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Spotlight on Economics: Evolution of Small-asset Credit Unions

Small-asset credit unions are the most common, comprising 23 percent of all U.S. credit unions in 2012 and averaging 900 members.

By Gregory McKee, Associate Professor/Director of the Quentin Burdick Center for Cooperatives

North Dakota State University

Credit unions are financial cooperatives. Reaching a maximum of approximately 24,000 entities in 1969, 7,240 credit unions were operating on Dec. 31, 2012. These cooperatives originally were designed to provide deposit and lending services to communities sharing common attributes, such as employment, geographic location or religious affiliation.

The concept of the common bond has shifted through time so that automated credit assessment tools have obviated certain formation concepts.

The smallest credit unions, those with $10 million or less in assets, may be the most likely to preserve the conceptual rationale of formation. Small-asset credit unions are the most common, comprising 23 percent of all U.S. credit unions in 2012 and averaging 900 members. In contrast, the average credit union nationally had 13,700 members in 2012.

Small-asset credit unions tend to be located in areas that are underserved by traditional financial service organizations such as banks, thrifts and large-asset credit unions. The Federal Deposit Insurance Corporation (FDIC) estimates that nearly 20 percent of U.S. consumer households have a relationship with or a substantial reliance on alternative financial service providers. The FDIC concludes that approximately 51 million adults live in underbanked households.

Do small-asset credit unions respond to macroeconomic, regulatory and technological changes in ways that continue to allow the viability of firms that preserve the conceptual rational of the narrow common bond? One can examine the changes in these credit unions during and following the Great Recession of 2008 through 2011.

During this period, two-thirds of all small-asset credit unions shifted their operational focus. Substantial asset and deposit growth occurred, accompanied by lower growth rates for net income and total loan activity.

An increasing fraction of small-asset credit union assets were not converted to loans. This conversion of assets is at a lower rate of change that is distinct from the industry average. Hence, a persistent gap in efficiency between small-asset credit unions and larger ones has developed.

Internal and external changes to credit unions are occurring. Current loans are increasingly being channeled to fund real estate purchases as opposed to prior short-term vehicle loans. The real estate product options in the short term appear to be a responsive pathway, given the asset constraints.

Macroeconomic forces affect small-asset credit unions. Compared with the average credit union, small-asset credit union performance is particularly sensitive to changes in housing values and unemployment.

Increased home loan volume is inversely associated with deposits, which indicates how per capita income ultimately is spent. Furthermore, the membership of the small-asset credit union is not as concerned with many of the features of transactional online websites as opposed to customers of other credit unions or financial institutions. No statistical significance of website use by small-asset credit union members is evident.

As U.S. credit unions continue to consolidate in numbers due to factors associated with market awareness, product offerings, technological change, competition and economies of scale, small- asset entities will have to adapt to a changing financial services landscape. Management of small-asset credit unions will need to focus on shifting member financial requirements to better serve the customer base.

NDSU Agriculture Communication – May 27, 2015

Source:Greg McKee, (701) 231-8521, gregory.mckee@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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