Street Talk | Season 2 | Ep.1 - Newly Merged Credit Union Sits On The 'Launchpad' Of Industry Innovation

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Tim Zawacki   00:00:00

Welcome to Street Talk, the S&P Global Market Intelligence podcast that offers listeners a deep dive into the issues and developments involving financial institutions and the investment community. I'm Tim Zawacki, Head of Financial Institutions Research, and this is my first episode as host. I'm glad you're here for it.

Today, we're talking about the largest merger in credit union history, the combination of Digital Federal Credit Union, better known as DCU, and First Tech Federal Credit Union, which legally came together on January 1 to form a nearly $29 billion cooperative serving close to 2 million members from coast to coast. My guest built her career in credit unions from the ground up. She led DCU through this deal. And now she runs the combined organization as President and CEO of First Tech Federal Credit Union. 

Shruti Miyashiro welcome to StreetTalk!

Shruti Miyashiro   00:00:56

Tim, thanks. I'm delighted to be here. I have enjoyed being a listener of your podcast and really honored to join you today.

Tim Zawacki   00:01:03

We have a lot to talk about. But before we get into the deal itself, I'd love for our listeners to get to know a little bit about you. You spent nearly your entire career in credit unions, going all the way back to your undergrad days. I was wondering what first drew you to the financial services space and to credit unions specifically? And what's kept you in this industry for essentially the balance of your career?

Shruti Miyashiro   00:01:30

Yes. I'm definitely an accidental CEO and even an accidental banker. You're right, I started as a part-time teller, the plan had been to pursue a master's degree in hospital administration. But along came a career or an opportunity that really had tremendous intellectual rigor.

There's still such complexity with credit unions and financial institutions in general. And then there was also purpose. The definition of success being not just running a good business, but a good business that creates great impact, both for individuals and for communities.

I've stayed in credit unions for as long as I have because of this balance of intellectual rigor with purpose. And the role of credit unions and community financial institutions is just so critical to the fabric of the American economy. It's certainly changed over the decades, the role that financial institutions play and the financial well-being of consumers. It has shifted as we've seen lots of entrants from non-banking sources, but the importance of it more than ever now remains.

I'm glad I accidentally fell into credit union. It's kept my brain busy and certainly a lot of work to be done.

Tim Zawacki   00:02:51

And now that you've risen to the top, I think it bears asking the C-suite in the financial services realm hasn't always had a lot of women at the top. Can you kind of talk about what the path was like for you? And maybe what advice you'd give to women who are in your shoes, say, several decades ago as they're looking to build their careers.

Shruti Miyashiro   00:03:14

Yes. It's funny how little I think of myself as a woman and more as just a seasoned executive who is continuing to really work to have an impact. But you're right, the outside world looking at me also notices the gender. And I've been very fortunate in my career that support has come from many different people, both men and women.

I think regardless of gender, we really do face some of the same challenges, lots of folks as we're building our careers to become C-suite leaders. face impostor syndrome. We also face that impostor syndrome, and we meet it with a lot of curiosity, a lot of initiative. And likely, there's a lack of fear of rejection or failure once you reach that C-suite. It's impossible to get to this level without the curiosity, the initiative and a willingness to take some risks and learn from our past mistakes. I've been lucky to have that combination and helping to build my career. I'm a very big pay it forward.

There are a few things that guide my definition of success and joy in the workplace. And one of those is really seeing people grow within a company and within their own careers. I've got a phrase I love. It was by Murial Siebert, who was one of the first women to have a seat on the New York Stock Exchange. And to paraphrase it, it was any time you see a closed door, rear back and kick it in, which speaks to not being afraid and at the same time, hold it open for others to follow. And I think that is a really important priority for all of us to have as we're building our own careers and helping others build theirs.

Tim Zawacki   00:05:06

That's an interesting perspective. And I think we also need to kind of dive into a bit about First Tech and DCU and what make those organizations special. maybe if you can give a quick overview of both of the credit unions who they serve, how they've grown and what makes it one of the nation's leading tech-focused credit unions.

