In Your Best Interest: An ALM First Podcast

Building Stronger Credit Unions Through Strategic Mergers

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This episode delves into the current trends and strategic considerations in the credit union merger landscape, highlighting the importance of preparation and adaptability in navigating the evolving M&A environment. The discussion emphasizes the significance of scale, proactive strategies, and understanding regulatory implications for successful future mergers.

• Exploring the increasing trend of larger credit union mergers
• The importance of geographic diversification in expansions
• Understanding regulatory scrutiny and merger approval processes
• The necessity for proactive preparation for merger discussions
• Examining board dynamics and engagement strategies in mergers
• Future projections for merger activity and market consolidation

Mike Enswiler:

Welcome everyone to, in your Best Interest, an ALM First podcast, a show that will explore common depository challenges, giving you an insider's view of the latest market trends and sharing stories and insights from industry leaders. I'm your host, mike Ensweiler. The mergers and acquisitions landscape continues to evolve rapidly, with credit unions facing both challenges and opportunities. In this dynamic environment, we've witnessed a notable uptick in merger activity throughout 2024, raising important questions about the optimal institution size, regulatory considerations and strategic planning. These trends have prompted many credit unions to reassess their growth strategies and competitive positioning in the market.

Mike Enswiler:

Today, I'm joined by David Ritter and Brandon Pelletier, who both are managing directors in our M&A practice and bring extensive experience in credit union mergers and strategic planning to our discussion. We'll explore the emerging trends of 2024, examine what's driving the recent wave of large-scale transactions and discuss how credit unions can best prepare for potential merger opportunities. We'll also dive into the current regulatory landscape and tackle the perennial question of ideal credit union size in today's market. Brandon and David, it's great to have you here today and welcome to the show. Thanks for having us, mike. Thanks, mike, appreciate it. As you guys are well aware, m&a continues to be a hot topic in the financial services arena, and we'd love to get from you your insights on what you're seeing, what you're hearing, what you're talking to boards and executives about. So let's just dig right in. What new trends did you see in 2024 and what are you expecting to see in?

David Ritter:

2025? You want me to take this one, david, or you want to take it? Sure, please, brandon, go ahead. So you know, one thing I think you're going to continue to see is a trend of larger credit unions merging in 2025. Several CEOs have told me that the digital and first tech transaction announcement was a wake-up call. I believe more and more CEOs are starting to realize and understand that it's really a scale game and if they don't keep up with the rapidly changing financial institution landscape, they're going to eventually become irrelevant. And CEOs have always known it's a scale game, but I think they are taking it more seriously today and truly trying to, you know, put in a strategy in place to where they remain relevant.

David Ritter:

Another thing that I think you're going to see continue into 2025 is bank-to-credit union transactions. So in 2024, there were 23 bank-to-credit union transactions announced. I believe the number could increase to over 30 in 2025. One of the things that's interesting in 2024, there was a shift in the size of banks acquired by credit unions. The average assets of banks acquired by credit unions between 2019 and 2023 was about $265 million versus $515 million in 2024. So I think this trend will continue and the average size of banks acquired by a credit union will increase in 2025. I think the average size is going to increase because there are proven statistics that indicate that these transactions are accretive and larger credit unions. They have the financial ability and risk tolerance to acquire a bank, and so I don't see that trend changing anytime soon.

Brandon Pelletier:

Yeah, and to add on to this and I don't want to repeat what Brandon said, so I'll just I'll try to incrementally add is we are seeing larger mergers, not just a struggling credit union with another well-to-do credit union. We're seeing two well-run organizations just thinking one plus one equals 12. And it's not the old hey, a CEO is going to retire and let's do a merger. We're seeing more where two younger CEOs come together and post-COVID, we're seeing geographic diversification, so we have a bigger back office that can help our organization. But we know our areas that we do business, so across state lines or multi-states, we have a regional president, maybe one overarching CEO, but we're seeing a lot more of those things.

