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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 Episode 341 Steven Reider of Bancography on How to Really Analyze Branch Closings, Openings and Mergers
Here’s the money question for you to ponder: : should you close that branch on Third Street and open a new branch in a neighboring town? Keep in mind that the ballpark cost of opening a new branch is $2.5 million. As for costs in a branch closure there always are some and there also may be remember losses. How to do the math?
Meet Steven Reider, president of Bancography - that’s the company that won best in show at Finovate fall 2024 for its Bancography Plan software tool that helps a credit union alanalyze branch closings and openings and also possible mergers.
Decisions that had been made based upon gut instinct now can be supported with analytical data.
How hard is Bancography Plan to use? It’s so easy, said Reider, even a CEO can use it.
As I tell Reider in the early moments of the show I’d never heard of such a tool before combing upon a Bancography press release. But I knew when I read it I had to get this guy on the show.
Oh…the costs are surprisingly affordable.
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:Here's the money question for you. Should you close that branch on 3rd Street and open a new branch in a neighboring town? Keep in mind that the ballpark cost of opening a new branch is about$2.5 million nowadays. As for the cost in a branch closure, there always are costs. There also may be member losses. How to do this math? Meet Stephen Ryder, President of Bankography. That's the company that went best in show at Finnovate Fall 2024 for its bankography plan software tool. That's a tool that helps credit unions analyze branch closings, openings, and also possible mergers. Possible mergers. And what credit union isn't thinking about merger today? Decisions that had been made based upon gut instinct, now can be supported with analytical data. How hard is Bankography planned to use? It's so easy, said Ryder, even a CEO can use it. As I tell Ryder in the early moments of the show, I'd never heard of such a tool before coming upon a Bankography press release. But I knew when I read it, I had to get this guy on the show. Here he is. Listen up. So Steve, you have some intriguing information pieces of software. Do you have any credit union customers?
SPEAKER_03:Any.
SPEAKER_02:Oh, cool. But yeah, I mean, your name says you're the antichrist. I mean, you're the bank.
SPEAKER_01:We confronted that early on when we launched the company and chose the name. But ultimately, I think we came down on the side of what a credit union CEO colleague of mine said, which is that we're not against We're not against banking. We don't object to the word. We just view it as a verb.
SPEAKER_02:Okay, that's cool.
SPEAKER_01:Bank is not what you are. Banking is something that you do. Look, you can see that in myriad credit union websites will describe themselves as a better place to bank or a better banking experience.
SPEAKER_02:Oh, sure. No, I was basically teasing you, but I do know some credit union people get apoplectic when they think about banks. To them, it is the antichrist. To me, it's just another form of competition. But what's the size range of the credit union customers that you have?
SPEAKER_01:We have worked for a credit union as small as a SEG-based institution with six employees looking for their first ever location outside of their legacy corporate sponsor site. The largest credit unions we've worked with, I believe, are PenFed and Golden One, which both rank among the 10 largest credit unions in the country. Top
SPEAKER_02:five for PenFed.
SPEAKER_01:Yeah, so there's a wide dispersion in our client base. I would tell you that... Yeah, we've worked for numerous top 50 credit unions, Global, which is the former Alaska USA, out of Anchorage, Suncoast out of Tampa, Space Coast from the opposite side of Florida, Members First out of Harrisburg, Pennsylvania are among our larger ones, Virginia Credit Union, and right pat, elevations, any number of those in that kind of top 30 tier. But we also do plenty of work for small credit unions that have three, four, five branches just looking, wrestling with a single branch expansion decision.
SPEAKER_02:Now, do you primarily do project work? In other words, are you brought in because we're thinking about closing a branch or we're thinking about adding a branch? And then when that research is done, when that project is done, are you gone?
SPEAKER_01:So it depends. Bankography has two different primary toolkits with which we work with financial institutions. One is a software tool, Bankography Plan. That is basically a do-it-yourself branch planning in a box kit. So in that case, the institution carries the toolkit on their own desktops and can perform analysis, be it on branch opens, branch closes, mergers and such within the confines of their own analytic departments. And then the other side is more traditional consulting in the manner you just referenced. Project has a defined start, right? We're considering a branch at the corner of 20th and Walnut Street. Is that a good idea? Yes or no. Those obviously also can extend to much broader strategy as in we're considering entering the Phoenix metropolitan area. How many branches do we need? Where should they be? Or we have a network of 40 branches. Are they all performing up to par? Are there markets where we benefit from reconfiguration, relocation, even in worst case, closure market exit? In those cases, that's a traditional consulting project, right? It has a start point, has an end point. Of course, we're always available for follow-up questions and such, but those are the two frameworks in which we work. project orientation and the software tool.