Shruti Miyashiro   00:05:28

You're right, Tim. It's really interesting to see two tech-focused credit unions coming together coast to coast. Each of the credit unions has deep roots, shared among three different tech companies, Hewlett Packard, Tektronix and Digital Equipment Corporation.

Each of those, while they were separate credit unions, grew with technology employees and grew with tech-focused solutions. As we fast forward to -- from last century's founding to this century -- what we have are credit unions who have always leveraged technology from our inception to develop solutions and to understand the needs of employees in those markets.

We do have a lot of overlap in terms of how we design solutions, a lot of overlap in the types of members that we serve. We certainly don't have geographic overlap. And so that's where we found some synergies and good ways to meet our members' needs here.

Our growth at both institutions really came from being intensely solution focused and understanding the problems of our members through different stages of their lives. We've also not been afraid to innovate or challenge traditional approaches. This has just been -- we joke about being fraternal twins. This has been a very good partnership coming together, and it will allow us to build even more in the future.

Tim Zawacki   00:06:58

So Shruti, I know you've said you've become a fan of the Street Talk podcast. And if those of our listeners who are familiar with the podcast, there are certainly many of which are professionals in the M&A realm. And so the nuts and bolts of this deal, according to S&P Capital IQ Pros transactions data, the largest credit union merger on record, as we said, roughly $17 billion at First Tech, roughly $12 billion at DCU for a $29 billion institution. Can you walk us through the rationale for this deal? Why was now the right time to join these fraternal twins?

Shruti Miyashiro   00:07:35

Well, as you know, sometimes it's not just about the right time, but it's also the ability to navigate through the deal itself. And so there were a couple of factors: First of all, we again saw that there were so many things that both credit unions shared in terms of values and shared in terms of how we were going about doing our work. The second thing was we really had a skilled executive team and board that understood that value was, frankly, not just doubled but tripled in terms of impact as we came together.

We are now in the top 1% of all insured financial institutions in the nation. It is a pretty amazing journey we've taken with our coming together. And that coming together was not just based on asset size for the sake of asset size. It's really been an intentional purpose-driven merger in that the asset size allows us to deliver more for people.

We are not looking at strictly ROA and financial metrics. We are fortunate not to have quarterly numbers for Wall Street that we're driving to. We have the discipline of all of that. But when we look at the real reason for the merger, it's really the fact that we are able to do more things for our key stakeholders, our employees, our members, our clients from investment and insurance services and then finally, our communities. That's the real litmus test.

So as we measure quantifiably the value of this merger, we're talking a lot about the return to our members or customers as they're called in banking world.

Tim Zawacki   00:09:23

Now the press release for this deal announcement, every word in these critical documents, I know, is chosen carefully. And you described this transaction as a launch pad. that prompts a question for me. What's your long-term vision for this combined organization? What do you think that First Tech will look like, say, 5 years from now?

Shruti Miyashiro   00:09:46

Well, we pride ourselves on a vision that is very focused and very clear. It is about setting a new standard for people-first solutions. We know exactly where we're headed. You noticed in those intentionally chosen words, we are actively making things happen.

New standards are really about imagining things in ways that others have not and quality at the same time. And then finally, people-first solutions harkens to the core of who we are as a credit union and the impact that we have to people's lives.

So this launch pad is taking the busy work -- the first two years of any M&A deal are all about integration -- but taking the work of integration to, at the same time, imagine the future state in a solutions-oriented world with product design and with delivery of member experience and transforming what that banking experience looks like.

We've already started to do things very uniquely. We have already legal Day 1, reduced fees by $6 million for our members. That's a material amount, and it's also a significant message to doing things differently within the banking world. Certainly, most folks are not reducing fees at this time. that just shows how we're looking at things differently.

That's the fee structure one step. but accelerating our product innovation also with money management as we know the definition of what money is and how that moves will be changing and of course, delivering elevated experiences for our members, but also our employee base with growth and development and upskilling.

Those are just a few of the ways where we'll be launching a different way to bank through everything we do.

