What Credit Union Executives Should Consider Before Pursuing a Merger & Acquisition
You face many pressures as a credit union executive. You work to maintain steady membership growth and adapt to new technology and emerging trends. However, in some cases, there may come a time that a merger and acquisition (M&A) presents itself as an opportunity. Perhaps you’re trying to grow your membership more rapidly or generate more income. Partnering with another credit union through an M&A may provide additional options to help you achieve your goal.
Doug discussed some of these examples with recent C.U. on the Show guest, Harry Gunsallus. Harry has been on a self-proclaimed “twisted” path through the bank and credit union space, facilitating numerous M&As during his more than 20-year career. He is a strong advocate for intra-community M&As that maintain a close connection to the merging partner’s community, employees, and culture. “I’m a big fan of mergers and acquisitions done the right way,” says Harry.
In the first episode of this two-part interview, Harry shares the factors you should consider before pursuing an M&A.
- Define why you’re considering an M&A. The various reasons you may be thinking about an M&A will have different implications and play a part in the credit union you target. For example, due to the uncertainty the pandemic presented, tens of thousands of Americans tightened their spending, saved more, and received economic impact payments—which they deposited at their local credit union. A rapid influx of assets can throw a credit union’s net worth ratio (capital compared to assets) upside down. If this is something you’re experiencing, for example, you may seek an M&A with a credit union that holds lower assets and more capital to regain balance.
- Run financial scenarios. Financial data for credit unions you may be targeting is readily available through resources such as Callahan and Associates. With this information, you can also produce hypothetical models of what a post-merger balance sheet or income statement might look like-—before even having a conversation with a potential partner. The financials are a good indication if a merger with a particular credit union is viable or not.
Listen to the full interview to hear more details about Harry’s financial services experience and his thoughts on what makes an M&A successful.
Audio Transcription (pulled from the podcast)
Speaker 1: (00:02)
Hello credit union executives. Welcome to C.U. on the Show, where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness. Hosted by me, Doug English, a CERTIFIED FINANCIAL PLANNER™ and former credit union insider with Act Advisors.
Speaker 1: (00:12)
Joining us today is Harry Gunsallus. Harry has over 20 plus years experience working in the credit union and banking space and has acquired a tremendous amount of skill with mergers and acquisitions. In this episode, we’ll talk about Harry’s journey, what you should consider when you’re thinking about M&As. All right, Harry. So tell me a bit, how did you get into credit unions?
Speaker 2: (00:25)
Doug, I gotta tell you, it’s a twisted road for sure. I was born and raised in Pennsylvania on a farm, joined the army, went to college, met a girl. Most of our stories somehow involve met a girl, and I moved to LA. So when I got to Los Angeles fresh off the country, fresh off the farm, I didn’t have a job. Didn’t know what I was going to do. I got the very first job I could ever find, which was a pay and file clerk at Bank of America. What that job was, you literally took, if you can remember this, a signature card, and compared it to the payroll checks of Nissan Motor Corporation. That was my entire job—to make sure that the payroll checks from Nissan were not forged. Turns out not many were.
Speaker 2: (01:19)
Somehow they thought that because I was really efficient at that, I should get promoted. Over the next 14 years, working at Bank of America, I lived in six states and 14 cities, doing everything that there was to do. At one point I had traders on the Chicago Mercantile floor reporting to me, this former farm guy. Right? So you can fool some of the people some of the time, Doug. In 1999, I found myself working in and living in San Francisco, when this guy came to town named Hugh McColl, who owned this little bank in Charlotte called Nation’s Bank. Nation’s Bank bought—no, no, sorry—merger of equals, Bank of America. And at the time they had offered me a job to move to Charlotte. And I said, no, thank you. I had been there for a while. They were offering pretty nice packages, so took my package and chased a girl to Hawaii because I thought, what better place to figure out what you want to do in the next phase of your life than Hawaii?
Speaker 2: (02:28)
So I got to Hawaii, long story, bought a company called Maui Air Conditioning. Very proud of that. I ran that company for three years, found myself in the field, fixing air conditioning. Oh my gosh. Something I never imagined doing. And I will tell you, having air conditioning in Hawaii is a good thing, fixing it, not so much. So we grew that company wildly and found ourselves at the place where every small business wants to be, Doug, which was in order to continue to grow this business, we needed to hire more technicians because certainly me in the field is not a good thing. I tended to break more stuff than fix. So, I took an opportunity to go to work at my very first credit union called Hawaii State Federal Credit Union.
