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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU 2.0 Podcast Peter Duffy on Mergers in 2025, Buckle Up
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).
Listen up.
Listen up.
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SPEAKER_00:Hi, and welcome to the CU2.0 podcast with big new ideas about credit unions and conversations about innovative technology with credit union and fintech leaders. This podcast is brought to you by Quillo, the real-time loan syndication network for credit unions, and by your host, longtime credit union and financial technology journalist, Robert McGarvey. And now... The CU 2.0 Podcast with Robert McGarvey.
SPEAKER_02:Peter Duffy's message is plain. The pace of mergers will get faster. 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's Enten Wings and the pace will keep up, says Duffy, who now has joined SRM. Will the chaos and uncertainty in 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 financial institutions. Bigger is a competitive advantage, he insists. He gives the details in the show. He does make one surprise prediction. He believes the number of credit union deals with banks will decrease. Listen to hear why. And incidentally, it doesn't have much to do with ICBA's caterwauling. Listen up. Mergers, mergers, mergers. You know, originally I thought 2025 and credit union land would be consumed by discussions about AI. AI got pushed to the side by mergers. Mergers have been pushed to the side by what the hell is happening with NCUA, tax exemption, a whole list of rather existential questions floating around Washington, D.C. Nonetheless, mergers aren't going away. So what do you see the lay of the land? Can you even get a merger through NCUA at this point?
SPEAKER_01:You know, the agency... is um it takes a lot of hits and i i've thought all along a lot of them unnecessary and i think you'll see the agency do what they need to do to get done what's right for for them the membership up through the institution and back to the regulator and the system and You know, that's not a political answer. It's actually what I've observed to be true. And at the same time, I think what you'll see is a tenacious desire amongst institutions to either retain or achieve economy of scale because of how obvious it's become amongst the depository base in the last few years. I've been talking about it and doing board meetings and speaking at conferences and speaking to you about the growing issues that are restraining an institution's ability to not only satisfy member demands, but also do it in a way where there's some income left over to reinvest in member demands. So I'll stop with this point. The baker's dozen of the drivers of consolidation that I've been speaking to for the better part of eight or nine years now are still there. and all of them are accelerating. And that's why you're seeing some of the announcements coming through.
SPEAKER_02:I get the economy of scale argument. I agree with it. Where I have a hesitation is if Navy Federal were to wave a wand and the choir tonight Pentagon Federal, Randolph Brooks, et cetera, et cetera, every single military-related credit union. It still would not have anything like the economy of scale of J.P. Morgan Chase. Jamie Dimon would still not really know they exist. Am I wrong?
SPEAKER_01:Yeah, I think you are on that, starting with that Navy is an organic growth juggernaut. Oh, Navy
SPEAKER_02:doesn't do mergers. That's the irony
SPEAKER_01:here. Yeah, may never care about inorganic growth. That being said, I'll give you some 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 me that I use. We started the century, credit unions with assets less than 1 billion had enough net interest income to pay for their non-interest expense. So as you know, a balance sheet is made up of income from loans and investments minus cost of funds, and that gives you net interest income. And when you subtract non-interest expense, which is branches, people, medical coverage, electricity, travel, conferences, all that stuff, then you have a plus or minus to which you add non-interest income, which includes fees, and then you take out the provision and that gives you your ROA. So going back to the opening comment, in the start of this century, credit unions with assets below a billion covered their non-interest expense with their 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 that was talking about the trend that eventually would lead to where we are today, where income from loan and investments minus cost of funds does not cover expenses. And in fact, at the end of last year, a few months ago, the net interest income, when you subtract non-interest expense, the entire industry of credit unions, in aggregate, less than$10 billion, loses money before you add in non-interest income. And before you lift your jaw up off the table, at the end of 24, the bank industry below 10 billion had some income after non-interest expense, but not much. And so to tie that up for a second, let's look at it this way. The banks with assets greater than 10 billion, let's say the banks, let's say it this way, the banks with assets greater than a billion are 25% of the bank industry. They're 96% of the assets and they're 96% of the net income of the industry. The credit unions with assets greater than a billion are 10% of the credit unions. They are 78% of the assets and they're 79% of the net income. What I just described to you is scale seems to look like it's above 10 billion. I don't know any credit union at 5 billion and above that thinks that 10 billion is economy of scale. And I believe that what's driving the the discussions to an accelerated pace. And I think you'll see the large credit unions continue to get together. And I think you'll see the smaller ones come together and they'll start to pick up the pace, not because they're looking to be on a par with JPMorgan Chase, but because they feel like with scale, they have a fighting chance to compete and do what they want to do and what they've always wanted to do for their membership and for their community.