SPEAKER_02:Now, you recently got a best in show at Finnovate. What was that for?
SPEAKER_01:Yeah. So that was the software tool we showed. Yeah. Yeah. We showed bankography plan and Finnovate, as you know, is this kind of speed dating for financial industry professionals. And so you have a seven minute window to present your product offering and There, we actually ran through in that brief seven-minute window how you could use Bankography Plan to evaluate a new branch opportunity or a merger opportunity. We shoehorned all of that into that brief menu showing how the tool can provide demographics for your proposed trade site. What's the household growth rate? How many households are there? What's the median age? What's the median income? Competitive evaluation, so plot all of the competing banks and credit unions on a map, allow you to mouse over and see their five-year deposit history, zoom in on the Google Maps interface that we have to actually look at the competing branches from street level, and then ultimately produce a full pro forma balance sheet and income statement for the proposed branch based on cost structure and rates and spreads that are all user-specified inputs. The bankography plan, it's kind of everything you need. Put a staple in the upper left-hand corner and bring to your CEO and say, here's why we want this new branch here. And it's as simple to use and intuitive that, in fact, you can do the process within not even a seven-minute window, but a four-minute window and still leave a few minutes left to show the merger and acquisition analysis capabilities of the tool.
SPEAKER_02:That's what I was going to ask you, which is, You started by referencing a six-employee SAG looking for its first branch outside its sponsor's building. Did they have, and I assume the answer is yes, but did they have the ability to run the tool?
SPEAKER_01:Yeah, I often joke, look, there's a trade-off in software between functionality and ease of use. You can cram absolutely every capability in. but it becomes very convoluted. Or you can have something very, very simple, but it doesn't have that much use. And we try to really tread a balance between those two attributes to have something quite robust in its capabilities. But as I often say, easy enough that the CEO can figure out how to run it or the CEO's administrative assistant. Very intuitive, menu-driven. If you know how to use... any basic out-of-the-box software tool, you'll be quite comfortable using this. And all the financial reports are available both as reports and also in Excel because every banker knows how to use Excel.
SPEAKER_02:No, that's very cool. I do think there's a generational shift in this CEO office that's going on where guys my age who thought a slide rule was technology and hadn't really adopted, adjusted to the new computer era are retiring and the younger generations coming in and they grew up with computers. I'm not saying they're necessarily geeks, but the word doesn't frighten them.
SPEAKER_01:No, but your point is fair. We certainly have a number of mid-sized clients, say assets in that billion, 2 billion range where the CEO would be very hands-on in this financial modeling because like you said, running scenarios through Excel spreadsheets are just, second nature to someone who's grown up in the generation where all analytics took place on a spreadsheet versus in a ledger.
SPEAKER_02:Now, do you have competitors? Are there competitive tools out in the marketplace?
SPEAKER_01:I don't really think so. As far as we know, we've never seen any other.
SPEAKER_02:I'm not aware of it. I saw this press release and I said, my heavens, why haven't I heard about these people? Everybody needs to have this damn thing because they're all opening and closing branches, and they're doing it by reading tea leaves, as far as I can tell from talking with them. What's the basis for this judgment? Well, they flipped some coins, which I don't think is a good way to make judgment on that. This is a wonderful thing. Why haven't I heard of such a thing before?
SPEAKER_01:Yeah, and I totally agree with you. And in fact, there are plenty of tools that can provide market demographics. I didn't say plenty, but there's a handful of industry providers that'll give you demographic information. And there are some sources where you can obtain competitive information. And certainly there are mapping utilities where on your own, you can plot competitors. But I think two things distinguish Bankography Plan. One is that we've integrated all of these different tools, right? The drawer that you reach into for your demographics, whether that's a physical or metaphoric online drawer, right? The drawer you reach for your maps, the drawer you reach for your competitive data, We've put all of those into a single tool, but as far as I know, this is the only tool that drives to a full pro forma balance sheet and income statement. And as I mentioned in that Finnovate demo, if you're not getting to that financial level to calculating what is the internal rate of return of this decision, what is the net present value of this decision, then you're really just predicating your decision on vibes. Yeah, it looks like a good market. Okay, it's a high income market. I'm looking for high income. That's good. But that's not enough, right? I mean, it could be a market that aligns demographically with your institution's target preferences. But maybe there's so many competitors that it dilutes balance projections to untenable levels. Or maybe it has what would presumably be viable levels, but the only site you can find has a$1.8 million market acquisition site for the land or a$45 a square foot lease. And when we run that through the financials, it again yields a non-viable internal rate of return. So you don't know those things again until you take that final step. It says not just does the market look good demographically, not just are there favorable competitive environment, but ultimately what's my return on liabilities? What's my internal rate of return? How long does it gonna take me to break even? And your CEO should not I'm not going to say will not, but should not be dispensing or your board of directors, the median cost of a new branch in the US, two and a half million dollars for freestanding, right? The board shouldn't be giving you two and a half million dollars unless you can substantiate that with financial projections.