Brandon Pelletier:

Low income designation is a big thing too as well. Yeah, for all the right reasons for low income designation, but also in terms of commercial lending, that's some of the only areas we get net interest margin right now is commercial lending. If you're hitting up to that 12.5% cap, low income designation helps out a lot. We saw a credit union merger announcement last year where there was going to be a co-CEO. That's unique and new. So we're seeing more situations where folks are thinking outside of the box because credit union, credit union mergers.

Brandon Pelletier:

As Brandon says, the return is huge because there's no cash being extracted here, but it's emotional. And so there's more unique ways that people are structuring these transactions to come together, whether it's board seats, whether, like I said, that co-CEO or regional president or chief advocacy officer or something of that nature. And then I do have to repeat one thing scale, it's a scale game. And then, last but not least, it's retaining relevance and eliminating a competitor from coming into the market space. So we're seeing a lot more of those type of strategic considerations seen a lot more of those type of strategic considerations.

Mike Enswiler:

Are you seeing, as you see these transactions, whether it's acquiring a bank, which I'd like to unpack that a little bit because Brandon mentioned they're getting larger, so I'm curious as to why that is. But are you seeing more going across state lines or into new geographic areas as well?

David Ritter:

Yeah, I would say the large number of transactions in terms of size, the largest transactions that were announced and completed in 2024, there was some distance between the headquarters. Who formed a strategic partnership with member one? Virginia Credit Union was in Richmond and member one was headquartered in Roanoke. There was about two and a half three hours between the two headquarters. You've got Premier Members and Mary Trust, where Premier Members is in Colorado and Mary Trust is in Kansas. You've got Twin Star and Northwest Community. There was some distance between the headquarters, between those two institutions.

David Ritter:

And we can't forget, you know, covid kind of changed the game a little bit to where people are more open to having maybe an admin east or an admin west or headquarters east and west. We proved during COVID that you can work remotely and be successful, be successful, and so I think institutions are becoming more open to the idea of, you know, crossing state lines or looking at institutions that have some distance between their headquarters or each institution's headquarters, and so I don't see that trend changing in the near future. I expect that to continue. Also, a lot of institutions they're doing well financially. However, you know they've kind of tapped out that field of membership and they're looking to expand into other geographic areas, to where they can de-risk their member concentration, and so I just don't see that trend changing in the future, mike, you know, david.

Mike Enswiler:

Thank you, brandon. David, you mentioned there's a lot more large, well-run transactions taking place or being announced. What do you see? You know, I know part of it is the scale. Is there anything else besides the scale that you're seeing that's driving that?

Brandon Pelletier:

else besides the scale that you're seeing that's driving that. Well, we've been doing a lot of research and Brandon had some great analysis on you know what is that ideal size? And the joke is you know 9 billion and nothing larger. And if you go past 10, you need to be 17 or whatever that number is. But there's sort of a sweet spot at that $3 billion to $5 billion mark and it's really just start to build that scale where really it's the tipping point when up X to average assets, it seems to just continue to drop as you get larger.

Brandon Pelletier:

You're spreading your expenses over a larger asset base and really at a certain threshold I'll call it the $3 billion you really start your expenses over a larger asset base and really at a certain threshold I'll call it the $3 billion you really start to see that accelerate, meaning your efficiency is a lot better and you're able to get back to your membership in terms of better rates on both the deposit and the asset side of things. So the rates, fees, incomes drops substantially and this is even before we get over $10 billion. And the retention I always call it retaining and obtaining talent is compensation grows tremendously for our employees and it's because we need the right talent in the right locations, maybe more focused, specialized, and they're making more money.

Brandon Pelletier:

So we're just seeing more of that. It's just the talent aspect. Out there, there's not as much talent as there used to be and we always joke because there's no CEO that says I have way too much talent. We're always looking for more talent. And those are some of the key areas why we're seeing two well-run organizations saying, hey, let's partner as opposed to compete, especially for let's not compete for the same talent constantly.

Mike Enswiler:

You know, I know you've heard or I've heard from you guys in the past that you know one of the big challenges in consummating these deals is the boards of directors and some of the number of seats and some of those kinds of things you know. So I guess with that size are there more proactive organizations or are they more receptive to because I can't believe two. You know, 10-person boards are going to become 20-person boards, right? So there's got to be give and take for the betterment of the institution. What are you seeing on that front as it relates to, you know, those conversations with boards? Yeah, go ahead.