SPEAKER_02:Now, when I first started to write about credit union mergers some years ago, 15 years ago, let's say, almost all of them were arranged marriages, shotgun weddings arranged by NCUA. where a bigger credit union was taking over a deathly sick smaller credit union before said smaller credit union was conserved. So no shame, no loss. And the big credit unions did it because they were accruing favor points from NCUA. And as one CEO said to me when I was asking him about his acquisition of a small credit union, Even if it all blows up, it's not even a blip on my balance sheet. Don't even think about it. And I thought about it and he was right. It wouldn't have made any difference at all. Today, that kind of merger is just a tiny piece of the merger picture. We see much more strategic mergers happening now. And That's what's kind of made this into a business for someone like yourself. And it's also created some excitement because you get these unlikely pairings like First Tech and DCU. So your prediction is we're going to see more of these big Goliaths coming together.
SPEAKER_01:Well, in the grand scheme of things, there's a few... Goliath in the credit union space, you know, when you look at the universe of banks and credit 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 the scene in 2005 to start making loans. You saw a rocket mortgage commercial on that during the Superbowl and everybody was like, who's rocket mortgage. Well, today, uh, fintechs and neobanks do more mortgage lending than the banks and credit unions combined
SPEAKER_02:that is the most horrifying statistic i've written that time and time again i'm old enough a year old enough to remember when snls own the mortgage market period snls go out of business credit unions take over a big chunk of that and banks take over the rest of it so a fairly seamless transition and somehow in this century Banks and credit unions have conspired to find ways to lose almost all of the mortgage market. It's just stunning.
SPEAKER_01:Yeah, and it's not all their fault. In fact, I would say most of it isn't. I think that the credit unions and the banks, I've said for a long time, are really in the same stadium fighting the same enemy. And they think it's each other, and it's actually... fintech, neobanks, and frankly, in some degree, our friendly U.S. Congress, who has not given banks and credit unions much regulatory relief over the years, but waved in Walmart, Goldman Sachs, Apple, Amazon, SoFi into the purview of banks and credit unions. And in the beginning, with nowhere near the regulatory oversight, And the credit unions and 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 acquisitions anymore. But the minute there's a bad economy, they go and knock on JPMorgan Chase or B of A's door and have them absorb the wounded bank. And that's how, by the way, JPMorgan Chase got the entire West Coast when they countrywide. Yeah. Well, in the Great Recession, they got the West Coast. No, no. B of
SPEAKER_02:A got countrywide.
SPEAKER_01:B of A got countrywide. You're right. JPMorgan Chase got WAMU. Right. And that's why there's a blue Chase sign from Seattle down to San Diego. So the banks and credit unions were left to to kind of fend for themselves. And getting back to your question, which I take it as, you know, you've got these strategic mergers going, well, yeah, of course you do, because people running credit unions these days have been brought up to understand what this business is about, and they've gotten some pretty good feedback inside the industry or outside the industry experience. And they've been focused on satisfying member needs and trying to have some money left over to solve problems for members and their staff, et cetera. And people that are focused like that are going to look for ways to improve their overall operation. And you look at a cross-border combination. And I'm not going to name names. We at Strategic Resource Management, at this moment, have 12 discussions going of some type. And those that are past, hello, how are you, are not just a couple, and they're all fairly large. And the reason that these things are being discussed and will continue to be discussed and occur is because the people running them and their boards see the benefit of a combination where you get, you know, there's a lot of hand-wringing in the credit union space, although the hand-wringing has gone down as these large deals have picked up. And I think you're going to continue to see the large deals pick up and medium and small deals pick up, and it'll be interesting to see where the hand-wringing goes. But here's the deal, and there's no getting around it. When you've got two credit unions at the table talking, as I do and we do at SRM, we're talking about stuff that doesn't come up in any of these articles, stuff like, You get a diversity of member. You get a diversity of geography. You get a diversity of the balance sheet. You know what those three things do alone? They give you the ability to manage economic risk where one state has a tough time in a recession while the other one is doing well. A diversity of membership gives you a chance to go from an average age of a member of 48 to 50 down to 40, which brings in more borrowers to complement your savers. And a diversity of balance sheet gives you a chance with diverse cash flows to manage interest rate risk and earnings better. You know, what you hear from the hand-wringing is, well, you know, big for big's sake. It's not big for big sake. It's actually big because big is table stakes. Without it, you lose money without fees. What is it that people want? It's okay to be not for profit, but you need profit to turn around and invest in the technology and digital delivery and brick and mortar of technology. that the membership's looking for and the marketing to be able to communicate that you can give them that. That stuff all costs money. What you see in the numbers of the industry, and it's not a 24-month trend, it's over a 25-year trend that the loan and deposit product of American banking's been commoditized. Nobody's got an advantage on product type, yield, coupon rate, distribution system, it's all commoditized. And that requires that you have scale so that then the other aspects of your business being managers who are shrewd, thoughtful, and deliberative about their strategy, but then once they're comfortable with it, they know how to pin their ears back and execute. Those kind of managers cost money. But once you have scale, it puts you in a position to then out-think, out-market, maybe be more nimble in the way you get and retain members.