Tim Zawacki   00:11:41

Another very unique aspect of this deal is just the branch footprint and the market presence of First Tech and DCU. our news team, when we have big deals announced, they put together branch maps of the two institutions. And typically, that will involve some counties or perhaps multiple states. This is the entire country.

First Tech, San Jose, very significant presence in the Willamette Valley of Oregon. DCU is certainly one of the preeminent financial institutions in the Route 128 corridor outside of Boston. Both membership bases would seem to be quite similar, but these markets are 3,000 miles apart. how do you go about building an integration plan that brings these two twins together that, in this case, I think it might be best described as long-lost siblings.

Shruti Miyashiro   00:12:38

I love it. That's right. Long-lost siblings - - fraternal twins finally found -- and so yes, we are on opposite coasts geographically. Our geographic presence is very strong in the places that we have branches and corporate offices. We're very rooted as a fabric of that community's needs.

A great example are portions of Massachusetts, where we've got multiple branches in Worcester, for example, a really popular city in Massachusetts. Close to one in three residents bank with us at DCU. That physical footprint is indeed important to us.

But as we know with everybody and particularly in a very mobile world, our commonalities aren't just off of geography. We also have similarities and homogeny in terms of tech workers across the nation and tech workers don't necessarily need the branching services. They really rely on digital delivery. We're able to execute and deliver on that. in addition to geography, we now have similarities with tech workers.

And then these days, whether you work directly in the tech field or not, you're definitely someone who adopts technology, digital delivery in our day-to-day lives. We're able to index more broadly there with the national footprint.

We won't have the highest number of branches. That's not our future delivery model. Our future delivery model is to understand and continue to serve the geographies and physical footprints where we are but also expand the digital delivery that we have been doing with both institutions and continue to do.

But [at] legacy DCU, 50% of members actually already came to us outside footprint. this is nothing new for us. It's just a continuation.

Tim Zawacki   00:14:34

Now one of the other I think somewhat unique aspects of this deal are that the First Tech and DCU entities are operating as separate divisions at least through this year before the full combination happens. Can you talk about this phased approach and what you're looking to prioritize during that time frame?

Shruti Miyashiro   00:14:53

Yes. Everything we're doing is to deliver on the promise of the merger. And as I mentioned earlier in our vision statement, setting a new standard for people-first solutions.

This idea of a new standard also talks about quality. The big work of integrating the first two to three years is very much focused on integrating culture, integrating technical systems, processes, strategies and philosophies and then executing with quality. That creates the stability that people earn during times of change. And then that allows us to build upon for transformation.

We are very carefully sequencing system conversions and operational changes. At the same time, we're also making sure that our people and purpose come through very strongly. Every decision that we make is evaluated through two lenses. Does it move us toward the future we are building? And what is the impact on our employees and members while we're integrating, converting and transforming. Those two things have to be very clearly understood so that we deliver both from the quality of the work that happens, but also to build upon it for transformation.

Tim Zawacki   00:16:18

That leads me to my next question, and that's around culture. And we've talked about what this deal has meant for the members. But what about for the employees? I mean these are two institutions that are separated by, quite frankly, 6-hour plane flights. With these very different geographies, how do you bring everyone together without losing what's made each of them unique?

Shruti Miyashiro   00:16:40

Yes. Well, culture really, at the end of the day, helps mergers and integrations succeed or fail. The people element can't be underestimated. And so we really started from a position of shared strengths.

The good news is in the credit union industry, all credit unions across the nation, share a very similar definition of success, which is rooted in people, not just finances. And so both of our credit unions premerger were very focused on our member experience, member value and these credit union principles of people helping people. That really led to starting from a place where we were anchored on the same things. Then we work through processes and systems and ways of working.

We're not trying to select one over the other, and we're not keeping a scorecard in terms of how many does DCU have premerger and how many does First Tech have premerger, but really what do we need to be as we move forward. we've been very honest with our team members that this is a lot of hard work. This will be the hardest work of our careers for most of us. And we do talk about the fact that there is complexity in this. It will be hard. There will be days where it's tough, but we're also keeping an eye on the why of what we're doing and the ability for people to build careers for people to have bigger impact on our members and our communities, that excites people. people who love building and having an impact are really energized by this work.

