May 5, 2025 • 37 mins
Peter Duffy’s message is plain: The pace of mergers will get fatter and it will involve credit unions of all sizes, from the small to the mega institutions. First Tech and DCU may seem an outlier but now there is ENT and Wings and the pace will keep up, says Duffy who now has joined SRM.
Will the chaos and uncertainty in Washington DC slow the merger pace? Duffy thinks not, indeed the pace may quicken.
That’s because, says Duffy, economies of scale are now the Holy Grail of financial institutions. Bigger is a competitive advantage, he says.
He does make one surprise prediction: he believes the number of credit unions deals with banks will decrease. Listen to hear why (and it doesn’t have much to do with ICBA’s caterwauling).
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_02 (00:00):
Welcome to the CU2.0 podcast.
SPEAKER_00 (00:05):
Hi, and welcome to the CU2.0 podcast with big new
ideas about credit unions andconversations about innovative
technology with credit union andfintech leaders.
This podcast is brought to youby Quillo, the real-time loan
syndication network for creditunions, and by your host,
longtime credit union andfinancial technology journalist,
(00:27):
Robert McGarvey.
And now...
The CU 2.0 Podcast with RobertMcGarvey.
SPEAKER_02 (00:33):
Peter Duffy's message is plain.
The pace of mergers will getfaster.
And it will involve creditunions of all sizes, from the
small to the mega institutions.
First Tech and DCU may seem anoutlier, but now there's Enten
Wings and the pace will keep up,says Duffy, who now has joined
(00:55):
SRM.
Will the chaos and uncertaintyin Washington, D.C.
slow the merger pace?
Duffy thinks not.
Indeed, the pace may quicken.
That's because, says Duffy,economies of scale are now the
holy grail of financialinstitutions.
Bigger is a competitiveadvantage, he insists.
(01:17):
He gives the details in theshow.
He does make one surpriseprediction.
He believes the number of creditunion deals with banks will
decrease.
Listen to hear why.
And incidentally, it doesn'thave much to do with ICBA's
caterwauling.
Listen up.
Mergers, mergers, mergers.
(01:37):
You know, originally I thought2025 and credit union land would
be consumed by discussions aboutAI.
AI got pushed to the side bymergers.
Mergers have been pushed to theside by what the hell is
happening with NCUA, taxexemption, a whole list of
(02:00):
rather existential questionsfloating around Washington, D.C.
Nonetheless, mergers aren'tgoing away.
So what do you see the lay ofthe land?
Can you even get a mergerthrough NCUA at this point?
SPEAKER_01 (02:19):
You know, the agency...
is um it takes a lot of hits andi i've thought all along a lot
of them unnecessary and i thinkyou'll see the agency do what
they need to do to get donewhat's right for for them the
(02:40):
membership up through theinstitution and back to the
regulator and the system and Youknow, that's not a political
answer.
It's actually what I've observedto be true.
And at the same time, I thinkwhat you'll see is a tenacious
(03:01):
desire amongst institutions toeither retain or achieve economy
of scale because of how obviousit's become amongst the
depository base in the last fewyears.
(03:23):
I've been talking about it anddoing board meetings and
speaking at conferences andspeaking to you about the
growing issues that arerestraining an institution's
ability to not only satisfymember demands, but also do it
(03:50):
in a way where there's someincome left over to reinvest in
member demands.
So I'll stop with this point.
The baker's dozen of the driversof consolidation that I've been
speaking to for the better partof eight or nine years now are
(04:14):
still there.
and all of them areaccelerating.
And that's why you're seeingsome of the announcements coming
through.
SPEAKER_02 (04:27):
I get the economy of scale argument.
I agree with it.
Where I have a hesitation is ifNavy Federal were to wave a wand
and the choir tonight PentagonFederal, Randolph Brooks, et
cetera, et cetera, every singlemilitary-related credit union.
(04:51):
It still would not have anythinglike the economy of scale of
J.P.
Morgan Chase.
Jamie Dimon would still notreally know they exist.
Am I wrong?
SPEAKER_01 (05:06):
Yeah, I think you are on that, starting with that
Navy is an organic growthjuggernaut.
Oh, Navy
SPEAKER_02 (05:15):
doesn't do mergers.
That's the irony
SPEAKER_01 (05:16):
here.
Yeah, may never care aboutinorganic growth.
That being said, I'll give yousome data to think about, and
I'll be brief on this.
When we started this century,Robert, and I've got the board
of director deck in front of methat I use.
(05:41):
We started the century, creditunions with assets less than 1
billion had enough net interestincome to pay for their
non-interest expense.
So as you know, a balance sheetis made up of income from loans
(06:02):
and investments minus cost offunds, and that gives you net
interest income.
And when you subtractnon-interest expense, which is
branches, people, medicalcoverage, electricity, travel,
conferences, all that stuff,then you have a plus or minus to
(06:22):
which you add non-interestincome, which includes fees, and
then you take out the provisionand that gives you your ROA.
So going back to the openingcomment, in the start of this
century, credit unions withassets below a billion covered
(06:44):
their non-interest expense withtheir net interest income, and
then they could add in fees.
At that time in the year 2000,I'm sure there were others, but
I'm the only one I know of thatwas talking about the trend that
eventually would lead to wherewe are today, where income from
(07:07):
loan and investments minus costof funds does not cover
expenses.
And in fact, at the end of lastyear, a few months ago, the net
interest income, when yousubtract non-interest expense,
(07:27):
the entire industry of creditunions, in aggregate, less than
$10 billion, loses money beforeyou add in non-interest income.
And before you lift your jaw upoff the table, at the end of 24,
(07:51):
the bank industry below 10billion had some income after
non-interest expense, but notmuch.
And so to tie that up for asecond, let's look at it this
way.
(08:13):
The banks with assets greaterthan 10 billion, let's say the
banks, let's say it this way,the banks with assets greater
than a billion are 25% of thebank industry.
They're 96% of the assets andthey're 96% of the net income of
(08:40):
the industry.
The credit unions with assetsgreater than a billion are 10%
of the credit unions.