SPEAKER_02:Is there still an interest on the part of bigger credit unions? merging with smaller credit unions? I'm talking about significant divergence in size, a$3 billion credit union and a$250 million credit union.
SPEAKER_01:It's a very good question. And the answer varies depending on who I'm in front of. And I have to tell you, since March 1st, when I began my journey with SRM, I've literally been nonstop at the request of credit unions. You know, I might reach out and say, how's it going? I might be in the Pacific Northwest. Would you like to get together? And that one meeting becomes five.
SPEAKER_02:Well, every$250 million credit union, there might be an odd exception, but I'm going to say every is interested in merger. It's... Is that the case for every$10 billion credit union? Not necessarily, but the$250 million, they're all hoping the phone rings.
SPEAKER_01:Yeah, I would tell you that still right now, Robert, it's this quote that I was given by a CEO a couple of years ago. Pete, I have a list I would like to merge. and I'm on other people's list. The answer to your question is, you can see a three, I have three, four,$5 billion asset credit unions that want to get to be productive at inorganic growth. And they'll consider below 500 million if it fits the characteristics of their ideal partner. The characteristics of the ideal partner is part of the process that I've developed that enables a C-suite and a board to determine what's the right way forward here, where we're good industry players and we're doing the right thing and we're gentlemanly and professional, but we know what we need and we need to go find it. And one of those characteristics is what's the asset range that's acceptable against what's the geographic preferences and the culture and the attitude towards solving member problems and meeting member needs, among other things. And we actually go through and socialize all that, and then we run it up against the typical credit union merger deal terms to determine Well, who would be then our ideal group of potential partners? And credit unions with some real size will consider credit unions that are small if, although they're on the smaller end of the range, that smaller potential partner has a real desire, all of them, to keep working and doing a good job for the membership. Because credit unions... They don't go in and lay people off. They want to combine and do the right thing by people. And that's something that I think is lost on a lot of credit unions and those that would advise to them and provide counsel. But here's the deal. Credit unions with size will look at and merge with a smaller shop. If the smaller shop displays a real positive attitude toward continuing to work and take care of the members and is in a geography that the larger one really cares about but isn't in yet, well, that's a win-win for both institutions and their members.
SPEAKER_02:Yeah, I understand that. I think a version of that is what happened when Hanscom Federal Credit Union acquired People's Bank in Maryland, is that the geography of People's Bank appealed to Hanscom.
SPEAKER_01:Right.
SPEAKER_02:Which already had a big presence in Northern Virginia, for instance, but it didn't have much happening in Maryland.
SPEAKER_01:Right.
SPEAKER_02:Yeah.
SPEAKER_01:Yeah. I'm in some discussions with large credit unions that say, all right, well, so we're here in pick a state, and we think we would benefit from geographic diversity. So how do you feel about a target list that includes a bunch of states, and some of them aren't contiguous to us? And my answer is, it depends on how you do it. If you're going to go in and by the way you implement the integration, you don't consider the needs of the local market, which would include keeping all the people at the credit union in the other state. And why not? Because they know the member and the member knows them. Well, then don't bother leaving your state because first of all, you're not going to get that deal. 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 going to go out of state or in-state, they want to keep people because, frankly, one of the benefits of a merger is you get to deepen your bench. I'm going to give you the number one driver of consolidation, Robert. It's one of the banker's dozen, and here's what it is. Credit unions... tell me that they have 15 mission 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 means they're not going to get to a dozen of them in the next year. And it'll be a few years before they get to all of them. And in the meantime, other mission critical things will come in. Well, one of the biggest, that's a driver of consolidation. And a way to solve for that is to combine with another credit union that brings in talent that you can put against some of those mission critical tasks while also bringing in capital. Because what those credit unions will tell you is, We have the time, people, and capital to do three a year. And the people that are on those missions are on all three of the missions. And then they have their day job.
SPEAKER_02:Peter, I wrote a story like 25 years ago about Cisco Systems, which was a high-flying tech company at that point. Cisco was acquiring a small tech company once a month, literally one deal a month.
SPEAKER_01:Yeah.
SPEAKER_02:And I asked the guy who was running that for Cisco, you do realize, don't you, that most of these companies are never going to have a marketable product? And he said, of course. We're hiring talent, man. Talent.
SPEAKER_00:Right.
SPEAKER_02:100%. The check does not get signed by us until I have employment agreements from the people we've identified, which weren't necessarily everybody. I'm not saying they weren't willing to take everybody, but there was some they had to have. And if they had consigned employment agreements, it was a done deal. Here's your money. And I thought this was exquisite. They were just going out shopping for brains.
