The Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994 allowed full interstate expansion for banks, whether through de novo branching or mergers. The full provisions of the law took effect in 1997, and in the 20 years since, the banking industry experienced a massive wave of consolidation.
In the June 30 FDIC reporting period in 1997, there were 11,189 banks nationwide (including thrifts). By the 2017 reporting period, the count of U.S. banks had been sliced nearly in half, to 5,797 banks and thrifts. Though several hundred of those banks left the industry due to failure in the financial crisis of 2008 and ensuing years, most of the decline in bank counts occurred through mergers.
The consolidation in the industry also led to great increases in concentration. In 1997, the 50 largest U.S. banks held 38% of all bank deposits, and the 50 largest branch networks accounted for 27% of all bank branches. In 2017, the 50 largest banks held 70% of bank deposits and the 50 largest networks accounted for 45% of bank branches. Today, the 20 largest U.S. banks hold well over half of all deposits compared to just one quarter back in 1997.
The growth of the top institutions arose at the expense of local community banks, and as smaller institutions merged into larger ones, locally-owned banks evaporated from the upper tier in many U.S. markets. As a result, in 40 of the 50 largest metropolitan areas in the U.S., the three largest institutions by deposit share are all regional or national banks.
In some of the nation’s largest markets, the seven or eight top-ranking banks (by deposits) are all large institutions based out of state — e.g., Baltimore, Orlando, Philadelphia, San Jose, Tampa and Washington. Other markets such as Atlanta and San Francisco include locally-based banks in their top-share tiers, but those institutions (SunTrust and Wells Fargo, respectively) still have regional/national operating models.
In many such markets, community-chartered credit unions have grown into the void left by bank consolidation. In 17 of the 50 largest metros, credit unions represent the largest locally based provider (when ranked by deposits), including markets as widespread as Baltimore, Tampa, Phoenix and Seattle.
Some Top-50 Markets Where Credit Unions Are the Largest Community Banking Provider
|Atlanta||Delta||7th||5th||Fidelity Bank (10th)|
|Baltimore||SECU||7th||1st||Columbia Bank (11th)|
|Cincinnati||General Electric||6th||7th||First Financial (7th)|
|Jacksonville||Vystar||3rd||1st||Ameris Bank (8th)|
|Milwaukee||Landmark||7th||4th||North Shore Bank (8th)|
|Portland||OnPoint||5th||2nd||Columbia State Bank (9th)|
|Raleigh||State Employees’||2nd||1st||Paragon Bank (10th)|
|Richmond||Virginia||5th||3rd||Union Bank (6th)|
|Sacramento||Golden 1||4th||1st||Rabobank (8th)|
|Salt Lake City||Mountain America||5th||2nd||First Utah Bank (12th)|
|San Jose||Star One||6th||5th||Western Alliance (10th)|
|Seattle||BECU||3rd||1st||Columbia State Bank (8th)|
|Washington, D.C.||Navy Federal||5th||1st||EagleBank (12th)|
|San Diego||San Diego County||5th||1st||Western Alliance (9th)|
|San Francisco||Patelco||10th||2nd||Fremont Bank (11th)|
In 35 of the top-50 metros, at least one credit union ranks among the three-largest locally based providers, allowing those institutions to use a marketing premise historically employed by community banks – that is, the option for consumers to use a locally based, community-invested provider. At a time when much of the commercial banking side of the industry is bifurcating into divergent segments — the largest regional/national banks and boutique providers emphasizing business over consumer clients — credit unions can fulfill a vital role not only as banking providers, but also as employers, philanthropic contributors and municipal leaders in a manner historically performed by community banks.
All these top-ranking credit unions originally arose from Select Employer Group (SEG) or Trade, Industry, Profession (TIP) charters, but most have since converted to community charters. Nevertheless, the historic origins of these institutions typically facilitated member growth based on either workplace convenience and/or affinity reasons. As a result, average branch deposit bases in these leading credit unions tend larger. Said another way, the institutions typically operate fewer branches than community banks of similar deposit size, and that may impede the institutions’ ability to fulfill a traditional community-bank role.
Still, many of the top-tier credit unions maintain sizable deposit bases and broad branch networks. For example, Desert Financial with 43 branches in Phoenix, Golden 1 with 39 branches in Sacramento, State Employees with 37 in Raleigh, Vystar with 36 in Jacksonville, and Bellco with 21 in Denver.
Overall, credit unions maintain the largest local-provider branch networks in 16 of the 50 largest metros, and hold top-three branch network rankings among that peer group in 33 of the top 50 metros.
The rise of credit unions into the niche created by the erosion of mid-tier, market-wide community banks has distinct implications for four segments of the banking industry.
1. Regional and national banks need to recognize the larger credit unions as legitimate competitors that can approach — if not match — their level of branch convenience.
2. Credit unions aspiring to market-leadership positions must assume the community-leadership roles historically fulfilled by local community banks. That role can include participation in government and quasi-governmental roles (e.g., economic development commission) as well as philanthropic leadership. Examples of such partnerships are growing, including prominent branding initiatives such as Golden 1’s sponsorship of the new arena in Sacramento that hosts the Kings’ basketball games in addition to concerts and other events; and more localized efforts such as WSECU’s long-term partnership for educational programs at the Hands On Children’s Museum in its home market of Olympia, Washington.
3. Traditional, market-wide consumer banks that survive must reemphasize their own community ties and leverage any advantages in product depth or service quality they can create.
4. Smaller banks that lack market-wide branch convenience must consider expansion (de novo, or merger) to broaden coverage, or specialization in a less convenience-driven segment such as commercial banking, mortgage lending, or wealth management.
Numerous industries have migrated to the dichotomy shown in the commercial-bank sector, where success in the middle sales tiers has become increasingly difficult to maintain. For example, in consumer retail, firms such as Walmart and Amazon leverage massive-scale economies to compete on price, and small boutiques can thrive on the personalized service the retail giants could never deliver. But the once-sizable middle ground that department stores previously owned continues to erode.
In the banking industry, years of consolidation have yielded steady increases in concentration, and the loss of 870 more banks over the past three years suggests these trends will continue.
Where is equilibrium? One possible model lies to the north. In Canada, five national banks dominate the landscape, joined by a handful of smaller banks with limited geographic footprints. However, there are no institutions that most American bankers would view as traditional community banks, i.e., consumer-focused, branch-based institutions serving a specific geographic market. Rather, Canada contains approximately 300 credit unions, including 38 institutions with at least $1B in total assets and more than 20 institutions with 20 or more branches. In that context, credit unions fulfill a role in Canada similar to that of community banks in the U.S.
The U.S. population is roughly nine-times larger than that of Canada, so a proportionate scaling of the Canadian model would suggest the end result of consolidation equilibrating at 45 national banks, possibly backed by an assortment
of single-market, commercial-banking specialists (a model adopted by many of the de novo institutions of the past 20 years); and with credit unions filling the middle ground once occupied by traditional community banks. Whether the U.S. reaches that stage remains speculative, but one certainty is that credit unions are increasingly assuming a role among the leading locally-based, consumer-banking options within their respective markets.