Brandon Pelletier:

David.

David Ritter:

You can take this one.

Brandon Pelletier:

Yeah, that is. We always start our discussions when we do presentations or we're meeting with a potential client or just a prospect. The hardest part about a credit union to credit union merger is the board of directors and it's hey, it's for all the right reasons. A board has many times a board member has been on the board for a long time. It's their baby, the credit union. They're not just going to roll over's their baby, the credit union. They're not just going to roll over and say, take my credit union. However, we're always talking about, okay, the fiduciary responsibility of the board member is about the membership, but it's also the grander of the stakeholders membership, your employees, your communities, your credit union in general. And so trying to get that thought process of who's the surviving credit union Legally it's the charter, but it's the perception of all the other areas. Okay, how do we make this come together and how are we doing this right for all the stakeholders and gaining that mindset with the board that, okay, I really need to put the fiduciary responsibility of my credit union, my members, in front of all my own self-interest. So not getting a bloated board. Most CEOs would shoot me for even thinking that as a joke. But hey, where is there an avenue for me to continue to serve, to volunteer for the credit union?

Brandon Pelletier:

Well, we're seeing emeritus, we're seeing foundations.

Brandon Pelletier:

We're seeing emeritus, we're seeing foundations, we're seeing advisory boards, maybe an association to take a step down and be part of that pool for as the future credit unions, as we go forward, and it's truly a collaborative methodology. So, you know, maybe they come in at a six and seven six board members from one organization, seven from another, and they all both had nine together or each. Those other folks take a step down for a period of time and still volunteer in different ways. A key, key element and I have to commend Brandon for this, because he talks about this is, you know what? What about community involvement? As an advisory group, we're to do put more money into the community, because together that's the right thing to do this, and our advisory group is going to help figure out those areas. What is going to benefit our members, benefit our credit union the most, so they can still be very involved and have a really big impact financially. And so that's, that's one, one of the many ways that we're seeing unique strategies for not bloating the board at a combined transaction.

David Ritter:

I also want to add, I think you know, because we get the question all the time from different institutions how can we actively prepare for, you know, a merger discussion? And I think you know, with all of the announcements that have occurred over the last 24 months, I think people are just becoming more educated on the topic of mergers in the credit union space. They're becoming more proactive because it's no longer a matter of if, but it's when another credit union is going to approach you, and you know several of our clients that we've worked with, it's not necessarily they're focused on a merger or even have, you know, a merger as part of their strategy. But you know they understand, with the changing landscape, you know that they must actively prepare for this conversation. You know that they must actively prepare for this conversation and so board and executive teams are putting in the work up front before there's ever a discussion at hand to.

David Ritter:

You know, establish what their negotiables are and their non-negotiables, in a non-emotional setting. Because, as David said, when you you know when you put pen to paper and you're in an active deal, you know when you put pen to paper and you're in an active deal, it's human nature for a person's decisions to be driven by their emotions. And if you've done the work up front and established your you know negotiables and non-negotiables, you can revert to those you know negotiables and non-negotiables that you've mutually agreed upon and say well, why has your stance changed? And so also establishing your list of negotiables. It better prepares your CEO for when the conversation occurs. Institutions that don't do this prep work you put your CEO in a very difficult position when they're talking to another CEO about a merger if they don't do this prep work. You put your CEO in a very difficult position when they're talking to another CEO about a merger if they don't know what the board's expectations and wants and needs are yeah, and that's a great point.

Mike Enswiler:

I know. You know, david, you've mentioned it to be part of the strategic planning process, and so I'm assuming that you're seeing more and more organizations, even if we don't have any plans on doing that, that we've at least had the discussion, so when we're approached or if we want to proactively target a new market, we know what the marching orders are. That's great and thanks for bringing that up.

