Bleak Future for Small Credit Unions

The National Credit Union Administration (NCUA) painted a bleak outlook for small credit unions in its proposal to raise the asset threshold for small entities to $100 million in assets.

NCUA described these small credit unions with less than $100 million in assets as competitively disadvantaged and generally facing significant challenges.

NCUA compared the performance of federally insured credit unions (FICUs) with less than $100 million in assets to credit unions with more than $100 million in assets between 2001 and 2013 across a number of performance metrics.

NCUA found that smaller credit unions lagged behind the performance of their larger peers across these different measures during this time period.

For example, NCUA concluded that smaller credit unions consistently demonstrated an inability to grow their deposit base at a rate that keeps pace with larger credit unions making it more difficult for these smaller entities to cover their fixed costs.

NCUA also found that "FICUs with less than $100 million in assets as of the end of the year 2000 had their membership shrink by 0.5 percent annually over the next 13 years. In contrast, FICUs with more than $100 million in assets as of the end of the year 2000 grew their membership by 2.3 percent annually over the same period."

Also, these smaller credit unions had higher operating expenses per unit of assets and per dollar of loan originations relative to their larger peers and were less profitable. NCUA found that the earnings gap between small and large credit unions averaged 40 basis points over this time period.

NCUA further noted that challenges related to lagging deposit growth, stagnant membership, and high operating costs have caused credit unions with less than $100 million in assets to merge and/or fail at higher rates.

My general takeaway from NCUA's analysis is that many smaller credit unions will have difficulty fulfilling their mission and remaining independent in the long-run.

Read the proposal.