SPEAKER_02:Which often they are doing. Yeah, they're looking at some financial projections, but it's the kind of stuff you cobbled together over lunch after a martini.
UNKNOWN:Yeah.
SPEAKER_01:Yeah, exactly. I mean, financial projections that don't have a basis in underlying demographics don't mean much. Sometimes I call it the analog method. And I don't mean analog versus digital, but analog versus analogy, right? The sort of crude method by which some bankers will project is, we opened a branch three years ago in a market that kind of looks like this, and it's up to$30 million now. So that's what I'll use as my basis here, right? They're going to find just the closest analog, the most analogous case in their footprint and predicate on that. But that's a really, really, really not very disciplined way to go about evaluating branch opportunities.
SPEAKER_02:Now, these are, as you suggested, expensive decisions.
SPEAKER_01:Yeah. And again, I didn't sort of finish the other half of that. The median cost, even of what we call an inline, like a storefront branch, where you're between the grocery store and the nail salon in the suburban strip center, the median cost of those is still$700,000. And then there's rent on top of that. And one of the challenges often mentioned is that, look, if you hire a mortgage banking officer, a mortgage lender, and that turns out to be the wrong hire, not a fit with our culture, embellish the resume, can't deliver the results that were promised, whatever. You call that lender and your director of human resources into a conference room and you push a little envelope across the table and it's as if that bad decision never happened. But if you put a branch in the wrong place, you can't pick it up and move it. It's not a decision. It's a really long-term commitment. It's not a decision that you can back away from the way you can a bad personnel decision or even a bad ad campaign that was ineffective. The branches are not They're not monopoly houses. You can't just pick them up and move them.
SPEAKER_02:And you can't assume the customers or members will follow. I mean, where I live, there had been a top 10 bank branch in a supermarket I often was in. They decided to shut that. But two blocks, two miles from where I live, there is a branch for that institution. I've never been in that branch. Never. It's too far away in Miami. Yeah. And you could say I'm ultra picky. Two miles isn't a big deal for me. It was just, it was a step too far. Whereas the supermarket I was in pretty weekly. So it was no big deal.
SPEAKER_01:And tell me, where do you live?
SPEAKER_02:Phoenix.
SPEAKER_01:Phoenix. Yeah. So, so that underscores, and are you inner or more suburban?
SPEAKER_02:Central, central Phoenix.
SPEAKER_01:Yeah. So that underscores an important attribute, which is that the, The reach of a branch is inversely proportionate to the surrounding population density, which is a fancy way of saying the more urbanized, the tighter that trade area is going to be, right? Because to you in central Phoenix, to go two miles, you're going to have to go through like seven red lights, right? Also, I'm walking
SPEAKER_02:by a Wells Fargo, a Chase, several credit unions.
SPEAKER_01:There's a
SPEAKER_02:zillion on the path.
SPEAKER_01:Yeah, you're gonna pass a dozen competitors, but more important, right? If you lived out in Queen Creek or Anthem, two miles is two and a half minutes, right? Because you're traveling at 50 miles an hour on basically rural roads, unencumbered by stop signs and stoplights. And so the drawing range of a branch in that rural area or edge of growth area ex-urban is much broader than an urban area because consumers ultimately, nobody defines convenience in terms of miles, right? They define it in terms of minutes. Your objection isn't to two miles. It's that because you live in the core of Phoenix where there's lots of traffic and lots of traffic lights, two miles is a 25 minute proposition in lunchtime traffic. You wouldn't care about two miles if it was a three minute proposition. So that's why we say there's that inverse relationship. The more urbanized, basically the greater minutes it takes to go a mile and thus the more closely clustered your branches need to be. And when you reach that closing decision, in fact, this is a module we just added in Bankography Plan, you have that ability to forecast what your likely attrition from your members is going to be based on how far they live from the nearest surviving branch. I have 10, I'm taking this one away. Which of these nine do I now live closer to? But there's two dimensions to that equation. One is How far is the closest surviving branch? And two is what is the density? Because that translates into how long does it take for me to get there? And ultimately, that's what's going to dictate your attrition, which members are going to leave you versus retention, which members are going to remain with you.
