Small Credit Unions Are Thriving

A prevailing perception of small credit unions is that they are barely surviving. The credit unions are generally depicted as constantly struggling with marketing loans, attracting new members, retaining and recruiting talented leaders and board members, and keeping up with the rising costs of operations and technology.

Indeed, some industry observers have ominously warned credit unions that fail to scale to at least $500 million or $1 billion in assets will become irrelevant in their marketplace and face extinction through consolidation.

That prevailing perception, however, has been debunked by a new Filene Research report, “The Puzzle-Solving Approach That Enables Small Credit Unions to Thrive.”

Between 2005 and 2021, despite the Great Recession, a low-interest rate environment and the COVID-19 pandemic, the highest-performing credit unions with less than $250 million in assets outperformed the industry at large in assets, loans and member growth, according to the report. What’s more, in 2021, the highest performing credit unions with less than $250 million in ­assets had effectively the same ROA as the peer group of $5 billion credit unions.

“I think this is one of the most important things that we’ve learned over the past year in this research,” Filene Research Institute Senior Director of Market Insights and Advisory Services Taylor C. Nelms said during a webinar that highlighted some of the report’s findings. “We know that many small credit unions are not just surviving, not just hanging on, but [they are] actually thriving. And we have a lot of data to back this up, both quantitative and qualitative.”

That quantitative and qualitative data included a statistical analysis of 17 years of financial performance using the NCUA 5300 Call Report of approximately 3,000 credit unions with between $10 million and $250 million in assets, two rounds of listening sessions with small credit union leaders and experts, informational interviews with research and industry experts, and hundreds of hours of desk research.

Mike Higgins, managing partner of Mike Higgins and Associates in Prairie Village, Kan., who was one of the co-authors of the research report, said these small credit unions managed to remain relevant in the marketplace by increasing membership from about 3% to 6% a year.

“So that was the first thing we saw was that they had consistent [member] growth. When we start to look at the balance sheet, some of the [common] characteristics – they were good at lending and they were good at lending without depleting their capital,” Higgins explained. “Meaning, they could extend credit within a risk tolerance and manage it very well. And the ones that were the most successful had a higher loan to asset ratio. So if you think of all your assets, the more of them that are earning the loan yield, which is higher than what we could earn as an investment, that’s a good way to generate a higher ROA because more of our assets are getting a higher rate of return to provide some capital for us to support some growth and maybe invest in the cooperative.”

Higgins also said the thriving credit unions were good at core deposit growth, which indicates they were retaining members and attracting new members as well; they are also good at generating non-interest income, or what he called the friendly type of income that doesn’t turn off members.

Those low-cost deposits grew about 8% to 12% annually, while loans averaged about 6% to 10% every year and non-interest income was about 9% a year.

It’s not explosive growth, but it is steady – and boring – growth, he noted.

“I like to say in this industry, boring is really exciting,” Higgins said. “You show me a steady growth rate, somewhere between 5% to 6% on the low end and maybe 8% to 9% on the high end with a real low standard of deviation of performance, and that’s the most exciting thing in the world because you’re consistently able to hammer that out.”

The research report also included details that show how seven small credit unions are thriving: The $90.5 million Ironworkers USA Federal Credit Union in Portland, Ore., the $108 million Calhoun-Liberty Employees Credit Union in Blountstown, Fla., the $154 million Tongass Federal Credit Union in Ketchikan, Ark., the $129 million Southern Chautauqua Federal Credit Union in Lakewood, N.Y., the $258 million Guadalupe Credit Union in Santa Fe, N.M., the $274 million Dawson Co-op Credit Union in Dawson, Minn., and the $326 million St. Cloud Financial Credit Union in Sartell, Minn.

Filene researchers separated data from credit unions that had grown to more than $250 million in assets by the end of the study, or what they called the “big gainers” group of about 500 credit unions, from those that remained below $250 million, or what the Filene researchers called the “sustainable growth” group of roughly 2,400 credit unions.

The research also conducted exploratory analyses to identify the key correlates of member growth, loan growth and asset growth for these groups. For the purposes of the financial analysis, the report looked at credit unions with less than $230 million in assets and those that started with less than $250 million in assets and grew above that threshold to get a wide-ranging view of how different groups of credit unions have performed.

