Small Credit Unions Not Sharing in Recovery

Small credit unions had an advantage in interest income, fees and provision expenses in the fourth quarter over those with more than $1 billion in assets, but small credit unions’ high overhead burden kept their margins far below larger ones.

A CU Times analysis of NCUA data released March 4 showed the 4,832 small credit unions’ annualized return on average assets was 0.59% for the three months ending Dec. 31, down from 0.66% in the third quarter and 0.60% in 2019’s fourth quarter.

For the 301 medium-sized credit unions (assets of $1 billion to less than $4 billion), ROA was 0.83% in the fourth quarter, roughly on par with both 2020’s third quarter and 2019’s fourth quarter.

For the 74 large credit unions (assets of $4 billion or more), fourth-quarter ROA was 1.00%, an improvement not only of 13 basis points from the third quarter, but also 6 bps from 2019’s fourth quarter.

Net income isn’t the end-all goal of credit unions, but it is the engine that keeps net worth margins in safe zones, and provides the capital credit unions need to invest to be able to attract and retain members with the level of services they expect.

Overall, the NCUA showed net income came in at 0.83% for the fourth quarter, up from ROA of 0.80% in both 2020’s third quarter and 2019’s fourth quarter. For the year, ROA was 0.71%, down from 0.94% in 2019.

The results were in line with Feb. 11 estimates from Callahan & Associates of Washington, D.C. Economists at CUNA and at CUNA Mutual Group, both of Madison, Wis., estimated Feb. 12 that ROA would be 0.65% for the year and 0.66% for the fourth quarter.

Fourth-quarter income was bolstered in part by sales of mortgages as the refinance boom continued through the end of the year. Originations, however, increased by size, further skewing income toward the larger credit unions.

The size limits used in this analysis were created to divide credit unions into cohorts with collective assets and members of roughly the same size.

The NCUA has six size classes, which date back decades and tend to more evenly group credit unions by the number of institutions. The smallest is for credit unions with under $2 million in assets (there were still 365 of them as of Dec. 31) and the largest is for the 659 credit unions with $500 million or more.

Mergers are swallowing up some of the smallest credit unions, and growth is pushing others into new size groups. Last year, 44 credit unions surpassed $1 billion in assets, and 19 surpassed $4 billion. None sunk below those thresholds.

The smallest credit unions are also the ones that dominate the ranks of the undercapitalized.

As of Dec. 31, the NCUA classified four credit unions as “critically undercapitalized,” which it defines as having a net worth ratio below 2%. That number is up from three as of Sept. 30. Seven were “Significantly Undercapitalized” (2% to 3.99%), up from six three months earlier.

There were 39 “Undercapitalized” (net worth ratio of 4% to 5.99%), the same number as Sept. 30, and 110 were “Adequately Capitalized” (6% to 6.99%), an increase of 18 since Sept. 30.

Among the 50 credit unions with any degree of undercapitalization, the largest by far is Municipal Credit Union of New York, N.Y. ($3.8 billion in assets, 590,784 members), which is classified as “Undercapitalized” with a net worth ratio of 4.96% as of Dec. 31, up 22 bps from a year earlier. MCU was placed into conservatorship by the NCUA in May 2019 following a fraud and corruption probe.

Among the others, five had assets of $100 million to under $500 million, 24 had assets of $10 million to under $100 million and 20 had assets under $10 million.