We also have a little bit of a thing where we don't want to have elephants in the room. having open honest conversations talking about things that don't make sense or that we want to question, everyone having a voice not being just hierarchical and focused in that way.

I spend a lot of time talking to our team members. I do a lot of meet-and-greet and skip-level conversations, but I do a lot of conversations with folks on the front line to understand what's working, what's not working, where the opportunities for improvement are and making sure we're connecting that back to what we're building. we're really designing a very intentional culture about where we're going, built on shared values that existed at each credit union before we came together and then accelerating this idea of, yes, we grew larger, but in some ways, we're smaller in terms of how important a voice is, and it's not a voice based on title alone.

That's energizing a lot of folks in terms of the hard work of building and integrating.

Tim Zawacki   00:19:35

So I would be remiss if I did not bring up the elephant in the room as it pertains to credit unions and banking. But credit unions operate as federal income tax exempt cooperatives. I'm wondering from your seat, what's the case for why that exemption continues to remain the right policy, particularly as credit unions like First Tech get larger and start to look more like banks just in their overall scale, doing both organic growth and M&A transactions.

Shruti Miyashiro   00:20:04

Yes. Well, it's so important to note that even as credit unions grow in scale, as do banks, the scale of us is nowhere near the scale of the largest banks in the nation. When we look at the top five largest banks in the nation, there is an enormous drop and gap, almost like a cliff when you get to this next tier of largest credit unions. that's a really important distinction. I'm also a really big fan of how America has financial institutions.

In our country, we have close to 8,000 banks and credit unions. That choice that people have is so important. It's really part of being an American. It's also very important in terms of the financial ecosystem. When we look at other nations that have become so consolidated to the point that there are maybe only five real financial institutions in the whole nation, that really creates a different experience for consumers and small businesses in particular. this idea of choice is important.

This idea of even at $30 billion, approaching $30 billion in our case, it's nowhere near the largest financial institutions in our nation. that scale is relative. I'm a big believer in the business model that credit unions have because our definition of success gets to remain people focused in addition to the rigor of running a business.

There are certainly banks also that choose not to be publicly traded and they're privately held or held in other ways. And I think they really love that particular model because of what it affords them in terms of their ability to focus. And so I think having multiple models for financial institutions and not just one approach is helpful and then people choose where they find the most value.

I frankly think this argument of should we be taxed, should we not, is a little bit of smoke and mirrors to take our eyes off the fact that we need community and regional financial institutions in our nation. Whether they're called banks or credit unions is not the point. The point is that we need them in our nation. I'm very deeply committed to that.

Tim Zawacki   00:22:32

Well, I guess now we can say that you'd be okay with getting a little bit bigger. And would that entail potentially some bolt-on transactions, whether that be acquisitions of commercial lending capabilities or maybe entering another market with a deal for an institution with a tech-focused customer base.

Shruti Miyashiro   00:22:53

Job one is integration for us, period. I've always been a CEO who has led with an organic growth strategy and delivered on that. It's very important to have that continue to be the cornerstone of the work we're doing. And then it's very important to make sure we integrate again with quality and start to build transformation. From there, we'll look at other bolt-ons when they strategically make sense. But once we have continued to deliver on our organic growth model, we get to be very selective. And we don't have to rely on M&A for continued growth. We'll grow organically, and we'll bolt on where it makes sense strategically, but it won't be a necessity for our future growth. That's the approach we're taking.

Tim Zawacki   00:23:43

You mentioned at the start of our conversation and the role that your digital-first customer base is playing and pushing outside of maybe the traditional banking system. And we've seen fintechs pick up their own banking charters. There's a lot of noise around stablecoins, potentially pulling deposits out of the traditional system. How do you think about that competitive landscape? And does it change how First Tech thinks about your deposit strategy?

Shruti Miyashiro   00:24:10

We're very focused on our deposit strategy, exactly as you shared, Tim, this idea of core deposits is critical to us. We're also aware that the definition of money is changing a lot.