While the Filene report acknowledged that the NCUA defines a small credit union as one that manages assets under $100 million, researchers found that among credit union professionals, some suggested higher thresholds of $250 million, $500 million and even $1 billion. The report explained that it did not adhere to any of these standards because while asset size does matter, it was not uniformly salient for the leaders of thriving credit unions.

More importantly, however, the report stated that the drivers of small credit union success are widely applicable regardless of asset size.

“From the leaders of these thriving small credit unions, we know that they all approached the challenge of running a small credit union like a small business as a puzzle to be solved,” Nelms said.

For the thriving small credit unions, those five puzzle pieces included:

1. Having a deep understanding for their market and its unique and pressing financial needs. 2. Forming their credit union identity to serve its market around being hyperlocal, nimble and essential. 3. Embracing strategic tradeoffs to capitalize on opportunities that align with what matters to their members and the community. 4. Proactively communicating with employees, board members, vendors, community partners and regulators. 5. Leveraging their balance sheet to tell their story.

Here are few examples of how credit unions are putting those pieces of the puzzle together.

Ironworkers USA developed a deep understanding of its members who don’t have consistent employment, must travel some distances to get to job sites and need temporary housing to be near their jobs. The credit union works with members in creative and unorthodox ways to meet their needs, such as providing a loan to purchase a trailer to save on housing costs. Credit union employees also monitor ACH data for predatory lending activity and then offer products that enable members to finance a car, for example, with a substantially lower interest rate loan.

To capitalize on its unique knowledge of its member market and to fuel growth, Ironworkers USA changed to an associational common bond charter in 2018, which enabled it to serve ironworkers across the nation. Since that year, Ironworkers has seen its assets grow by 261% and its average monthly lending has nearly tripled, according to Filene.

Southern Chautauqua has solidified its identity around protecting its members from predatory lenders, helping members build or rebuild their credit, and working to support the community. It charges minimal fees and offers generous fee-forgiveness options and financial education. What’s more, Southern Chautauqua is not dependent on FICO scores when decisioning a loan as it has developed its own underwriting standards based on its membership and has a detailed interview process that allows the credit union to determine the member’s desire to repay the loans.

The credit union’s lending focus of used cars and refinancing credit card debt generates a high loan yield of 6.52% that produces an above average net interest margin of 4.18% and a below average net charge-off rate of 0.22%, according to Filene.

To maintain its trust with members, Guadalupe’s primary strategy is to treat all of them – Indigenous and Native American peoples and multigenerational Hispanic families, especially immigrants and Dreamers – with dignity and respect.

To keep members’ trust, the credit union’s strategic tradeoff is to invest heavily in employees and other stakeholders, such as by hiring financial coaches that focus on supporting members’ sense of safety.

Members prefer to conduct business in person because they do not have reliable access to, nor do they particularly trust, the internet. Many of them feel like they are being surveilled and they want to leave as few virtual breadcrumbs as possible, according to Filene.

Guadalupe trains employees to be supportive of their members to keep reinforcing that bond of trust. To limit turnover, Guadalupe prioritizes employee well-being by providing targeted training so that employees gain the knowledge and proficiency for professional and personal growth.

According to Filene, Guadalupe’s strategy and tradeoff generates a high loan yield of 6.82% that produces an above average net interest margin of 3.45% with average net charge-offs.

Calhoun Liberty’s operating principle is that people deserve dignity and respect. After Hurricane Michael in 2018 devastated the communities it serves, the credit union stepped up its efforts to coordinate with other credit unions within a 200-mile radius to keep its ATMs filled with cash, as they were running more than 1,100 transactions per day, in addition to cashing checks for non-members. The credit union’s employees also showed up with chain saws to clear out residents’ yards.

In addition, Calhoun Liberty bought new bleachers for county parks as part of the $300,000 it invests in the community every year. The organization even asks regulators to calculate its financial performance with and without the money that it gives back to their community. This is the organization’s way to explicitly show how its balance sheet could look, but that it chooses instead to be a supportive community member.

Nevertheless, the credit union’s lending focus of vehicle and consumer loans that account for 71% of its assets generated a high loan yield of 5.79%, which produced an above average net interest margin of 3.77% with below average net charge-offs of 0.13%, according to Filene.