The 2019 financial year of Schools Financial CU’s (Sacramento, CA) operating performance is impressive. Loan growth of 10.4% to $1.6 billion with delinquency of only 0.26% and an allowance account of more than double all past due loans. ROA of 1.55% building net worth to 12.3% . Member growth of over 4% adding up to a year-end total of 160,00 member-owners.
As of January 1, 2020, Schools Financial CU, chartered in 1933, no longer exists. Its total assets of $2,150,075,670 including net worth of $264 million were transferred via merger to the control of the Board and executives of SchoolsFirst FCU ($16.8B) in Santa Ana, CA.
The Gift That Doubles in Value
The total gain for SchoolsFirst FCU however is $530 million in this generosity from the members of Schools Financial CU.
The $265 million in reserves will be transferred intact as “equity acquired in merger” to SchoolsFirst’s balance sheet. And following the accounting requirements for business combinations, the assets and liabilities of Schools Financial CU will be marked to market, creating an excess of assets over liabilities of a similar amount. This second gain will be called “negative goodwill” and recognized as income on the books of SchoolsFirst FCU for a total gain of $530 million.
The Immediate Benefits of the Merger for Members of Schools Financial
As described in the Schools Financial Chairman’s letter to members recommending they approve the merger, the two largest financial “benefits” disclosed as part of this transaction were:
- A one-time special year-end $4.0 million dividend (an average of $26 per member) , if they approved the merger, to be paid from Schools Financials’ 2019 results above;
- The opportunity for Schools Financial CEO, who arranged this merger, to increase his existing compensation by over $8.0 million
The details of this event and possible consequences have been described in three prior blog posts.
How Can This Merger Be in the Members’ Best Interest?
Part I: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger
Part II: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger
The only question remaining: Is this example what the credit union cooperative system was intended for?