SPEAKER_02:Here's a scenario. And tell me if you've ever encountered it. I know the CEO of a pretty decent sized credit union, not a pen fed size, but pretty decent size. It was approached by a large regional bank that was closing all its branches in a particular county. And they said, hey, do you want them? Basically for free, do you want them? Now he had to agree to certain things, keep the branches open, keep the employees on the payroll for X years. Yes, there were strings attached. Could you run analysis on that? Obviously, there'd be more data available than what I just
SPEAKER_01:said. Yeah, absolutely. Because we would, and again, Bankography could run that in a consulting basis and evaluate each location in terms of trade area demographics and competitive profile and balance implications and pending. Are we acquiring just the physical facilities or are we acquiring the facilities and the depositors?
SPEAKER_02:Oh, absolutely. Everything.
SPEAKER_01:Yeah. You get everything. And even in some cases, the depositors and the borrowing and the lending accounts, right? Those transactions can range anything from facilities only to full. And yeah, we can do that in a consulting basis. Or again, in bankography plan, you can actually just from a dropdown menu, choose any institution in the country. You can zoom in and say, Arizona, First National Bank, Show me a demographic profile of each of its branches. Show me the competitive environment of each of those trade areas. And what is the fair share market potential, which then gives your colleague not only information about the network that the credit union would be acquiring, but what's the upside potential above and beyond the balances that those branches hold today. And then you can obviously equate that to, okay, well, if there's, It's a$200 million franchise today. Fair share opportunity is 300 million, right? So there's 100 million and upside. If that has a 400 basis point margin, and I'm just throwing around some numbers here for ease of explanation, then that means there's$4 million in revenue to be had by more effectively managing this franchise. That then translates to what premium I can afford to pay. Now, again, in this case, it may be the institution was just looking for a safe landing spot for its depositors. And so they were willing, as you said, to do a fee-free transaction. But we saw, what, 22 credit union purchases of banks last year. And so what that tells you, you can actually use the tool to back into what the fair premium is, what the maximum premium is that you could pay and still afford to come out ahead. And your scenario there seems like it was a brand new market area for the credit union. But another thing that the plan can do or that bankography and consulting bases can do is look at what the overlaps are, right? So often a merger is in market and the success of the merger is predicated on at least partially on elimination of excess capacity, right? I've got a branch at 20th and main, you have a branch at 19th and main, Bankography plan can actually look at that. And again, based on the proximity and the density forecast, what level of runoff you would incur from closing the smaller of those branches and what level of expense savings you're likely to achieve. And then again, that drives to an actual return, right? How much does our return on assets improve? How much does our efficiency ratio improve? All of those important quantitative measurements that any executive or board of directors should be examining before undertaking that type of capital transaction.
SPEAKER_02:Now, my sense, and I don't necessarily, I don't follow this universe that closely. My sense is that in recent years, banks have been closing branches. Credit unions paradoxically have been opening. Am I more or less right there?
SPEAKER_01:Yeah, absolutely. And I think there's a couple of things there. First off, so many of the bank closures are still a result of
SPEAKER_02:merger. Where I live in Phoenix, a lot of the closures are branches that were opened literally 60 years ago. They're all old drive-through branches. The architecture is still a beautiful period, 1960 architecture. It's not the most ideal bank branch today.
SPEAKER_01:No, and that's not an indictment on anyone's prior decision, right? No, no. It's generations. Yeah. When everybody had to come to the branch once a week to deposit their paycheck, you needed 5,000, 6,000 square feet just for everybody to queue up in. I remember those days, man.
UNKNOWN:Every two weeks you'd stand in this long queue.