Brandon Pelletier:

And for all the listeners CEOs, be prepared. I don't care what size you are, you will get a call from another CEO. So being prepared on how to react, and what I would say is take the call, listen, it doesn't hurt to listen. You might find your best friend, and if you don't do anything, you do. Participation loans together.

Brandon Pelletier:

But at least having that ability to listen, understand what someone's telling you and having some background that your board has told you these type of things it's not that you're going to negotiate right away, but listen, take those calls. The biggest concern, though, is those calls that are just folks trolling. If someone is talking to you, throw out the question hey, I would love to sit down with you, show me what you've put together. Why us? Because, really, at the end of the day, what's going to happen is, if you go back to your board, there's three questions going to be brought up why, why us? What about the employees? So you know, just listen to what they have to say, and if the other side has to do some homework, don't just let them try to trawl. We do see some of those kind of credit unions out there.

Mike Enswiler:

One thing I just want to touch on real quick, and then I want to pivot, is you know, brandon, you mentioned that the size of the bank deals has basically doubled, you know, over the last several years. Why is that?

David Ritter:

I believe it's due to a couple of factors. So there is what we kind of call no man's land in the community banking space and you're starting to see a similar trend occur in the credit union space, where the largest institutions are growing at a faster pace than the smaller institutions. So they're creating this significant spread between the smallest and largest institutions. And I think we're getting to a point in the community banking space where the largest institutions have grown so much larger than the smaller institutions where they don't see the benefit of merging in a billion and a half or $2 billion community bank. It's not worth their time and headaches and resources internally to integrate that bank into their institution. And so what that's doing is there's not a lot of buyers in the community banking space for these sorts of institutions.

David Ritter:

You know let's just call it between 500 million and 2 billion, a lot of these institutions. They are experiencing the same issues that credit unions are. It's a scale kind of game and they look at it as if we're a billion and a half. Well, if we merge with somebody similar size, we're only three billion. We're still kind of behind the eight ball. And so what it's doing is it's creating opportunities for credit unions to move into this space and you know credit unions are looking at it from a perspective of.

David Ritter:

You know, a lot of the bank transactions between banks and credit unions in 2024 were driven by the fact of you're getting a land grab, you're acquiring, you know six plus branches, you're moving into new areas where maybe you didn't have a membership presence and you're able to convert those members or those customers into members. And I think with the larger institutions they just have the financial ability and risk tolerance to take a chance on acquiring a bank just because they've become so large. They've got that net worth to take the risk of saying it might work out. It might not work out but more often than not, the serial acquirers in the credit union space, they've got a system in place in terms of how do we integrate these institutions into our institution and they've been successful with it and they've got a proven track record.

Mike Enswiler:

So you know, I've got some credit union CEO friends who are either going through or having their merger discussions, as well as one that's, you know, in the process of buying a bank. Talk to us a little bit. We've had a recent administration change. Talk to us a little bit about the regulatory environment for M&A transactions these days these days.

David Ritter:

Well, I mean, I don't think that, even with the new administration coming in, I still think that the regulatory approval process is not going to change.

David Ritter:

It's not necessarily that the regulators are not approving deals to move forward.

David Ritter:

It's more so that they've kind of sharpened their pencils and they're taking a much deeper dive into reviewing the regulatory merger applications.

David Ritter:

And so, you know, over the last 12 to 24 months we've seen a significant change in the time it takes to get a deal approved.

David Ritter:

You know, 12 to 24 months ago you could almost guarantee that you were going to get approval within 45 to 60 days. Over the last year we've seen that rise to 90 to 120 days and I don't expect that timeline to get shorter. If anything, we're going to probably see that timeline extend to closer to 150 to 180 days, and that's more driven just because there's more and more mergers of size that are being announced and there's the same amount of resources available at the regulatory bodies to approve these mergers. And one of the things that we've noticed that the regulators are really focusing in on is what is your plan from an IT integration side of things? You know, how do we limit or, you know, not allow for there to be member disruption in a transaction, and that's something that the regulators are asking more and more questions about, and so institutions that you know are pursuing a merger or going through the regulatory approval process they're familiar, I would imagine, with getting those sorts of questions from the regulators.