They are 78% of the assets andthey're 79% of the net income.
(09:08):
What I just described to you isscale seems to look like it's
above 10 billion.
I don't know any credit union at5 billion and above that thinks
that 10 billion is economy ofscale.
And I believe that what'sdriving the the discussions to
(09:33):
an accelerated pace.
And I think you'll see the largecredit unions continue to get
together.
And I think you'll see thesmaller ones come together and
they'll start to pick up thepace, not because they're
looking to be on a par withJPMorgan Chase, but because they
(09:55):
feel like with scale, they havea fighting chance to compete and
do what they want to do and whatthey've always wanted to do for
their membership and for theircommunity.
SPEAKER_02 (10:12):
Now, when I first started to write about credit
union mergers some years ago, 15years ago, let's say, almost all
of them were arranged marriages,shotgun weddings arranged by
NCUA.
where a bigger credit union wastaking over a deathly sick
(10:34):
smaller credit union before saidsmaller credit union was
conserved.
So no shame, no loss.
And the big credit unions did itbecause they were accruing favor
points from NCUA.
And as one CEO said to me when Iwas asking him about his
(10:55):
acquisition of a small creditunion, Even if it all blows up,
it's not even a blip on mybalance sheet.
Don't even think about it.
And I thought about it and hewas right.
It wouldn't have made anydifference at all.
Today, that kind of merger isjust a tiny piece of the merger
(11:20):
picture.
We see much more strategicmergers happening now.
And That's what's kind of madethis into a business for someone
like yourself.
And it's also created someexcitement because you get these
unlikely pairings like FirstTech and DCU.
(11:41):
So your prediction is we'regoing to see more of these big
Goliaths coming together.
SPEAKER_01 (11:52):
Well, in the grand scheme of things, there's a
few...
Goliath in the credit unionspace, you know, when you look
at the universe of banks andcredit unions and what you got
to remember too.
And I'll answer your question,but I think a bit of background
is useful.
You know, FinTech came on thescene in 2005 to start making
(12:15):
loans.
You saw a rocket mortgagecommercial on that during the
Superbowl and everybody waslike, who's rocket mortgage.
Well, today, uh, fintechs andneobanks do more mortgage
lending than the banks andcredit unions combined
SPEAKER_02 (12:33):
that is the most horrifying statistic i've
written that time and time againi'm old enough a year old enough
to remember when snls own themortgage market period snls go
out of business credit unionstake over a big chunk of that
and banks take over the rest ofit so a fairly seamless
transition and somehow in thiscentury Banks and credit unions
(12:55):
have conspired to find ways tolose almost all of the mortgage
market.
It's just stunning.
SPEAKER_01 (13:02):
Yeah, and it's not all their fault.
In fact, I would say most of itisn't.
I think that the credit unionsand the banks, I've said for a
long time, are really in thesame stadium fighting the same
enemy.
And they think it's each other,and it's actually...
(13:24):
fintech, neobanks, and frankly,in some degree, our friendly
U.S.
Congress, who has not givenbanks and credit unions much
regulatory relief over theyears, but waved in Walmart,
Goldman Sachs, Apple, Amazon,SoFi into the purview of banks
(13:45):
and credit unions.
And in the beginning, withnowhere near the regulatory
oversight, And the credit unionsand banks have had to deal with
that.
And they told the biggest banks,the top five or six, you're not
allowed to do bank acquisitionsanymore.
But the minute there's a badeconomy, they go and knock on
(14:08):
JPMorgan Chase or B of A's doorand have them absorb the wounded
bank.
And that's how, by the way,JPMorgan Chase got the entire
West Coast when theycountrywide.
Yeah.
Well, in the Great Recession,they got the West Coast.
(14:30):
No, no.
B of
SPEAKER_02 (14:32):
A got countrywide.
SPEAKER_01 (14:34):
B of A got countrywide.
You're right.
JPMorgan Chase got WAMU.
Right.
And that's why there's a blueChase sign from Seattle down to
San Diego.
So the banks and credit unionswere left to to kind of fend for
themselves.
And getting back to yourquestion, which I take it as,
(15:01):
you know, you've got thesestrategic mergers going, well,
yeah, of course you do, becausepeople running credit unions
these days have been brought upto understand what this business
is about, and they've gottensome pretty good feedback inside
the industry or outside theindustry experience.
(15:26):
And they've been focused onsatisfying member needs and
trying to have some money leftover to solve problems for
members and their staff, etcetera.
And people that are focused likethat are going to look for ways
to improve their overalloperation.
And you look at a cross-bordercombination.
(15:48):
And I'm not going to name names.
We at Strategic ResourceManagement, at this moment, have
12 discussions going of sometype.
And those that are past, hello,how are you, are not just a
(16:10):
couple, and they're all fairlylarge.
And the reason that these thingsare being discussed and will
continue to be discussed andoccur is because the people
running them and their boardssee the benefit of a combination
(16:32):
where you get, you know, there'sa lot of hand-wringing in the
credit union space, although thehand-wringing has gone down as
these large deals have pickedup.
And I think you're going tocontinue to see the large deals
pick up and medium and smalldeals pick up, and it'll be
interesting to see where thehand-wringing goes.
(16:53):
But here's the deal, and there'sno getting around it.
When you've got two creditunions at the table talking, as
I do and we do at SRM, we'retalking about stuff that doesn't
come up in any of thesearticles, stuff like, You get a
diversity of member.
(17:13):
You get a diversity ofgeography.
You get a diversity of thebalance sheet.
You know what those three thingsdo alone?
They give you the ability tomanage economic risk where one
state has a tough time in arecession while the other one is
doing well.
A diversity of membership givesyou a chance to go from an
(17:39):
average age of a member of 48 to50 down to 40, which brings in
more borrowers to complementyour savers.
And a diversity of balance sheetgives you a chance with diverse
cash flows to manage interestrate risk and earnings better.
(18:01):
You know, what you hear from thehand-wringing is, well, you
know, big for big's sake.
It's not big for big sake.
It's actually big because big istable stakes.
Without it, you lose moneywithout fees.
What is it that people want?