SPEAKER_01:Yeah. But of course, how now most of us are paid by direct deposit and- And even things like social security checks are dispersed by direct deposit. And so there's much less demand by that. But you also have in the branch closing statistics, things like, and I'm gonna take you to the opposite side of the country, like when SunTrust and BB&T merged to form the awkwardly named Truist, there were hundreds of locations where those two institutions had branches within a quarter mile of one another. And so of course, those are going to close That's not really a reduction in service to consumers, right? All of the people who banked with either one of those institutions still had a branch right down the street from their house. And so that's what we're seeing. And certainly, look, we are seeing banks tolerate a little bit broader spacing between their branch locations. We are seeing them pair some of the most inefficient, like you said, those large facilities built for the environment of a generation ago, maybe some small rural communities where just natural Market forces have eroded the size of the household base to untenable levels. But credit unions, a lot have converted from seg-based charters to community charters, and so have suddenly found themselves with whole new geographies that they could serve that were previously unattainable. And we've all seen a lot of credit unions move into locations vacated by banks, continuing to deliver those services Those solid community services. And one area where credit unions are particularly thriving and utilizing branches is in small business services. Because a lot of the big banks, they've really taken their focus to the commercial middle market, firms with sales of say 10 to 50 million. And if you're a client of one of the big money center banks and your firm has annual sales of less than a million dollars, in most cases, you don't even get your own relationship manager anymore, your own business services officer. You get dumped into a call center. That's not the service proposition that a small business owner is looking for. Think about any small business that you work with, your dry cleaner, your favorite restaurant, where the owner always gets to your table, even on a crowded Friday night. The electrician who calls you the day after the storm to make sure that your power's up and running. These business owners pride themselves on on this all enveloping customer care. And they're expecting and demanding the same from those who provide services to them. And so credit unions are stepping into some of these markets there where banks have vacated and providing good solid services to those local merchants.
SPEAKER_02:Do you have customers who come to you and say, maybe I do it myself, maybe I pay you on a consulting basis, but I wanna look at all of my branches. and see if there are some I should be closing. I'm not picking one. I just want to look at all of
SPEAKER_01:them. Yeah, and look, that's the most comprehensive service we offer, what we call our branch network optimization services. And the most comprehensive project is, yeah, here's my geography and here's my network. And here's the network today. Tell us what the network should look like five years down the road, right? So that's where do we open? Where do we close? Where do we relocate? Where do we just change service model? So maybe that market that you alluded to would be gorgeous, but outdated 6,000 square foot branch is still a market we want to be in, but it takes us seven member service representatives just just to make sure that we have security control over a facility that big. We want to be in that market. We want to relocate downsize to 2,000 square feet. So yeah, absolutely. And we can work on sort of either half of that, right? Just the expansion side. Where do I put my next five branches? Or just the performance side. Again, I've got 40 branches. How is each fair and relevant industry benchmarks? and fair share market opportunity, and how do I resultingly migrate those to the optimal configuration as far as what do I keep as is, what do I invest more in terms of marketing and sales support, what do I downsize, relocate, and which markets do we exit entirely?
SPEAKER_02:Give me some idea of your fees. I mean, how much do you cost?
SPEAKER_01:The Bankography Plan software tool is the most cost-effective tool utility because it's do-it-yourself and annual licenses for that start at just seven thousand dollars a year if you're licensing just a single state which the vast majority credit unions are operating within only one state and and it ticks up just a little bit from there by about 50 if you're taking on i think up to three states and and so on and there are national licenses that that run northward of 25 000 but that basic single state license seven thousand dollars a year And that's unlimited users in the institutions. That's a site license, not a seat license. So the marketing director may want to use the tool just for, say, obtaining demographics about the branch network for advertising purposes. The CFO may want to run those full pro formas on the next branch opportunity. And there's no additional cost for both of those to have the copy of it on their desk. We have some clients that have half a dozen different users. And again, that's all covered within that single annual license fee. The consulting projects that we pride ourselves on transparency. And so there are no black boxes at Bankography. All of our methods are laid bare. You can replicate from A to Z. You can see most of them explained in our quarterly educational research journal, Bankology, which you can find on our website. And there's no paywalls, no registration or anything to read all those back issues. There
SPEAKER_02:will be a link to that in the show notes.
SPEAKER_01:Oh, excellent. Thank you. And our pricing is quite transparent too. And so for a evaluation of current branch network, it's just a fixed fee per branch. And forgive me, I don't have that number offhand, but it's somewhere in the$1,200 per branch range. And one of my colleagues handles all the proposals and pricing. And then for the expansion, it's just, it's a fixed price per million of population we're studying, right? So a market of 4 million costs twice as much to study as a market of 2 million, which costs twice as much study as a market of 1 million. In general, those consulting projects are going to run, say, 15,000 on the small side up to 40,000 or so on the higher side. And of course, for an institution with 50, 100 branches, it could be, and looking across multiple states, it could get considerably larger than that. And I will also mention our most basic branch site analysis, which is just, I'm looking at one site, right? Corner of 20th and Main. What are the implications? We do those$3,600 start to finish. What are the demographics? What's the competition? What are the full financial projections? Again, that's the everything you need to put a staple in the left-hand corner, bring to your CEO and say, Here's my business case for the branch. Or sometimes here's my business case against the branch, right? The$2 million of bad investment that we save you from doing is worth just as much as the$2 million good investment that we encourage you to perform.