SPEAKER_01:Exactly. Well, it doesn't have to be in actuality. It is not with a lot of the bank-to-bank and credit union-to-credit union deals. And in the case of credit unions acquiring banks... in many cases it's it's a different geography which again can be very beneficial um as well as you're picking up commercial loan talent and commercial deposits and and that sort of thing so again one of the baker's dozen of the drivers of consolidation and it's a it's a doozy and and a good combination can help solve for that
SPEAKER_02:now When you talk with credit unions and the discussion, the merger issue is getting more intense. Do you ever raise the question or do they ever raise the question, do you think the memberships of both credit unions will approve this? And I'm hearing more rumblings that there are doubts, particularly when a big credit union is acquiring a little credit union and the little credit union members say, geez, we're going to be just a blip on the screen. And strangely enough, there's an argument that acquiring a community bank is simpler because all you got to do is satisfy a handful of shareholders. No membership vote, no nothing on their side. You wouldn't have a serious discussion if you weren't satisfying the few shareholders of the institution. So does this worry come up?
SPEAKER_01:Oh, on every discussion. And it's not so much, it's by no means phrased as a worry. The credit union acquisition of a bank, you're right, it tends to not see obstacles related to the customer base of the bank, although there has been a few of those. Credit union to credit union, I bring it up if it's not brought up. And again, for the hand wringers, if it's not the top, it's one of the top two to three things that both credit unions and their boards think about is, is this right for the membership? And can we communicate it to them? And when? What's the right time to do it? How do we get the message to them? You know, like with anything else, when you compare one thing to another, one of the pros of a credit union acquisition of a bank is it's much less of a concern. But I got to tell you, If I was a betting man, I would bet on as credit union to credit union combinations continue to accelerate, the desire to acquire a bank by a credit union will decelerate. And there are a lot of reasons for that. And we like the credit union acquisition of a bank idea and have done them. But that said... there's a lot more to like about credit union to credit union. And to your point, the North Star is the membership, staff, and community. And honestly, I haven't spoken to a credit union yet that doesn't get that. So when you hear rumblings about a membership that is concerned about it, that's, first of all, the membership deserves a good explanation. And that starts with respecting the question. But at the end of the day, most people understand and have intellectualized mergers and acquisitions in all industries of American commerce. And when you explain it in fact-based attributed discussion and material, it allows them to make an informed decision. And that's what they should expect. It's what the institution expects and it's what the regulators want. And I don't think you're going to see a lot of credit union mergers get shot down by members.
SPEAKER_02:I think it's been a handful in history. It's not very common at all.
SPEAKER_01:No, there have been a few. And in some of those cases, they got outside help, where people from outside the membership and outside the credit union came in to quote-unquote inform. That thing's going to go by the wayside the more of these kind of discussions occur because... The simple truth of the matter is more and more credit unions understand that in order for them to satisfy their members, they need more scale. And it's not going to be hard to explain and show how that's true.
SPEAKER_02:So bottom line is you think that. the merger topic will remain as hot as it has been, despite the many uncertainties there are in Washington, D.C., NCUA, tax exemption, CFPB, the list goes on. And so you think one way or another, the merger thing has an inevitability to it at this point.
SPEAKER_01:Absolutely. What's more, I'll share with you that I started at a college at TCU. I started with Procter& Gamble and rose to district manager at a pretty young age. But we talked a lot about strategizing the business and that kind of thing. And we kept coming back to sales cures all ills. So for example, you know, the shipment didn't make it to the warehouse on time, or the weather messed up my flight and I couldn't get to the customer on time, that kind of thing. You know, you get obstacles in the business, but the more you add customers who end up being happy with you, it solves all the problems. Well, in this discussion, scale solves a lot of problems. And you just listed a number of them that scale can deal with effectively, whether it's the on-again, off-again of overdrafts. And I wouldn't be one to bet that it doesn't sustain over time that that kind of fee is going to continue to have headwinds. while once you get over 10 billion, there's the loss of interchange. Well, you look at those two things, taxation, regulatory consolidation, all the drama that's going on in Washington. If your financial institution achieves scale and you have net income after you subtract expenses from net interest income, and then you add in fees, you're in a position where you can invest capital to add more members and fix things that aren't right for you. But if you don't have that income, you can't. So it's not about size for size sake. It's about being able to continue to do what you want to do for your membership and And if you're a bank, the customer base.
SPEAKER_02:Yeah, I think you're right. Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial scene? Can't all be mega banks, can it? It's my hope it won't all be mega banks. It'll always be a place for credit unions. That's what we're discussing here. 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. Get in touch. We'll figure out a way that you can help. We need your support. We want your support. We thank you for your support. The CU2.0 Podcast.