Less Is More
Credit unions should not exist merely because they idea of them gives people the warm fuzzies. The idea of credit unions is awesome, but if they are not fulfilling member needs then something needs to be done. Barring catastrophic local or SEG problems, if credit unions are truly serving their members, they would not be losing members.
Part of the reason the financial services industry is in the state it's in is because there were too many lenders nudging them to get creative with the structure and underwriting of loans. Consolidation in the financial services industry is a good thing. If there are 50% of the banks and credit unions remaining 10 years from now that there are today, that's a good thing. If there are more than 5,000 credit unions left by 2015, I'll be surprised--and dismayed.
SAFE Credit Union President Henry Wirz recently shared an analysis he had recently done of the situation as it pertains to California. The 242 California CUs with less than $50 million in assets have the highest capital level at 11.20%, but in aggregate have lost over 20,000 members in the last three years and have a lower return on capital than credit unions $50 million to $500 million in assets or CUs over $500 million in assets. The 146 mid-size CUs have 9.36% capital but have in aggregate lost over 43,000 members in the last three years and have only a slightly higher return on capital than the smaller CUs. The CUs over $500 million have combined capital ratio of 8.87%, the least capital capacity to support future growth, but this group grew by 506,109 members over the last five years.
He provided all sorts of other statistics to support his thesis, which we plan to publish in Credit Union Times, but the overarching theme of his thoughts was that small credit unions have the most capital cushion and are losing members, while the largest credit unions are adding members despite their lower aggregate net worth ratio; it boiled down to a problem of wise use of capital and the lack of accountability for that, he said. Wirz did note that there are some smaller credit unions doing a great job of deploying capital and that mergers can skew the membership numbers across the various asset buckets.
Credit unions of course need to have enough capital on their books to stay afloat in stormy seas, but if they're always sitting on it, they aren't riding the waves either. Sure credit unions in general have enough capital to ride this out. But in the decade or so prior, during the good times, credit unions in aggregate weren't growing either. Membership growth is good indicator of member satisfaction; the depth of member relationships is another. What does this say about the credit union industry? Some are fulfilling their mission of serving their members through judicious deployment of capital and some are not, so maybe less is more.