SPEAKER_02:Why would a credit union say no to you? I'm just thinking$3,600 for that project, for instance, in the smallest credit union, a small number of branches, that's going to be a board decision. The board's going to want to see a report. It would take me personally a week to put it together. I get paid more than$3,600 in that week if I'm a C-suite executive in a credit union. Why don't they just pay you? It doesn't make any sense to me not to.
SPEAKER_01:And even in some cases, a new branch application requires some level of feasibility study. Look, I agree with you. We there's a bit of a Robin Hood in our pricing because we do some work for a lot of big banks. And again, when we're doing those comprehensive studies for an institution with hundreds of branches, that carries a healthy price tag that allows us to deliver these simple one-offs at very affordable prices. And I just have a very egalitarian view that, you know, Every institution should have the ability to access sophisticated branch planning services at an affordable price. So yeah, those one-offs, they're priced to be attainable for the small institutions to provide that level of data sophistication. And for us, it just helps us stay current on the landscape and on the environment of what the entire industry is. Our industry is more than just chasing whales And the credit union side of the industry is more than Navy Federal and state employees and BQ and Golden One and a handful of giants for sure.
SPEAKER_02:Well, as I tell credit union people, they don't like to hear it. Chase might want to kill Wells Fargo, but Chase don't care about you. You're too small. They're glad you're there, actually. It's fine. Knock yourself out. They simply aren't bothered.
SPEAKER_01:Small, but quite important within their particular communities. And to the point you raised earlier about branch closures, in a lot of cases, and like that example where you said the CEO had the opportunity to just absorb this bank's network, in a lot of cases, credit unions are moving into markets, whether it's underserved urban banking deserts or rural towns that have lost providers. And they're providing a critical service. So, yeah, while there are rounding error on Wells Fargo's balance sheet and inconsequential as competitors, like you said, Wells Fargo cares about Chase and Chase cares about Wells Fargo and neither one of them care about, you know, first community local credit union. The people of that small town who have no other banking options sure do care about them.
SPEAKER_02:Well, actually, I think Jamie's happy that that credit union is serving that town because he's not going to get any political pressure to open a Chase branch. Yeah, exactly. Why would we do that? They're already happy. They're happy members in this credit unit. God love that credit unit. I think I'll open an account there myself.
SPEAKER_01:Yeah, exactly. And in fact, look, that's one of the reasons why as far as Community Reinvestment Act compliance, like sometimes we try to dissuade large banks from going into lower income neighborhoods in favor of partnering with CDFIs, Community Development Financial Institutions, because If Chase is forced to come into a low income community where there's already a locally owned minority depository institution or community development finance institution, chances are the lower income profiles of that neighborhood are such that the aggregate demand is only gonna support one branch. So now you've come in, right? You've put Wells, you've put B of A, you've put Chase, you've put Citi in competition with this community development bank or credit union. And you've just divided the fixed pie two ways so that neither one of them are profitable. That doesn't do the big bank any good, but it also doesn't do the local.
SPEAKER_02:The local one. Chase can absorb the small amount of loss that's involved in that.
SPEAKER_01:So we very much like the concept of partnerships where the big bank, rather than putting physical presence in a market, they don't want to be in any way. is deferring to the local credit union or community development bank and saying, here, the market's yours, but we're going to provide this fiscal support in terms of all of your clients or members have fee-free access at our other ATMs in the market. Or we're going to provide technology support for the implementation of your online banking platform, that kind of partnership. Because like you said, the banks don't want to be there. They're grateful for the other financial institutions, but the other financial institutions are grateful not to have the bank there. So that given this is a small pie, they can at least take home 100% of that pie versus 50%.
SPEAKER_02:Chase also has enormous scale so they can beat the prices of almost any small institution if Chase wishes to. The scale that they have is just, it's amazing.