(18:21):
It's okay to be not for profit,but you need profit to turn
around and invest in thetechnology and digital delivery
and brick and mortar oftechnology.
that the membership's lookingfor and the marketing to be able
to communicate that you can givethem that.
(18:43):
That stuff all costs money.
What you see in the numbers ofthe industry, and it's not a
24-month trend, it's over a25-year trend that the loan and
deposit product of Americanbanking's been commoditized.
Nobody's got an advantage onproduct type, yield, coupon
(19:06):
rate, distribution system, it'sall commoditized.
And that requires that you havescale so that then the other
aspects of your business beingmanagers who are shrewd,
thoughtful, and deliberativeabout their strategy, but then
(19:30):
once they're comfortable withit, they know how to pin their
ears back and execute.
Those kind of managers costmoney.
But once you have scale, it putsyou in a position to then
out-think, out-market, maybe bemore nimble in the way you get
(19:53):
and retain members.
SPEAKER_02 (19:59):
Is there still an interest on the part of bigger
credit unions?
merging with smaller creditunions?
I'm talking about significantdivergence in size, a$3 billion
credit union and a$250 millioncredit union.
SPEAKER_01 (20:19):
It's a very good question.
And the answer varies dependingon who I'm in front of.
And I have to tell you, sinceMarch 1st, when I began my
journey with SRM, I've literallybeen nonstop at the request of
credit unions.
You know, I might reach out andsay, how's it going?
(20:42):
I might be in the PacificNorthwest.
Would you like to get together?
And that one meeting becomesfive.
SPEAKER_02 (20:50):
Well, every$250 million credit union, there
might be an odd exception, butI'm going to say every is
interested in merger.
It's...
Is that the case for every$10billion credit union?
Not necessarily, but the$250million, they're all hoping the
(21:11):
phone rings.
SPEAKER_01 (21:13):
Yeah, I would tell you that still right now,
Robert, it's this quote that Iwas given by a CEO a couple of
years ago.
Pete, I have a list I would liketo merge.
and I'm on other people's list.
(21:34):
The answer to your question is,you can see a three, I have
three, four,$5 billion assetcredit unions that want to get
to be productive at inorganicgrowth.
And they'll consider below 500million if it fits the
(22:01):
characteristics of their idealpartner.
The characteristics of the idealpartner is part of the process
that I've developed that enablesa C-suite and a board to
determine what's the right wayforward here, where we're good
industry players and we're doingthe right thing and we're
gentlemanly and professional,but we know what we need and we
(22:25):
need to go find it.
And one of those characteristicsis what's the asset range that's
acceptable against what's thegeographic preferences and the
culture and the attitude towardssolving member problems and
meeting member needs, amongother things.
(22:47):
And we actually go through andsocialize all that, and then we
run it up against the typicalcredit union merger deal terms
to determine Well, who would bethen our ideal group of
potential partners?
And credit unions with some realsize will consider credit unions
that are small if, althoughthey're on the smaller end of
(23:13):
the range, that smallerpotential partner has a real
desire, all of them, to keepworking and doing a good job for
the membership.
Because credit unions...
They don't go in and lay peopleoff.
They want to combine and do theright thing by people.
And that's something that Ithink is lost on a lot of credit
(23:39):
unions and those that wouldadvise to them and provide
counsel.
But here's the deal.
Credit unions with size willlook at and merge with a smaller
shop.
If the smaller shop displays areal positive attitude toward
(24:01):
continuing to work and take careof the members and is in a
geography that the larger onereally cares about but isn't in
yet, well, that's a win-win forboth institutions and their
members.
SPEAKER_02 (24:17):
Yeah, I understand that.
I think a version of that iswhat happened when Hanscom
Federal Credit Union acquiredPeople's Bank in Maryland, is
that the geography of People'sBank appealed to Hanscom.
SPEAKER_01 (24:33):
Right.
SPEAKER_02 (24:34):
Which already had a big presence in Northern
Virginia, for instance, but itdidn't have much happening in
Maryland.
SPEAKER_01 (24:40):
Right.
SPEAKER_02 (24:41):
Yeah.
SPEAKER_01 (24:42):
Yeah.
I'm in some discussions withlarge credit unions that say,
all right, well, so we're herein pick a state, and we think we
would benefit from geographicdiversity.
So how do you feel about atarget list that includes a
(25:02):
bunch of states, and some ofthem aren't contiguous to us?
And my answer is, it depends onhow you do it.
If you're going to go in and bythe way you implement the
integration, you don't considerthe needs of the local market,
which would include keeping allthe people at the credit union
(25:27):
in the other state.
And why not?
Because they know the member andthe member knows them.
Well, then don't bother leavingyour state because first of all,
you're not going to get thatdeal.
in most cases, and if you did,it's not going to work very well
for you.
But credit unions, by and large,are of the mind that if they're
(25:47):
going to go out of state orin-state, they want to keep
people because, frankly, one ofthe benefits of a merger is you
get to deepen your bench.
I'm going to give you the numberone driver of consolidation,
Robert.
It's one of the banker's dozen,and here's what it is.
(26:07):
Credit unions...
tell me that they have 15mission critical things they
need to do for the membership.
And they have the time, people,and capital dollars to do three
or four a year, which meansthey're not going to get to a
dozen of them in the next year.
(26:31):
And it'll be a few years beforethey get to all of them.
And in the meantime, othermission critical things will
come in.
Well, one of the biggest, that'sa driver of consolidation.
And a way to solve for that isto combine with another credit
union that brings in talent thatyou can put against some of
(26:52):
those mission critical taskswhile also bringing in capital.
Because what those credit unionswill tell you is, We have the
time, people, and capital to dothree a year.
And the people that are on thosemissions are on all three of the
missions.
(27:12):
And then they have their dayjob.
SPEAKER_02 (27:14):
Peter, I wrote a story like 25 years ago about
Cisco Systems, which was ahigh-flying tech company at that
point.
Cisco was acquiring a small techcompany once a month, literally
one deal a month.
SPEAKER_01 (27:29):
Yeah.