Speaker 2: (03:23)
That was my first exposure to credit unions. I worked there for a couple of years. We started to have children. I was living on Oahu. My wife was on Maui. I was flying home on the weekends. I thought this is not very tenable long term. So we decided to up and move to Sacramento, California, because I had interviewed for some companies trying to bring the family back together. I was an IT guy back then, and still am, and I went to work for a privately held bank owned by a REIT if you can imagine that. It was a very interesting time and it was the only time that I ever got to work at a company that actually did their three-year plan. So in three years, what we wanted to do was we wanted to do an IPO. We wanted to grow through mergers and acquisitions, and then we wanted to sell to a larger bank all in three years, and three years to the day we sold that bank to Wells Fargo and Doug, it was December of 2007.
Oh, nice timing.
Speaker 2: (04:41)
Yeah. I mean, that wasn’t planned, but it was great. Had a nice exit. And anybody that’s ever been through a merger acquisition of a big bank like that, knows you have a quiet period in your contract. So I decided to go back and get my master’s degree. A master’s degree takes about three years, but I made it my full-time job and got my master’s degree in 14 months. And a year to the day, because you had the quiet period for a year, my old boss called me and said, Hey, let’s start a de novo bank. So it was 2009 and our claim to fame. De novo is Latin for new, so we started a bank. Okay. You love the story. I’ll fast forward 12 years on that story real quick. That bank last week got sold to SoFi.
Speaker 2: (05:40)
So people should be paying attention right to the fintechs of the world, because three fintechs have bought community bank charters. And so if you’re not comfortable with the fintech space, you should be because they’re coming. Right. So when we started that bank, a year in, we had raised all the capital. We went to the OTC, they don’t exist anymore, and we got permission to start and they said, Oh, by the way, we’ll give you three charters, right? At the height of the financial meltdown, we’ll give you three charters. And all you have to do is mergers and acquisitions. We did three mergers and acquisitions in a year. I don’t recommend that to anybody. That’s a lot of work, a lot of risks. So that put me at somewhere around 10 to 12 M&As in the last six years. And I was pretty tired of doing M&As and I said to my wife, I don’t want to keep doing this. It’s hard work. I put my name out to a recruiter. He called me up and said, best job ever. I go, sounds exciting. Where, what, what about it? And he goes, there’s only one catch; it’s in Huntsville, Alabama. And I said, where’s that? And he goes, Huntsville. I said, no, Alabama.
Speaker 2: (07:02)
And I went to work for my second credit union, Redstone Federal Credit Union. A great place. That place is incredible. And I really saw for the first time, the impact that a credit union will have on the community. I don’t think there’s any other organization that’s specifically geared like a chamber of commerce, right? That’s specifically geared for the community that does as much for our community as a credit union does. It’s in their DNA really and truly, right? So they teach their people to volunteer. They teach them to be invested in the community. Credit union folks sit on the chamber of commerce and the rotaries and the Red Crosses and the American Heart Associations. And when a credit union exits, oftentimes there’s a hole left in that community. We see that when the big credit unions take out credit unions that are not in their headquarters area.
Speaker 2: (08:03)
Right. So I’m not picking on anybody, but a big one in Washington, DC comes in and takes out a small credit union in Augusta, Georgia. They don’t sit on the chamber of commerce, right? They don’t volunteer. They don’t do the heart walks, the 5ks. So I’m a big fan of mergers and acquisitions that are done the right way, which is kind of intra community. So I worked there for six years, had an opportunity to go be a CEO, did that for four years, got another opportunity to go start a digital bank, a purely digital bank, which is what I’m doing now for a bank. So three credit unions and five banks later, here I am today. And thank you for having me on.
Speaker 1: (08:56)
Thanks, Harry. I’m very glad you could join me. Wow. You’ve had a rapid journey, lots of mergers and acquisitions, and that’s what I want to focus on. So let’s dial in to your M&A work when you’re a credit union CEO. Why are you pursuing a merger or acquisition and what are you looking for?
Speaker 2: (09:13)
Yeah. Okay. So look, there’s all kinds of pressures on credit unions today. And everybody’s living through this now with the stimulus checks coming out, etc., and your assets grow faster, ridiculously faster, than your capital can grow. Everybody knows the gold standard of 10%, right? We want a 10% net worth capitalized to seven or higher, but really the gold standard is 10. And when your assets grow at 35%, and your capital grows at 1%, that creates a real challenge for folks. Now, one of the ways that you can address growth as a general statement, but specifically capital growth, is through M&A, right? And when I talk to folks, and I’ve been helping several folks do this myself, but when I talk to folks about mergers and acquisitions, everybody tends to think that I want the most assets that I can get.
