leaders instead focused on better member service.
Cheney said in early 2018 SchoolsFirst received approval from NCUA to geographically expand its field of membership to serve school employees throughout the state.
“We wanted to expand for two reasons,” explained Cheney. “First, we have a third-party administration CUSO that provides services to school districts. The CUSO initially served Southern California, but in recent years a number of schools in Northern California began using its services. But before the recent (field of membership) expansion, we could serve these school districts’ employees through the CUSO but not through the credit union. We had to explain that to many of these employees, why the credit union could not serve them.”
Cheney said SchoolsFirst was also serving a number of statewide organizations for school employees and administrators.
“We had the same conversations with their employees—you can join the credit union if you live in Southern California,” he said.
More Than 60 Branches
Cheney noted when SchoolsFirst got the OK to expand statewide, it initially planned to serve members outside of Southern California remotely.
“Building branches in other parts of the state was not a consideration yet as we were still filling out our branch structure in Southern California. We did not have a branching strategy for Northern California. But when Tim approached me about the merger it made perfect sense to provide more convenience and better service for our members. So, this gives our members access to branches in Northern California and gives us a team there to serve them,” explained Cheney, who said no jobs will be lost from the deal. “It also gives Schools Financial members access to our extensive branch network in Southern California. We will combine our products and services to use only the best of each.”
SchoolsFirst, the largest credit union in California with more than 860,000 members, has 50 branches throughout Southern California. Schools Financial serves more than 150,000 members with 11 branches in the Sacramento area.
Cheney agreed some credit unions will look at the merger and say the real driver is SchoolsFirst plans to become very large.
“Again, not the case,” said Cheney. “We were the fifth largest credit union in the nation before the merger and we are the fifth largest CU with the merger. We are not trying to get bigger. This merger simply makes us stronger and is the right thing to do for both memberships.”
Analyst Expects to See More
Glenn Christensen, president and CEO of CEO Advisory Group in an recent CUToday.info report said to expect more big mergers in 2019.
He sees the California mega merger as good for both CUs and their memberships, and also for the movement.
“We are seeing the beginning of a new trend of mergers among large credit unions,” Christensen said. “In a recent study we conducted of credit union CEOs and directors, the second-greatest hurdle for considering mergers was the ego, or pride—pride of the directors and CEOs. It is encouraging to see that large credit union leaders are setting aside egos and are engaging in conversations that benefit the key stakeholders.”