SPEAKER_02 (27:30):
And I asked the guy who was running that for Cisco,
you do realize, don't you, thatmost of these companies are
never going to have a marketableproduct?
And he said, of course.
We're hiring talent, man.
Talent.
SPEAKER_00 (27:44):
Right.
SPEAKER_02 (27:44):
100%.
The check does not get signed byus until I have employment
agreements from the people we'veidentified, which weren't
necessarily everybody.
I'm not saying they weren'twilling to take everybody, but
there was some they had to have.
And if they had consignedemployment agreements, it was a
done deal.
Here's your money.
(28:04):
And I thought this wasexquisite.
They were just going outshopping for brains.
SPEAKER_01 (28:09):
Exactly.
Well, it doesn't have to be inactuality.
It is not with a lot of thebank-to-bank and credit
union-to-credit union deals.
And in the case of credit unionsacquiring banks...
in many cases it's it's adifferent geography which again
can be very beneficial um aswell as you're picking up
(28:30):
commercial loan talent andcommercial deposits and and that
sort of thing so again one ofthe baker's dozen of the drivers
of consolidation and it's a it'sa doozy and and a good
combination can help solve forthat
SPEAKER_02 (28:47):
now When you talk with credit unions and the
discussion, the merger issue isgetting more intense.
Do you ever raise the questionor do they ever raise the
question, do you think thememberships of both credit
unions will approve this?
And I'm hearing more rumblingsthat there are doubts,
(29:09):
particularly when a big creditunion is acquiring a little
credit union and the littlecredit union members say, geez,
we're going to be just a blip onthe screen.
And strangely enough, there's anargument that acquiring a
community bank is simplerbecause all you got to do is
satisfy a handful ofshareholders.
No membership vote, no nothingon their side.
(29:31):
You wouldn't have a seriousdiscussion if you weren't
satisfying the few shareholdersof the institution.
So does this worry come up?
SPEAKER_01 (29:42):
Oh, on every discussion.
And it's not so much, it's by nomeans phrased as a worry.
The credit union acquisition ofa bank, you're right, it tends
to not see obstacles related tothe customer base of the bank,
although there has been a few ofthose.
(30:04):
Credit union to credit union, Ibring it up if it's not brought
up.
And again, for the handwringers, if it's not the top,
it's one of the top two to threethings that both credit unions
and their boards think about is,is this right for the
membership?
(30:24):
And can we communicate it tothem?
And when?
What's the right time to do it?
How do we get the message tothem?
You know, like with anythingelse, when you compare one thing
to another, one of the pros of acredit union acquisition of a
bank is it's much less of aconcern.
(30:46):
But I got to tell you, If I wasa betting man, I would bet on as
credit union to credit unioncombinations continue to
accelerate, the desire toacquire a bank by a credit union
will decelerate.
(31:07):
And there are a lot of reasonsfor that.
And we like the credit unionacquisition of a bank idea and
have done them.
But that said...
there's a lot more to like aboutcredit union to credit union.
And to your point, the NorthStar is the membership, staff,
and community.
(31:29):
And honestly, I haven't spokento a credit union yet that
doesn't get that.
So when you hear rumblings abouta membership that is concerned
about it, that's, first of all,the membership deserves a good
explanation.
(31:49):
And that starts with respectingthe question.
But at the end of the day, mostpeople understand and have
intellectualized mergers andacquisitions in all industries
of American commerce.
(32:11):
And when you explain it infact-based attributed discussion
and material, it allows them tomake an informed decision.
And that's what they shouldexpect.
(32:33):
It's what the institutionexpects and it's what the
regulators want.
And I don't think you're goingto see a lot of credit union
mergers get shot down bymembers.
SPEAKER_02 (32:46):
I think it's been a handful in history.
It's not very common at all.
SPEAKER_01 (32:54):
No, there have been a few.
And in some of those cases, theygot outside help, where people
from outside the membership andoutside the credit union came in
to quote-unquote inform.
That thing's going to go by thewayside the more of these kind
of discussions occur because...
(33:16):
The simple truth of the matteris more and more credit unions
understand that in order forthem to satisfy their members,
they need more scale.
And it's not going to be hard toexplain and show how that's
true.
SPEAKER_02 (33:35):
So bottom line is you think that.
the merger topic will remain ashot as it has been, despite the
many uncertainties there are inWashington, D.C., NCUA, tax
exemption, CFPB, the list goeson.
(33:55):
And so you think one way oranother, the merger thing has an
inevitability to it at thispoint.
SPEAKER_01 (34:07):
Absolutely.
What's more, I'll share with youthat I started at a college at
TCU.
I started with Procter& Gambleand rose to district manager at
a pretty young age.
But we talked a lot aboutstrategizing the business and
(34:28):
that kind of thing.
And we kept coming back to salescures all ills.
So for example, you know, theshipment didn't make it to the
warehouse on time, or theweather messed up my flight and
I couldn't get to the customeron time, that kind of thing.
You know, you get obstacles inthe business, but the more you
(34:51):
add customers who end up beinghappy with you, it solves all
the problems.
Well, in this discussion, scalesolves a lot of problems.
And you just listed a number ofthem that scale can deal with
(35:12):
effectively, whether it's theon-again, off-again of
overdrafts.
And I wouldn't be one to betthat it doesn't sustain over
time that that kind of fee isgoing to continue to have
(35:34):
headwinds.
while once you get over 10billion, there's the loss of
interchange.
Well, you look at those twothings, taxation, regulatory
consolidation, all the dramathat's going on in Washington.
If your financial institutionachieves scale and you have net
(35:59):
income after you subtractexpenses from net interest
income, and then you add infees, you're in a position where
you can invest capital to addmore members and fix things that
aren't right for you.
But if you don't have thatincome, you can't.
(36:24):
So it's not about size for sizesake.
It's about being able tocontinue to do what you want to
do for your membership and Andif you're a bank, the customer
base.
SPEAKER_02 (36:37):
Yeah, I think you're right.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
(36:59):
in the financial scene?
Can't all be mega banks, can it?
It's my hope it won't all bemega banks.