Brandon Pelletier:

Yeah, and to add on to that, if you look at the NCA website and that's usually the first place people look for, the application process there's about 30, 32 line items with the regulators, the standard application process.

Brandon Pelletier:

However, we've seen that actually balloon to a lot more questions. As Brandon said, an integration plan which is not actually on the website, at least as far as I know of late, but there's a lot more questions, so be prepared. I know of late, but there's a lot more questions, so be prepared. You're more likely to have to put together a combined ALM, the integration packet, et cetera. There's still the merger-related financial arrangements, which means merger-related compensation, and the regulators are going to look at that. It doesn't mean it's going to be canceled if someone you know, their retention bonuses, a change in control, I mean those are all natural things to do, but they just want pure transparency. And then also to the membership. So just please, everyone understand that the process takes longer and there's more paperwork to put together. So having the right advisor whether it's advisor, legal et cetera to help you along with that process makes it a lot more efficient.

Mike Enswiler:

Well, time always flies when you're having fun and we're butting up against the clock here, gentlemen, so maybe from each of you can I get some closing thoughts. What should the audience know that maybe we haven't touched on?

Brandon Pelletier:

you know the audience know that maybe we haven't touched on. I'd say, just prepare, as Brandon mentioned. You know, just have some dialogue on your annual strategic planning meetings. You know, think, put M&A as maybe 10% of your strategy. If you want to open a new branch, maybe there's a credit union that has a branch in the area that you're looking to go into, as opposed to doing something from scratch, it could be a lot less expensive. Talk to advisors, have them keep their ears open for you, whether it's another credit union, whether it's a bank or a branch those kind of opportunities. So just have those dialogues with your board and just be prepared. I know Brandon has something probably.

David Ritter:

You know the numbers aren't in for 2024 because the NCUA hasn't published their Q4 report on mergers, but, you know, through Q3 of 2024, there were about 121 credit union to credit union mergers versus 121 credit union to credit union mergers versus, you know, 108. Through q3 of 2023, I expect there to be about 155 to 165 mergers in 2024. I think this number could increase closer to 200 in 2025 and I think you're going to continue to see an uptick in merger activity over the next, you know, five to seven years and we're forecasting, by the end of 2030, that there's going to be less than 3,000 credit unions, and so in order for us to, you know, hit that estimate, you're going to have to average 225 to 250 mergers annually, and I suspect and believe that that's going to be the case over the next five to seven years.

Mike Enswiler:

Well as always. I appreciate your guys' time. Thank you, david and Brandon, for joining us today and sharing your insights on the M&A landscape. Thank you, mike. Thanks.

Mike Enswiler:

Mike sharing your insights on the M&A landscape. Thank you, mike. Thanks, mike. Thank you for joining us for this insightful discussion about credit union mergers and strategic growth. The two key takeaways I had from today's conversation with David and Brandon are that A proactive preparation is crucial for successful merger discussions. Being sure you understand your non-negotiables ahead of time will save you a lot of time and consternation in the future. And that B there's no one-size-fits-all approach to determining optimal credit union size. It's really about finding the right strategic fit for your institution and its members.

Mike Enswiler:

As always, thank you for tuning in At the end of each episode. I'd like to take a moment and let you know more about the resources we have available. We have a robust workshop, conference and webinar schedule, so be sure to visit our website for more details on these, as well as our Education Hub and Resource Center for recorded webinars, articles and more. As always, stay safe, stay healthy, and thank you for listening to, in your Best Interest, an alum-first podcast or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all investment decisions.

Disclaimer:

Current and future holdings are subject to risk, and past performance is no guarantee of future results. Podcasts should not be copied, distributed, published or reproduced in a whole or in part. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed, and ALM First Financial Advisors disclaims any responsibility to update such views. These views should not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any ALM First Financial Advisors product. Neither ALM First Financial Advisors nor the speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Ailm First Financial Advisors is an SEC-registered investment advisor with a fiduciary duty that requires it to act in the best interest of clients and to place the interest of clients before its own. However, registration as an investment advisor does not imply any level of skill or training.

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