SPEAKER_01:It's a critical point. It's one that I caution smaller credit unions on in entering lower income markets. Because again, lower income inherently is going to translate to lower balances, but you do have to really adhere to a cost structure. Because as you said, the large banks, they can amortize their fixed costs so low that they can make money on a$200 checking account. A small credit union, their fixed costs may be such that it takes minimum$500, minimum$1,000 for that account to be profitable. Then we like to look at and saying, look, from a mission standpoint, we want to be able to fulfill needs in this community. We don't have the cost structure that those large banks do as small community credit unions, right? How do we reconcile that? And that's often using technology to lower the cost of delivery, maybe some remote delivery like interactive teller machines, right? After hours extended, using smaller footprints, using teller cash recyclers in lieu of a traditional Teller line using universal agents versus a traditional teller member service representative divide, ways that they can lower the cost basis of branch operations, such that even lacking the scale economies of the money center banks, the local community credit union can still operate, if not profitably, at least break even in those lower communities and fulfill that critical goal of maintaining services and what might otherwise be a community lacking such.
SPEAKER_02:Now, early on, you mentioned that your tool also does merger analysis. Every credit union. There might be an exception, but there are about 4,500 credit unions that today are thinking about merger. It's being acquired or acquired. Thinking, not actually doing it. What does your tool do? And mainly, they make the decision based on coin flips, I think. Or perhaps they pull tarot cards. I'm not really sure.
SPEAKER_01:Yeah. Well, and look, it's interesting because bank and credit union mergers are so different, right? Because in the banking world, if a bank wants to buy another bank, you can basically keep piling dollars on the table until the other bank, until the target ultimately has to accede to its fiduciary responsibility to treat its shareholders appropriately and says, yes, we'll sell. And with a credit union, There's really no such equivalent, right? So it's much more about, hey, do we get along? Is this a receptive home for our members? Are you providing different services for our members? And unfortunately, sometimes there's issues of just board intransigence where the merger would in fact be advantageous for the credit union's members, but board members and or CEOs like being board members and or CEOs?
SPEAKER_02:Well, as I said, the board member does not want to give up that free trip to Honolulu once a year to attend a credit union conference. So, therefore, I vote no.
SPEAKER_01:Yeah, and towards that end, we've even encouraged some credit union clients, at least on the executive side, to consider what the corporate world calls golden parachutes. Yeah. We're going to give the CEO... basically a$100,000 one-time lump sum payment to go away.
SPEAKER_02:That's actually happening
SPEAKER_01:now. But anyhow, relative to Bankography Plan, what it allows you to do is from a drop-down menu, so first I'm going to select my credit union, my first community credit union, and then given what state that's in, it's going to pop up a list of all the other banks or credit unions, because of course we're seeing more bank credit union mergers these days, and you can choose the target institution. And then you just push a button and it's going to show you how many branches, if any, there are with overlapping trade areas, right? Because those are my efficiency closures. Again, I'm here and they're a quarter mile away. And here's my likely attrition in the event that I close that branch, right? If they're right on top of each other, that number is going to approach zero. If they're five miles away, that number is going to approach 100%. And if they're somewhere in between, then so the attrition retention will be somewhere in between. The tool also retrieves the acquirer, or in this case, we'll call it surviving partner and merging partners, income statements from the NCUA's website. So your quarterly call report filings, and it's going to populate a spreadsheet with what the total non-interest expenses are of each institution, what the total assets are, what the total liabilities are. It's going to build basically a miniature pro forma merged income statement. It says, right, here's institution A's assets, liabilities, net interest margin, non-interest revenue, costs, and so on. Here's institution B. If we put them together with no cost reduction, here's the impact. Then let's layer in these likely closures due to overlaps. And here's the net improvement. And it frames that in terms of two key measures, return on assets and efficiency ratio. And it allows a lot of other user scenarios too. So you can actually designate, OK, above and beyond that, if I eliminate 5% of additional non-branch, non-interest expenses, what's the impact? If I eliminate 10% of other non-branch, non-interest expenses and so on. So a lot of scenario analysis that really helps forecast, again, the financial implication and outcome of that merger. Now, that still leaves the troubling issue of getting the board to go along, but At least we've given you the financial justification.
SPEAKER_02:Are you getting a lot of customers for that tool right now?