It'll always be a place forcredit unions.
That's what we're discussinghere.
So figure out how you can help.
Get in touch with me.
This is rjmcgarvey at gmail.com.
Robert McGarvey again.
That's rjmcgarvey at gmail.com.
(37:21):
Get in touch.
We'll figure out a way that youcan help.
We need your support.
We want your support.
We thank you for your support.
The CU2.0 Podcast.
Welcome to the CU2.0 podcast.
SPEAKER_00 (00:05):
Hi, and welcome to the CU2.0 podcast with big new
ideas about credit unions andconversations about innovative
technology with credit union andfintech leaders.
This podcast is brought to youby Quillo, the real-time loan
syndication network for creditunions, and by your host,
longtime credit union andfinancial technology journalist,
(00:27):
Robert McGarvey.
And now...
The CU 2.0 Podcast with RobertMcGarvey.
SPEAKER_02 (00:33):
Peter Duffy's message is plain.
The pace of mergers will getfaster.
And it will involve creditunions of all sizes, from the
small to the mega institutions.
First Tech and DCU may seem anoutlier, but now there's Enten
Wings and the pace will keep up,says Duffy, who now has joined
(00:55):
SRM.
Will the chaos and uncertaintyin Washington, D.C.
slow the merger pace?
Duffy thinks not.
Indeed, the pace may quicken.
That's because, says Duffy,economies of scale are now the
holy grail of financialinstitutions.
Bigger is a competitiveadvantage, he insists.
(01:17):
He gives the details in theshow.
He does make one surpriseprediction.
He believes the number of creditunion deals with banks will
decrease.
Listen to hear why.
And incidentally, it doesn'thave much to do with ICBA's
caterwauling.
Listen up.
Mergers, mergers, mergers.
(01:37):
You know, originally I thought2025 and credit union land would
be consumed by discussions aboutAI.
AI got pushed to the side bymergers.
Mergers have been pushed to theside by what the hell is
happening with NCUA, taxexemption, a whole list of
(02:00):
rather existential questionsfloating around Washington, D.C.
Nonetheless, mergers aren'tgoing away.
So what do you see the lay ofthe land?
Can you even get a mergerthrough NCUA at this point?
SPEAKER_01 (02:19):
You know, the agency...
is um it takes a lot of hits andi i've thought all along a lot
of them unnecessary and i thinkyou'll see the agency do what
they need to do to get donewhat's right for for them the
(02:40):
membership up through theinstitution and back to the
regulator and the system and Youknow, that's not a political
answer.
It's actually what I've observedto be true.
And at the same time, I thinkwhat you'll see is a tenacious
(03:01):
desire amongst institutions toeither retain or achieve economy
of scale because of how obviousit's become amongst the
depository base in the last fewyears.
(03:23):
I've been talking about it anddoing board meetings and
speaking at conferences andspeaking to you about the
growing issues that arerestraining an institution's
ability to not only satisfymember demands, but also do it
(03:50):
in a way where there's someincome left over to reinvest in
member demands.
So I'll stop with this point.
The baker's dozen of the driversof consolidation that I've been
speaking to for the better partof eight or nine years now are
(04:14):
still there.
and all of them areaccelerating.
And that's why you're seeingsome of the announcements coming
through.
SPEAKER_02 (04:27):
I get the economy of scale argument.
I agree with it.
Where I have a hesitation is ifNavy Federal were to wave a wand
and the choir tonight PentagonFederal, Randolph Brooks, et
cetera, et cetera, every singlemilitary-related credit union.
(04:51):
It still would not have anythinglike the economy of scale of
J.P.
Morgan Chase.
Jamie Dimon would still notreally know they exist.
Am I wrong?
SPEAKER_01 (05:06):
Yeah, I think you are on that, starting with that
Navy is an organic growthjuggernaut.
Oh, Navy
SPEAKER_02 (05:15):
doesn't do mergers.
That's the irony
SPEAKER_01 (05:16):
here.
Yeah, may never care aboutinorganic growth.
That being said, I'll give yousome data to think about, and
I'll be brief on this.
When we started this century,Robert, and I've got the board
of director deck in front of methat I use.
(05:41):
We started the century, creditunions with assets less than 1
billion had enough net interestincome to pay for their
non-interest expense.
So as you know, a balance sheetis made up of income from loans
(06:02):
and investments minus cost offunds, and that gives you net
interest income.
And when you subtractnon-interest expense, which is
branches, people, medicalcoverage, electricity, travel,
conferences, all that stuff,then you have a plus or minus to
(06:22):
which you add non-interestincome, which includes fees, and
then you take out the provisionand that gives you your ROA.
So going back to the openingcomment, in the start of this
century, credit unions withassets below a billion covered
(06:44):
their non-interest expense withtheir net interest income, and
then they could add in fees.
At that time in the year 2000,I'm sure there were others, but
I'm the only one I know of thatwas talking about the trend that
eventually would lead to wherewe are today, where income from
(07:07):
loan and investments minus costof funds does not cover
expenses.
And in fact, at the end of lastyear, a few months ago, the net
interest income, when yousubtract non-interest expense,
(07:27):
the entire industry of creditunions, in aggregate, less than
$10 billion, loses money beforeyou add in non-interest income.
And before you lift your jaw upoff the table, at the end of 24,
(07:51):
the bank industry below 10billion had some income after
non-interest expense, but notmuch.
And so to tie that up for asecond, let's look at it this
way.
(08:13):
The banks with assets greaterthan 10 billion, let's say the
banks, let's say it this way,the banks with assets greater
than a billion are 25% of thebank industry.
They're 96% of the assets andthey're 96% of the net income of
(08:40):
the industry.
The credit unions with assetsgreater than a billion are 10%
of the credit unions.
They are 78% of the assets andthey're 79% of the net income.
(09:08):
What I just described to you isscale seems to look like it's
above 10 billion.
I don't know any credit union at5 billion and above that thinks
that 10 billion is economy ofscale.
And I believe that what'sdriving the the discussions to
(09:33):
an accelerated pace.
And I think you'll see the largecredit unions continue to get
together.
