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Of Credit Unions Big & Small


At Olden Lane, we remain bullish on the future of credit unions, as the industry continues to thrive. Last year alone, credit unions added 4.9 million new members, swelling total nationwide membership to more than 116 million.

But, these headline numbers disguise a disturbing trend. Almost all of the membership and asset gains can be attributed to the largest credit unions. In fact, today the 100 largest credit unions account for an astounding 44% of the industry’s assets, up from 39% a decade ago. As Chart 1 below highlights, while other credit unions struggled to grow assets at all last year, the club of credit unions with $1 billion or more of assets managed almost 10% asset growth.

Chart 1. Credit Union Total Assets

Meanwhile, smaller credit unions, with under $100 million in assets, are disappearing at an alarming rate. As Chart 2 illustrates, last year alone, 212 small credit unions were lost to merger or closure. According to one forecast, if the trend continues at the current pace, only 60% of all credit unions will still be standing in 2027.

Chart 2. Number of Credit Unions

To be sure, smaller credit unions are challenged on several fronts. First, absent economies of scale, the cost of doing business can be overwhelming. After the 2010 introduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, the credit union model struggled to maintain its footing, shuffling staff and priorities to respond to the increasing compliance demands. Today, additional outsized regulatory costs are once again on the horizon, with the upcoming changes related to CECL.

While lending growth has been impressive over the past several years, smaller CUs have struggled to find ample spread with interest rates so low and the curve so flat. These credit unions are reluctant to raise fees to keep up, as higher fees are frustrating to the cooperative model and, traditionally, low fees have been a hook to attract new members.

At the same time, consumer demands for more and better online and mobile banking options are accelerating. And, the cost of providing banking services in 2019 has layered on significant costs for small institutions. New online options are a compliment to (not a replacement for) existing telephone and in-branch banking. Employer-based credit unions have faced an additional challenge too, as many industries continue in a downsizing cycle.

To be sure, consolidation is hardly confined to credit unions. For example, as Chart 3 shows, the number of FDIC-insured banks in the U.S. dropped below 5,000 last year, down from almost 8,000 in 2002. 

Chart 3. FDIC-Insured Banks

But, small credit unions meet a specific and acute need. And, their increased rate of disappearance is troubling indeed. These institutions tend to serve members that other institutions cannot or will not. They have a reach and accessibility to a broad spectrum of typically underserved populations — low-income people or specific ethnic communities, for example — that sometimes garner little attention from banks.

At Olden Lane, we have been impressed by the resilience and forward thinking of a cohort of small credit unions not content to be resigned to any particular fate. We were particularly impressed by a recent letter from the CUNA Small Credit Union Committee to the NCUA’s Director of the Office of Examination and Insurance. The letter challenges the NCUA to “truly weigh” the effects of the continued loss of small institutions. The group questions whether fewer small firms will: (1) make the defense of a preferable tax status less tenable, (2) equate to greater concentration risk on the share insurance fund, or (3) lead to changes in NCUA operating structure that overly burdens the fewer remaining small CUs.

As importantly, on a more practical level, we have been honored to work closely with management teams of several firms that are laser focused on the efficient provision of services for their members. Several of our clients have adopted responsible growth strategies that make it more likely that they might capture the economies of scale available to the larger institutions. In increasing numbers, our smaller low-income designated credit union (LICU) clients are turning to secondary capital. Used responsibly, secondary capital can give a boost to a credit union’s growth plan.

Secondary capital is an important regulatory benefit for LICUs. As the NCUA described, secondary capital

"allows these credit unions to build temporary capital from external sources. Without secondary capital, the growth rate of low-income credit unions is constrained by their ability to add capital only through retained earnings. If assets grow at a rate faster than capital grows internally, the credit union’s net worth ratio declines. This constraint on the ability to add capital can also adversely affect a credit union’s expense ratio by making it more difficult to achieve economies of scale."

While by no means a panacea, we have seen secondary capital deftly employed by LICUs looking to: (1) support profitable growth without diluting capital; (2) expand products and services; and (3) diversify capital sources. 

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