Its time for Credit unions to Hang together or they will hang separately
Later today the industry will have itself in a foam-mouthed- frenzy analyzing the NCUA’s latest attempt at devising a sensible risk-based-capital framework. I’ll be joining in the frenzy but let’s be honest: With or without RBC reform there are trends fundamentally reshaping the industry.
The Great Recession may very well mark a decisive turning point in the history of The Movement: Increasingly only the big can survive and only the biggest can prosper. One of the most basic steps the industry should take to counter this trend is to engage in more extensive collaboration that enables all credit unions to enjoy the benefits that come from economies of scale.
First the numbers don’t lie. According to a September 2014 Filene Report(Credit Union 2.0: An Opportunity to Build Collaborative Partnerships ) In 1969 there were 23,866 institutions. Since then there have been more than 13,000 credit union mergers and a smaller number of liquidations. Today there are approximately 6,700 credit unions, a number that will undoubtedly decline even more by the end of the day.
These numbers don’t begin to reflect the full impact of the Great Recession and its aftermath: Creative destruction is creating a system of “Haves” and “Have not’s” where only the strongest and the biggest survive.
According to NCUA Chief Economist John Worth in his December report on economic trends membership growth at credit unions with $1 billion or more in assets exceeded 8 % recently and has averaged 6% over the last five years. In contrast membership growth for credit unions with $500 million or less in assets has fallen for each of the last four years
Loan growth at credit unions with $1 billion or more in assets exceeded 15 % over the last year but has contracted for the last five years at credit unions with $100 million or less in assets. In addition the ROA of the largest credit unions has averaged one hundred basis points for the last three years; This far exceeds growth for any other asset class. As Worth points out smaller credit unions are facing challenges that can’t be overcome by an improving economy.
These trends can’t be reversed but they can be mitigated. The unique attributes of credit unions are going to be harder to see if the only institutions left are those over $1 billion dollars.Collaboration can benefit all credit unions. I know that this idea has been around for years but given the accelerated pace of consolidation it really is time to get serious.
For example in the age of Cloud Computing there is absolutely no need for credit unions, most of which offer a similar basket of services not to centralize their IT infrastructure. More robust systems can ultimately provide better and cheaper back office support and might even prevent smaller credit unions from being left behind by the latest mobile and online banking trends.
Another obvious candidate is compliance. The burden is here to stay but you all face the same set of regulations. At the Association we are in the process of introducing a shared compliance model under which an employee hired by the Association takes on compliance projects for a group of credit unions. The model has already been adopted successfully in several other states.
A third step credit unions can take is to fully utilize their state and federal trade associations. When times are tough and credit unions are looking for places to cut back I know that association dues is a tempting target but this is penny wise and pound foolish. Every day I talk to staff people who teach me something about the credit union industry I didn’t know when I came in the door. These people are here for you. Used properly, an Association is one of the most cost-effective employees you have,
Finally if you have to merge than why not consider a merger of equals? In its September 2014 report Filene profiled relatively strong but small credit unions that realized synergies by merging. They were able to grow to meet member needs. If your credit union is stuck in the cross currents of economic change why not proactively make inevitable changes from a position of strength?
Recently the OCC released a report encouraging community banks to collaborate. What it said of community banks is certainly true of credit unions:
“As diverse as community banks are, they share the same commitment to supporting the communities they serve. With this in mind, the OCC sees an opportunity for community banks to share resources and expertise to the mutual benefit of all involved. Some community banks may have excess capacity or may have developed platforms or expertise that enable them to provide shared services to other community banks that may not have sufficient resources or demand. Other community banks may look to collaborate with fellow community banks that share the same core values as a cost-effective way to meet growing demands while retaining their individual identities.”
Here is a copy of the report