And I think you'll see thesmaller ones come together and
they'll start to pick up thepace, not because they're
looking to be on a par withJPMorgan Chase, but because they
(09:55):
feel like with scale, they havea fighting chance to compete and
do what they want to do and whatthey've always wanted to do for
their membership and for theircommunity.
SPEAKER_02 (10:12):
Now, when I first started to write about credit
union mergers some years ago, 15years ago, let's say, almost all
of them were arranged marriages,shotgun weddings arranged by
NCUA.
where a bigger credit union wastaking over a deathly sick
(10:34):
smaller credit union before saidsmaller credit union was
conserved.
So no shame, no loss.
And the big credit unions did itbecause they were accruing favor
points from NCUA.
And as one CEO said to me when Iwas asking him about his
(10:55):
acquisition of a small creditunion, Even if it all blows up,
it's not even a blip on mybalance sheet.
Don't even think about it.
And I thought about it and hewas right.
It wouldn't have made anydifference at all.
Today, that kind of merger isjust a tiny piece of the merger
(11:20):
picture.
We see much more strategicmergers happening now.
And That's what's kind of madethis into a business for someone
like yourself.
And it's also created someexcitement because you get these
unlikely pairings like FirstTech and DCU.
(11:41):
So your prediction is we'regoing to see more of these big
Goliaths coming together.
SPEAKER_01 (11:52):
Well, in the grand scheme of things, there's a
few...
Goliath in the credit unionspace, you know, when you look
at the universe of banks andcredit unions and what you got
to remember too.
And I'll answer your question,but I think a bit of background
is useful.
You know, FinTech came on thescene in 2005 to start making
(12:15):
loans.
You saw a rocket mortgagecommercial on that during the
Superbowl and everybody waslike, who's rocket mortgage.
Well, today, uh, fintechs andneobanks do more mortgage
lending than the banks andcredit unions combined
SPEAKER_02 (12:33):
that is the most horrifying statistic i've
written that time and time againi'm old enough a year old enough
to remember when snls own themortgage market period snls go
out of business credit unionstake over a big chunk of that
and banks take over the rest ofit so a fairly seamless
transition and somehow in thiscentury Banks and credit unions
(12:55):
have conspired to find ways tolose almost all of the mortgage
market.
It's just stunning.
SPEAKER_01 (13:02):
Yeah, and it's not all their fault.
In fact, I would say most of itisn't.
I think that the credit unionsand the banks, I've said for a
long time, are really in thesame stadium fighting the same
enemy.
And they think it's each other,and it's actually...
(13:24):
fintech, neobanks, and frankly,in some degree, our friendly
U.S.
Congress, who has not givenbanks and credit unions much
regulatory relief over theyears, but waved in Walmart,
Goldman Sachs, Apple, Amazon,SoFi into the purview of banks
(13:45):
and credit unions.
And in the beginning, withnowhere near the regulatory
oversight, And the credit unionsand banks have had to deal with
that.
And they told the biggest banks,the top five or six, you're not
allowed to do bank acquisitionsanymore.
But the minute there's a badeconomy, they go and knock on
(14:08):
JPMorgan Chase or B of A's doorand have them absorb the wounded
bank.
And that's how, by the way,JPMorgan Chase got the entire
West Coast when theycountrywide.
Yeah.
Well, in the Great Recession,they got the West Coast.
(14:30):
No, no.
B of
SPEAKER_02 (14:32):
A got countrywide.
SPEAKER_01 (14:34):
B of A got countrywide.
You're right.
JPMorgan Chase got WAMU.
Right.
And that's why there's a blueChase sign from Seattle down to
San Diego.
So the banks and credit unionswere left to to kind of fend for
themselves.
And getting back to yourquestion, which I take it as,
(15:01):
you know, you've got thesestrategic mergers going, well,
yeah, of course you do, becausepeople running credit unions
these days have been brought upto understand what this business
is about, and they've gottensome pretty good feedback inside
the industry or outside theindustry experience.
(15:26):
And they've been focused onsatisfying member needs and
trying to have some money leftover to solve problems for
members and their staff, etcetera.
And people that are focused likethat are going to look for ways
to improve their overalloperation.
And you look at a cross-bordercombination.
(15:48):
And I'm not going to name names.
We at Strategic ResourceManagement, at this moment, have
12 discussions going of sometype.
And those that are past, hello,how are you, are not just a
(16:10):
couple, and they're all fairlylarge.
And the reason that these thingsare being discussed and will
continue to be discussed andoccur is because the people
running them and their boardssee the benefit of a combination
(16:32):
where you get, you know, there'sa lot of hand-wringing in the
credit union space, although thehand-wringing has gone down as
these large deals have pickedup.
And I think you're going tocontinue to see the large deals
pick up and medium and smalldeals pick up, and it'll be
interesting to see where thehand-wringing goes.
(16:53):
But here's the deal, and there'sno getting around it.
When you've got two creditunions at the table talking, as
I do and we do at SRM, we'retalking about stuff that doesn't
come up in any of thesearticles, stuff like, You get a
diversity of member.
(17:13):
You get a diversity ofgeography.
You get a diversity of thebalance sheet.
You know what those three thingsdo alone?
They give you the ability tomanage economic risk where one
state has a tough time in arecession while the other one is
doing well.
A diversity of membership givesyou a chance to go from an
(17:39):
average age of a member of 48 to50 down to 40, which brings in
more borrowers to complementyour savers.
And a diversity of balance sheetgives you a chance with diverse
cash flows to manage interestrate risk and earnings better.
(18:01):
You know, what you hear from thehand-wringing is, well, you
know, big for big's sake.
It's not big for big sake.
It's actually big because big istable stakes.
Without it, you lose moneywithout fees.
What is it that people want?
(18:21):
It's okay to be not for profit,but you need profit to turn
around and invest in thetechnology and digital delivery
and brick and mortar oftechnology.
that the membership's lookingfor and the marketing to be able
to communicate that you can givethem that.
(18:43):
That stuff all costs money.
What you see in the numbers ofthe industry, and it's not a
24-month trend, it's over a25-year trend that the loan and
deposit product of Americanbanking's been commoditized.
