Kern County's largest locally based financial institution is poised to launch a major geographical expansion and rebranding effort it sees as securing its long-term survival while also benefiting its existing membership.
Kern Schools Federal Credit Union, soon to become Valley Strong Credit Union, says it will open branches this summer in Tulare and Visalia — its first two offices outside the county in its 82-year history. It expects to establish branches in as many as nine additional counties during the next 10 to 15 years.
The move follows years of careful planning and a recent vote in which KSFCU members approved, by a 3-to-1 margin, switching from a federal to a state charter. The new charter set to take effect in mid-February offers far greater flexibility regarding where the credit union enrolls new members.
Observers say Bakersfield-based Kern Schools will likely endure some small, initial financial losses as it moves gradually northward through the Central Valley. Also, the credit union's accompanying return to business banking is seen as introducing new risk along with potential reward.
But there is broad agreement that the credit union's prospects for growth — and ability to compete against larger banks, credit unions and financial-technology companies — are limited if it cannot expand outside the county.
Kern Schools Chairman Larry Reider likened the credit union's expansion to asking for "a little (more) playing field."
"We need to grow to be competitive and stay financially strong," he said.
Added Senior Vice President Michael George, "The only way we wouldn't have a bright future is if we just sat idle and didn't do anything."
The credit union's executive leadership emphasized that growth will help Kern Schools' existing members by bringing greater financial resources to bear on sustaining or enhancing its slate of products and services.
President and CEO Steve Renock said the credit union's existing fleet of more than 70 ATMs will be replaced. A number of fees will be reduced or eliminated, he and George said, and the hours of Kern Schools' call center will be extended to 12 hours seven days per week, up from 12 hours on weekdays and five on Saturdays.
They noted also that member deposits will still be federally insured and changes won't be made to account numbers.
Renock said the credit union intends to reach $3 billion in assets by 2025 — an ambitious goal implying growth of an average of about 13 percent in each of the next five years. Some of that might be achieved, he said, by acquiring smaller credit unions, which can be easier than pioneering a new market.
He added, however, that "we're not looking to take over the world" and that the bigger accomplishment will be persevering in an industry that has shrunk drastically in the last four decades, going from 17,000 credit unions nationwide to less than 5,500 now.
Others in California's credit union industry view Kern Schools' expansion plans, as well as its upcoming name change, as a necessary adjustment.
EXPANDING BY NECESSITY
Young people across the Central Valley are migrating outside the area, which forces the area's financial institutions to expand operations in ways that allow them to capture a greater geographical base, said Diana Dykstra, a former credit union executive now serving as president and CEO of the California Credit Union League.
Most California credit unions operate in multiple counties under a state charter, Dykstra said. She asserted that Kern Schools' expansion campaign "is not unusual and, in fact, it's necessary."
Failing to expand could jeopardize the costly products and services — things like mobile banking and paying bills from home — that Kern Schools' members have come to expect, said Doug Kileen, president and CEO of Bakersfield-based Safe 1 Credit Union.
It won't be easy, though. There's no guarantee new branches will pull their weight financially during their first few years in operation, he said.
"In the short term, there will be challenges financially to have profitable offices. But in the long term, in the long run, I think it's something that really is necessary to survive for Kern Schools," said Kileen, who used to work at KSFCU.
Reider said it's not imperative that new branches carry their own financial weight immediately. He sees them as an investment in the future.
"It's like investing in anything," he said. "We hope to turn a profit later on."
BACK TO BUSINESS
Kern Schools' decision to reintroduce business banking last fall after dropping the service during the Great Recession was partly inspired by member requests, Renock said.
It involves not only deposits but business loans, thereby expanding the credit union's lending beyond auto, personal, home and home-equity loans, as well as credit cards.
Kileen observed that, for all its potential reward, business banking can be risky and must be done carefully.
"As long as they're cautious, I see no reason they couldn't be successful," he said, adding that money made from business loans can be invested in improving services to all the credit union's members.
Renock noted that Kern Schools hired experienced local business bankers when it relaunched business banking.
Reider said he was confident the credit union's underwriting team would approve only prudent loans.
"I would say that we have faith in our underwriting ability to make sure that we minimize any negative effect," he said.
Kileen also cast some doubt on the idea that the credit union will find many opportunities to grow through mergers and acquisitions. The most likely candidates for such deals typically face financial troubles and, for that reason, aren't attractive.
Joining up with another credit union can also become difficult because, despite offering benefits for both institutions, the people who would have to approve — the merger candidates' executives and board members — know they might be putting themselves out of work.
"It's difficult to get seven individuals who would say, 'Yes, I would leave my position but it's good for members,'" Kileen said.
Renock said Kern Schools has had merger conversations with a handful of credit unions but that no deals were struck.
Only transactions that make sense for both parties will be considered, he said, emphasizing that Kern Schools would only agree to partner with a smaller institution where the arrangement leaves the Bakersfield credit union in the driver's seat.
The California agency that reviewed Kern Schools' state charter application, the Department of Business Oversight, noted that converting from a federal to a state charter is not particularly common, having taken place just three times since 2014. It said that during that same period, two credit unions in California switched from state to federal charters.
Before state regulators agreed to the change, they examined Kern Schools' records to make sure of its financial stability, regulatory compliance and management competence, the DBO stated. The agency also required that the credit union conduct a vote by its membership.
Renock and George said the decision to expand generally northward — plans also call for moving westward into San Luis Obispo County — grew out of recognition that the rest of the Central Valley's demographics resemble those of Kern County much more than they do Southern California.
The credit union's formal expansion targets are the counties of Fresno, Kings, Madera, Mariposa, Merced, San Joaquin, San Luis Obispo, Stanislaus, Tulare and Tuolumne.
In a related move, Kern Schools plans to open a new, full-service branch in Tehachapi at the corner of Tehachapi Boulevard and Tucker Road in early 2021.
A NEW NAME
When northward expansion became the goal, Renock and George said it became clear Kern Schools would have to be renamed. They said that's because focus groups indicated residents in other counties would not easily embrace a credit union bearing the name Kern.
"Outside of Kern County, the name Kern will not work," Renock said.
The new name, Valley Strong, will be accompanied by a new tagline — "Grow Your Possibilities" — that reflects the region's agricultural heritage.
Dykstra, the credit union league executive, said it's clear Kern Schools' expansion plan wasn't a "knee-jerk reaction" but the result of a deliberative strategic move.
"It'll be exciting," she said, "to watch them execute."