There was a time where money was largely defined as gold coins, then the printing press came along, and it became hyper currency. And of course, now the definition of money has shifted a lot with cryptocurrency and lots of other things. Then the definition of how people store money used to be in an insured financial institution or under your mattress has now expanded from anywhere from prepaid cards to, again, lots of other types of accounts.

We are, first and foremost, focused on moving as the world moves on the definition of money, moving as the world moves on how that is stored. And that means making sure that we are very focused on our core deposit strategy and, also, moving as member behavior changes and being able to meet them there. we're absolutely understanding where the world is headed. We also understand, again, because of our tech routes and our innovation routes, how to look ahead to where things are going and how to build backwards so that we have lots of different pathways on where we help our members in those areas.

Tim Zawacki   00:25:34

So with that in mind, First Tech has been described as a catalyst in the industry for effortless banking experiences. Can you describe what that actually looks like in practice? What member experience investments are you making? And what's next on the road map along those lines?

Shruti Miyashiro   00:25:51

Yes. It's pretty fun. Between the two of us, we've had a lot of firsts. We were actually one of the first in banking, not just credit unions when it came to remote deposit capture, one of the first to have a website. you look back at history and kind of being the first with technology and effortless banking has very much been a part of who we are for decades, way before digital even became as common as it is today. we're revolutionizing in some key areas.

As I mentioned with you, we're making investments around our deposit strategy. We're also making material investments around our cards strategy and more specifically, money movement in general. We've used things like AI to also modernize. We've put in some things to help on the back end, and we're now able to decision about 50% faster on auto loans as an example.

Our investments are very much around this idea of user experience, less so around just digital by itself, but it's the end goal of digital to make things quicker and faster as defined by the user. design thinking is an important element of how we'll be moving forward as we continue to transform.

Tim Zawacki   00:27:06

I guess at the other end of the spectrum, DCU has a legacy of serving members who are new to banking, whether that's young adults, underserved communities, new arrivals to the U.S. banking system. Obviously, there's a lot of political noise around some of these issues. But what does First Tech do to reach and serve those members under the combined organization? And how does that mission carry forward?

Shruti Miyashiro   00:27:29

Yes. new to banking is certainly not just a citizenship status at all. It's really about folks who are new to banking. And some of those areas where folks are newest to banking are Gen Zs or millennials when they were first. this idea of being new to banking, just by virtue of age is another area where we focus heavily.

The combined credit union has over 50% of our members are actually Gen Z or millennial, so we really focus on that particular segment that is just unsure of how to make some of these decisions in banking. And it can be because they're new to country, but it can be because of the age of just establishing for the first time your checking account, getting your first auto loan, getting your first mortgage loan.

 

That education of new to banking is something we index on -- we also recognize sometimes when folks are not new to banking in that they've had relationships before, it doesn't necessarily mean they're confident about banking. And so that time we take to consult with them as opposed to sell to them has gone a long way in building trust with our members. That's really been a differentiator for us.

Tim Zawacki   00:28:47

Just to wrap up, it's been a great conversation. I wanted to think about maybe 30,000-foot view about the credit union movement’s broader role in the future of banking. Is this First Tech DCU merger a sign of things to come? Or is there a role for credit unions of all sizes as we look forward?

Shruti Miyashiro   00:29:06

There's absolutely a role for financial institutions of all sizes. I think what makes the business continue to survive through times of change is not scale by itself. It's always being very clear about purpose and impact. And with that, there are so many different ways to achieve it. It can be through scale and it can be through very targeted differentiation. success, whether it's financial institutions or any other business for that matter, is really about having clarity of purpose. The industry has that in spades. I'm confident that size will not at all be the only lever that determines continued growth.

Tim Zawacki   00:29:49

Well, Shruti, congratulations once again on getting this deal across the finish line, and thanks for walking us through it in so much detail. Best of luck to you as this integration proceeds.

Shruti Miyashiro   00:30:00

Thank you.

Tim Zawacki   00:30:00

Shruti Miyashiro, President and CEO of First Tech Federal Credit Union. Thanks so much for joining us. That's it for this episode of Street Talk. Thanks for listening, and we'll catch you next time.