Nobody's got an advantage onproduct type, yield, coupon
(19:06):
rate, distribution system, it'sall commoditized.
And that requires that you havescale so that then the other
aspects of your business beingmanagers who are shrewd,
thoughtful, and deliberativeabout their strategy, but then
(19:30):
once they're comfortable withit, they know how to pin their
ears back and execute.
Those kind of managers costmoney.
But once you have scale, it putsyou in a position to then
out-think, out-market, maybe bemore nimble in the way you get
(19:53):
and retain members.
SPEAKER_02 (19:59):
Is there still an interest on the part of bigger
credit unions?
merging with smaller creditunions?
I'm talking about significantdivergence in size, a$3 billion
credit union and a$250 millioncredit union.
SPEAKER_01 (20:19):
It's a very good question.
And the answer varies dependingon who I'm in front of.
And I have to tell you, sinceMarch 1st, when I began my
journey with SRM, I've literallybeen nonstop at the request of
credit unions.
You know, I might reach out andsay, how's it going?
(20:42):
I might be in the PacificNorthwest.
Would you like to get together?
And that one meeting becomesfive.
SPEAKER_02 (20:50):
Well, every$250 million credit union, there
might be an odd exception, butI'm going to say every is
interested in merger.
It's...
Is that the case for every$10billion credit union?
Not necessarily, but the$250million, they're all hoping the
(21:11):
phone rings.
SPEAKER_01 (21:13):
Yeah, I would tell you that still right now,
Robert, it's this quote that Iwas given by a CEO a couple of
years ago.
Pete, I have a list I would liketo merge.
and I'm on other people's list.
(21:34):
The answer to your question is,you can see a three, I have
three, four,$5 billion assetcredit unions that want to get
to be productive at inorganicgrowth.
And they'll consider below 500million if it fits the
(22:01):
characteristics of their idealpartner.
The characteristics of the idealpartner is part of the process
that I've developed that enablesa C-suite and a board to
determine what's the right wayforward here, where we're good
industry players and we're doingthe right thing and we're
gentlemanly and professional,but we know what we need and we
(22:25):
need to go find it.
And one of those characteristicsis what's the asset range that's
acceptable against what's thegeographic preferences and the
culture and the attitude towardssolving member problems and
meeting member needs, amongother things.
(22:47):
And we actually go through andsocialize all that, and then we
run it up against the typicalcredit union merger deal terms
to determine Well, who would bethen our ideal group of
potential partners?
And credit unions with some realsize will consider credit unions
that are small if, althoughthey're on the smaller end of
(23:13):
the range, that smallerpotential partner has a real
desire, all of them, to keepworking and doing a good job for
the membership.
Because credit unions...
They don't go in and lay peopleoff.
They want to combine and do theright thing by people.
And that's something that Ithink is lost on a lot of credit
(23:39):
unions and those that wouldadvise to them and provide
counsel.
But here's the deal.
Credit unions with size willlook at and merge with a smaller
shop.
If the smaller shop displays areal positive attitude toward
(24:01):
continuing to work and take careof the members and is in a
geography that the larger onereally cares about but isn't in
yet, well, that's a win-win forboth institutions and their
members.
SPEAKER_02 (24:17):
Yeah, I understand that.
I think a version of that iswhat happened when Hanscom
Federal Credit Union acquiredPeople's Bank in Maryland, is
that the geography of People'sBank appealed to Hanscom.
SPEAKER_01 (24:33):
Right.
SPEAKER_02 (24:34):
Which already had a big presence in Northern
Virginia, for instance, but itdidn't have much happening in
Maryland.
SPEAKER_01 (24:40):
Right.
SPEAKER_02 (24:41):
Yeah.
SPEAKER_01 (24:42):
Yeah.
I'm in some discussions withlarge credit unions that say,
all right, well, so we're herein pick a state, and we think we
would benefit from geographicdiversity.
So how do you feel about atarget list that includes a
(25:02):
bunch of states, and some ofthem aren't contiguous to us?
And my answer is, it depends onhow you do it.
If you're going to go in and bythe way you implement the
integration, you don't considerthe needs of the local market,
which would include keeping allthe people at the credit union
(25:27):
in the other state.
And why not?
Because they know the member andthe member knows them.
Well, then don't bother leavingyour state because first of all,
you're not going to get thatdeal.
in most cases, and if you did,it's not going to work very well
for you.
But credit unions, by and large,are of the mind that if they're
(25:47):
going to go out of state orin-state, they want to keep
people because, frankly, one ofthe benefits of a merger is you
get to deepen your bench.
I'm going to give you the numberone driver of consolidation,
Robert.
It's one of the banker's dozen,and here's what it is.
(26:07):
Credit unions...
tell me that they have 15mission critical things they
need to do for the membership.
And they have the time, people,and capital dollars to do three
or four a year, which meansthey're not going to get to a
dozen of them in the next year.
(26:31):
And it'll be a few years beforethey get to all of them.
And in the meantime, othermission critical things will
come in.
Well, one of the biggest, that'sa driver of consolidation.
And a way to solve for that isto combine with another credit
union that brings in talent thatyou can put against some of
(26:52):
those mission critical taskswhile also bringing in capital.
Because what those credit unionswill tell you is, We have the
time, people, and capital to dothree a year.
And the people that are on thosemissions are on all three of the
missions.
(27:12):
And then they have their dayjob.
SPEAKER_02 (27:14):
Peter, I wrote a story like 25 years ago about
Cisco Systems, which was ahigh-flying tech company at that
point.
Cisco was acquiring a small techcompany once a month, literally
one deal a month.
SPEAKER_01 (27:29):
Yeah.
SPEAKER_02 (27:30):
And I asked the guy who was running that for Cisco,
you do realize, don't you, thatmost of these companies are
never going to have a marketableproduct?
And he said, of course.
We're hiring talent, man.
Talent.
SPEAKER_00 (27:44):
Right.
SPEAKER_02 (27:44):
100%.