Speaker 2: (10:21)
What I try to tell them is you want the most capital that you can get, right? So a $3 million asset credit union that has a million dollars of capital, 30% capital, is probably a better merger partner than a $50 million asset credit union that also has $3 million in capital, right? That doesn’t really help your situation a lot. So when you’re out there looking for merger partners, and I use this word very specifically, right? Mergers should not be takeovers. Mergers should be a combining; you should be bringing these two organizations together. You should serve their membership. You should treat their employees. You should care about their community because in fact it is your community, right? That’s why I’m a big fan of intra-community. And we can define community like the NCUA does, right? But you know, the charters matter, and the culture matters, right?
Speaker 2: (11:27)
Once you’ve got those things figured out, I would target based on my balance sheet, quite frankly, or my income statement. So the first rule of M&A, when you’re looking at targets to partner with, look at the balance sheets; the very first thing you can do is the financial analysis. It’s simple. The data is everywhere from the Callahan portal to call reports to whatever. And if you need help, feel free to call me. I love helping people be smarter. And so that’s the first thing you should do. Once you’ve figured that piece out, there’s all the other things you get to look at, geography, culture, people, staffing, products, systems, and all the gamut. But if the balance sheet fit isn’t right, I would tell you, you shouldn’t do it now.
Speaker 1: (12:20)
Let me ask you a question, because I’m imagining that the way the industry is now, and maybe I’m wrong, but that everybody has piles of assets. So wouldn’t any acquisition you’re looking at be similarly positioned to what you probably have yourself?
Speaker 2: (12:40)
Well, so the real challenge, I think, is the word creative, right? I like that word. You probably love that word in your business, right? But it’s a creative right. Assets are easy to get. Capital is really very hard for a credit union especially. There’s really only one or two ways that you can grow capital and it’s net income. And the more assets you have, it puts pressure on you from a capital perspective, the ratios get all wonky, right? And that’s a technical term. It means something. And so you don’t want your ratios to go upside down, right? So if I’m sitting here at a hundred million dollar credit union, and I’ve got 10% capital, and I bring in $35 million of stimulus checks, I don’t have 10% capital anymore. And why do I want to go out and merge with a $50 million credit union that has the same amount of capital exactly?
Speaker 2: (13:42)
Right. It puts my ratios in a really bad place. And it’s hard to outgrow that. Now look, every merger is unique. Every single one of them is different, and you really have to understand why it is you as the CEO or pursuing that merger example. Gosh, my membership growth is just not, for whatever reason, where I want it; we’re not adding members at the rate that I would like. I’ve tried everything. A merger is a really good opportunity for you because what it does is it opens a new market. And if you do it right, leverage the brand that you’re partnering with, there’s a huge opportunity to grow membership. And because you have a wider member base, you now have more people to take on your products and services, more fees that could be generated, more interest income that could be earned.
Speaker 2: (14:32)
Right. That’s a really good reason to look for a merger, earnings power, right? Net interest margin. Everybody’s under pressure. Now, recently, we believe that interest rates will go up, but I think they’re going to stay flat at least until 2023. And if your net interest margin is below four, the last thing you want is more assets on your books, right? So you got to understand the financial implication of doing a merger. And by the way, there are scenarios that you can run that will show you what the post-merger balance sheet looks like before you ever even talk to anybody.
Speaker 1: (15:13)
Oh, where do you do that?
Speaker 2: (15:15)
Well, you can get one from Callahan. I’ve, I’ve done some work on that and I’m happy to share it. That’s the whole point, right? That’s what we do; we share. And so I want people to be successful. Look, credit unions are shrinking. I have this saying, when a day goes away, whether it be a community bank or a credit union, every single business day, there’s one less. And what I think is we really need the smaller credit unions to exist, right? There are segments of the market that no bank will serve. Right? The factory worker, the church goer, the smaller community, the rural communities, big banks won’t serve those folks. And so they need financial resources, right? I mean, we’ve all heard about food deserts. I tend to think about financial deserts as well. There are a lot of small towns here in Georgia and South Carolina that no bank will go into. And gosh, darn it, those are good people.
Speaker 2: (16:25)
And they deserve financial services and products. And the things that credit unions bring like literacy, training and those kinds of things. So I think all of that is relevant when you think about a merger, and if you want to know more about it, feel free to reach out to Doug. I am happy to help anyone all along the way. I want credit unions to be successful and quite frankly banks, because as I see it, they have employees and the employees matter. So if I can help out in any way, feel free to reach out to Doug. He’ll get you my contact info. I’m happy to have a conversation with you. Thank you, Doug. Have a good day.
Speaker 1: (17:06)
Thank you, Harry. Listeners, be sure to check out part two of this interview. In our next episode, Harry and I will take a deeper look at credit unions, acquiring banks, and the differences between a bank acquisition and a merger with another credit union.
That’s all the insider credit union knowledge we have for this episode. Can’t wait for the next episode. We’re always available through our email@example.com. That’s A C T-advisors.com. See you next time on C.U. you on the show.
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