SPEAKER_01:We just launched the merger tool back in the summer times. I want to say maybe August. I think like any software out there, we've got kind of a bell curve of users. So the power users, those that have dive into every function and capability. Yeah, absolutely. They're using it. Honestly, I think a lot of the others are kind of still discovering. And for some, the need is more episodic, right? You have kind of serial acquirers out there, serial mergers that are always scanning the landscape. And then you have those who are just more opportunistic, right? I was at the National Credit Union or I was at the State Credit Union League annual conference, having a drink with the CEO of the credit union down the street. And she indicated, hey, I'm really thinking about retirement soon, and we're kind of thinking what we should do with the institution here, and what's best for our members, right? And it's just that kind of one-off happenstance that emerges. So just depending on the needs, we're going to have different rates of adaptation. One of the neat things in Bankography Plan, when we launched it, it had three basic functions. The evaluation of a branch site, right? I'm considering a branch at 15th and Walnut. demographics, competition, financials, the ability to plot the entire network of any bank or credit union on a map, and the ability to retrieve deposit share reports for any county or metropolitan area. That's all it did. That was 2001. Every function we've added since then, including the closure analysis, this merger analysis, has come because a client of ours has said, gee, I think it would be great if we could do this too. And so the merger was born of of a client of ours, not in your state, but actually in the Western United States that was looking at a merger and said, could you help us figure out how to evaluate this merger from a financial standpoint? We're working on the cultural fit and we kind of tinkered around and built a series and then client called us back. It's like, well, wait, can we do this? Can we do that? And we're like, hey, let's embed this as a scenario where the user can put in all of their various assumptions test the various hypotheses on their own. And so that's how that one was born.
SPEAKER_02:Historically, most credit union mergers came about. It was a big credit union acquiring a very small credit union. And it happened because the regulator came, put a gun to the head of the CEO of the big credit union and said, I want you to do me a favor and take over this little credit union that's dying. Now, at no point did that CEO actually do anything. analysis. Whereas with this tool, you actually could do some analysis. How much will this hurt me to take this over? Number two, we're seeing these giant mergers like First Tech and Digital, two very healthy, gigantic credit units merging. That's a whole new world of merger. Almost none of the merger consultants, none of them have ever dealt with this kind of thing before. Because this is like, huh? You're two big, healthy guys. Why are you merging? It makes no sense. It makes perfect sense, I think, in that case, but it's a whole new scenario. You can't use yesterday's thinking and analyzing this.
SPEAKER_01:Yeah, totally agree. And to the former situation, first off, the financials didn't matter because like you said, the surviving entity was so much larger than the merging entity that even if the merging entity was in some fiscal duress, It's not going to damage the balance sheet of the$10 billion credit union to absorb the$50 million credit union, no matter how troubled their portfolio is. And second, as you said, a lot of those were encouraged by regulators to the point where, well, yeah, I may take a fiscal loss, but it really kind of puts me in good stead with my primary. Basically, I'm doing a service. I'm doing a service for the industry.
SPEAKER_02:I talked with a CEO of my new off the record company. about why the heck did you fire this credit union? He said, I did a favor to the regulator. I'm pretty sure that I'll come back to me someday.
SPEAKER_01:Yeah.
SPEAKER_02:And it's not going to hurt us at all.
SPEAKER_01:Exactly. And on top of it, you gave these other members a safe landing place who otherwise would have faced disruption. And the whole motto of the industry is people helping people. And so, yeah, that makes perfect sense. But to these larger ones that you mentioned, sometimes they're efficiency driven. because these larger credit unions, like the first tech you mentioned right there now, competing in the world with the regional banks. And so they need those scale economies in terms of IT and compliance and such. And so there is a lot of strategic sense in it. For others, I think it's more geographically oriented, right, to gain complementary markets. So I'm I'm based in Dallas, and it makes a lot of sense to expand into Fort Worth and leverage up our advertising. And here's a viable partner there. But certainly now, when it's not a$10 billion and a$50 million, but it's two$2 billions or a$2 billion and a half a billion, that is impactful. And that can be quite harmful if it's not. It has the potential to be quite harmful if it's not a fiscally compatible transactions. So then it really does demand that level of analysis. And I have to share, I have a colleague and she actually just retired CEO of a pretty sizable credit union. But she said, I understand why credit unions are buying banks. We bought one and it's a much cleaner transaction. There's no vote of the membership. It's all cash. You just kind of buy it and move on. versus the credit union merger, where there are a lot of those cultural issues to follow through on. But yeah, the fiscal issues of these larger mergers, absolutely. I mean, you're negligent if you don't dig into every potential cost saving and every potential revenue growth opportunity to forecast what the long-term financial implications are going to be. And certainly the plan toolkit renders a lot of that much easier on your desktop.
SPEAKER_02: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, and 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.