The check does not get signed byus until I have employment
agreements from the people we'veidentified, which weren't
necessarily everybody.
I'm not saying they weren'twilling to take everybody, but
there was some they had to have.
And if they had consignedemployment agreements, it was a
done deal.
Here's your money.
(28:04):
And I thought this wasexquisite.
They were just going outshopping for brains.
SPEAKER_01 (28:09):
Exactly.
Well, it doesn't have to be inactuality.
It is not with a lot of thebank-to-bank and credit
union-to-credit union deals.
And in the case of credit unionsacquiring banks...
in many cases it's it's adifferent geography which again
can be very beneficial um aswell as you're picking up
(28:30):
commercial loan talent andcommercial deposits and and that
sort of thing so again one ofthe baker's dozen of the drivers
of consolidation and it's a it'sa doozy and and a good
combination can help solve forthat
SPEAKER_02 (28:47):
now When you talk with credit unions and the
discussion, the merger issue isgetting more intense.
Do you ever raise the questionor do they ever raise the
question, do you think thememberships of both credit
unions will approve this?
And I'm hearing more rumblingsthat there are doubts,
(29:09):
particularly when a big creditunion is acquiring a little
credit union and the littlecredit union members say, geez,
we're going to be just a blip onthe screen.
And strangely enough, there's anargument that acquiring a
community bank is simplerbecause all you got to do is
satisfy a handful ofshareholders.
No membership vote, no nothingon their side.
(29:31):
You wouldn't have a seriousdiscussion if you weren't
satisfying the few shareholdersof the institution.
So does this worry come up?
SPEAKER_01 (29:42):
Oh, on every discussion.
And it's not so much, it's by nomeans phrased as a worry.
The credit union acquisition ofa bank, you're right, it tends
to not see obstacles related tothe customer base of the bank,
although there has been a few ofthose.
(30:04):
Credit union to credit union, Ibring it up if it's not brought
up.
And again, for the handwringers, if it's not the top,
it's one of the top two to threethings that both credit unions
and their boards think about is,is this right for the
membership?
(30:24):
And can we communicate it tothem?
And when?
What's the right time to do it?
How do we get the message tothem?
You know, like with anythingelse, when you compare one thing
to another, one of the pros of acredit union acquisition of a
bank is it's much less of aconcern.
(30:46):
But I got to tell you, If I wasa betting man, I would bet on as
credit union to credit unioncombinations continue to
accelerate, the desire toacquire a bank by a credit union
will decelerate.
(31:07):
And there are a lot of reasonsfor that.
And we like the credit unionacquisition of a bank idea and
have done them.
But that said...
there's a lot more to like aboutcredit union to credit union.
And to your point, the NorthStar is the membership, staff,
and community.
(31:29):
And honestly, I haven't spokento a credit union yet that
doesn't get that.
So when you hear rumblings abouta membership that is concerned
about it, that's, first of all,the membership deserves a good
explanation.
(31:49):
And that starts with respectingthe question.
But at the end of the day, mostpeople understand and have
intellectualized mergers andacquisitions in all industries
of American commerce.
(32:11):
And when you explain it infact-based attributed discussion
and material, it allows them tomake an informed decision.
And that's what they shouldexpect.
(32:33):
It's what the institutionexpects and it's what the
regulators want.
And I don't think you're goingto see a lot of credit union
mergers get shot down bymembers.
SPEAKER_02 (32:46):
I think it's been a handful in history.
It's not very common at all.
SPEAKER_01 (32:54):
No, there have been a few.
And in some of those cases, theygot outside help, where people
from outside the membership andoutside the credit union came in
to quote-unquote inform.
That thing's going to go by thewayside the more of these kind
of discussions occur because...
(33:16):
The simple truth of the matteris more and more credit unions
understand that in order forthem to satisfy their members,
they need more scale.
And it's not going to be hard toexplain and show how that's
true.
SPEAKER_02 (33:35):
So bottom line is you think that.
the merger topic will remain ashot as it has been, despite the
many uncertainties there are inWashington, D.C., NCUA, tax
exemption, CFPB, the list goeson.
(33:55):
And so you think one way oranother, the merger thing has an
inevitability to it at thispoint.
SPEAKER_01 (34:07):
Absolutely.
What's more, I'll share with youthat I started at a college at
TCU.
I started with Procter& Gambleand rose to district manager at
a pretty young age.
But we talked a lot aboutstrategizing the business and
(34:28):
that kind of thing.
And we kept coming back to salescures all ills.
So for example, you know, theshipment didn't make it to the
warehouse on time, or theweather messed up my flight and
I couldn't get to the customeron time, that kind of thing.
You know, you get obstacles inthe business, but the more you
(34:51):
add customers who end up beinghappy with you, it solves all
the problems.
Well, in this discussion, scalesolves a lot of problems.
And you just listed a number ofthem that scale can deal with
(35:12):
effectively, whether it's theon-again, off-again of
overdrafts.
And I wouldn't be one to betthat it doesn't sustain over
time that that kind of fee isgoing to continue to have
(35:34):
headwinds.
while once you get over 10billion, there's the loss of
interchange.
Well, you look at those twothings, taxation, regulatory
consolidation, all the dramathat's going on in Washington.
If your financial institutionachieves scale and you have net
(35:59):
income after you subtractexpenses from net interest
income, and then you add infees, you're in a position where
you can invest capital to addmore members and fix things that
aren't right for you.
But if you don't have thatincome, you can't.
(36:24):
So it's not about size for sizesake.
It's about being able tocontinue to do what you want to
do for your membership and Andif you're a bank, the customer
base.
SPEAKER_02 (36:37):
Yeah, I think you're right.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
(36:59):
in the financial scene?
Can't all be mega banks, can it?
It's my hope it won't all bemega banks.
It'll always be a place forcredit unions.
That's what we're discussinghere.
So figure out how you can help.
Get in touch with me.
This is rjmcgarvey at gmail.com.
Robert McGarvey again.
That's rjmcgarvey at gmail.com.
(37:21):
Get in touch.
We'll figure out a way that youcan help.
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We thank you for your support.
The CU2.0 Podcast.
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