The recently published Celent study “Tipping Scale: Credit Union Consolidation” correctly describes long-term and widely recognized consolidation trends in the credit union movement.
But the report generates more heat than light – missing a key opportunity to provide important context and explore successes that would help credit union managers make critical strategic decisions.
The report also unfortunately uses a broad brush that perpetuates several myths about credit union consolidation trends and operating characteristics.
What we know to be true is that small financial institutions – including small credit unions – have fewer resources than their larger counterparts so economic, demographic and operational challenges are magnified at these institutions.
It also is true that the credit union movement has consolidated dramatically over the past decade. However, the Celent report fails to note that the banking industry experienced a nearly identical consolidation trend.
Ten years ago there were over 9,900 banking institutions in the U.S. This total declined to fewer than 7,700 by year-end 2010. In all, the total number of U.S. banks declined by 23% over the past decade.
A close look at small institutions reveals that 71% of banks with $100 million or less in assets at year-end 2000 remain in operation today (some remain in the $100 million or less tier and some have grown up and out of this tier – either from organic growth or through merger activity).
As shown in the table below a nearly identical percentage (69%) of credit unions with $100 million or less in assets at year-end 2000 remain in operation today (again, some remain in the $100 million or less tier and some have grown up and out of this tier).
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Small Financial Institution Consolidation 2000 to 2010 Sources: FDIC, NCUA and CUNA. |
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Banks |
Credit Unions |
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Number of small institutions (<$100 million in assets) at year-end 2000 |
5,464 |
9,661 |
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Percent of Year-end 2000 small institutions that are operating at year-end 2010 |
71% |
69% |
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Percent of Year-end 2000 small institutions that are no longer operating |
29% |
31% |
The nearly-identical survival rate of small credit unions is especially significant given the relatively small size of small credit unions. Small credit unions (i.e., those with less than $100 million in assets) have an average of $21 million in total assets, whereas small banks have an average of $57 million in total assets.
In our view, it is significant that small credit unions have survived at a rate that is essentially identical to the survival rate of small banks even though small banks are more than 2.5 times larger than small CUs on average.
Despite large and growing challenges small credit unions seem to be doing something right. The Celent analysts could have greatly enriched their report by exploring reasons that small credit unions preserved charters at a similar rate compared to (substantially larger) small banking institutions.
While we haven’t had the opportunity to conduct an extensive analysis over the period studied by Celent, we believe the credit union difference – its non-for-profit member-ownership structure with democratic control helps to explain a good deal of the small credit union success.
For example, credit union mergers do not produce the financial windfalls for owners that bank mergers produce so the incentives to merge institutions are substantially lower. Second, credit unions are cooperatives and are much more likely than for-profit institutions to seek partnerships and collaborative ventures with others.
Shared branching is but one example of this activity but there are many other examples of these partnerships and the number and variety is growing at a fast (and increasing) pace.
Similarly, the study’s broad-brush focus on asset tiers leads Celent to conclude that “only the very largest are flourishing” but the analysis ignores the fact that many small credit unions are flourishing:
Most have substantial capital positions and many hundreds consistently reflect high asset quality, grow and earn at above-average rates and are effective niche players that serve critical needs that would otherwise go unmet.
Celent claims that “credit unions with less than $50 million in assets are disappearing”. While the declines have been dramatic, credit unions with $50 million or less in assets today represent 70% of all credit unions.
The Celent analysis also perpetuates two small credit unions myths – in our phone conversation I referred to these the “myth of the mini-bank” and the “myth of gross inefficiency”.
- The Myth of the Mini Bank: The Celent report states that the biggest factors accounting for recent declines in the number of smaller credit unions have been an inability to branch widely, offer Internet banking, bill pay and “know your customer (KYC)” and that, going forward, the demand for mobile banking consumer and business remote deposit capture and branch capture will be “absolutely necessary to stay with the curve.” However, we believe that Celent’s view of small credit unions as indistinguishable from small commercial banks is flawed. Certainly, for some small credit unions, demands to provide a wide variety of services and to be “all things to all people” introduce significant strains. However, many successful small credit unions are not pursing the standard banking model and are exploring niche markets and providing value propositions that don’t look like the standard propositions presented by the average commercial bank. In contrast, our research has shown that the biggest challenges facing smaller credit unions are: 1) large and growing compliance burdens; 2) corporate stabilization costs; 3) back office redundancies and lack of cooperation; and 4) succession planning.
- The Myth of Gross Inefficiency: The Celent analysis examines efficiency ratios and concludes that one of the key factors accounting for the decline in small credit unions is their relatively high average efficiency ratios (where high ratios reflect high levels of inefficiency). However, closer examination reveals that gross inefficiency at smaller credit unions is a myth. The nation’s smallest credit unions have operating expense ratios that are essentially equal to those reported by their mid-size counterparts.
Over the past decade, credit unions with less than $50 million in total assets reported annual average operating expense ratios equal to 3.92% of average assets – this average is the same across three asset-size tiers we examine in the table below (i.e., <$2 million; $2 to $10 million; and $10 to $50 million).
The 3.92% average expense ratio for credit unions under $50 million is only three basis points higher than the decade-average ratio among credit unions with $50 million to $100 million in assets and is only 10 basis points higher than the decade-average ratio among credit unions with $100 to $200 million in assets.
It is interesting to note that banks with less than $100 million in assets reported a 3.85% operating expense ratio in 2010 and savings institutions with less than $100 million in assets reported a 4.40% operating expense ratio in 2010.
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