By Doug Wadsworth
I had some interesting interactions recently, which I think deserve an analysis from my small credit union perspective. Consider the following:
Story 1: Yesterday, the CEO of a $25 million credit union on the East Coast) told me they will likely merge-out in the next few years, probably soon after her upcoming retirement. She serves a dedicated niche in her community, is financially healthy, and has devoted directors and employees, so this caught me off guard.
WHY? Well, she said that a couple very large credit unions from out-of-town and out-of-state had recently moved into her community, and they were aggressively taking her market share. She doubted her ability to survive in the face of such intense competition, especially when money is likely to be offered as merger compensation for whoever replaces her as CEO. Hmmm. The credit union offering the best value to members, deserves to win, right?
Story 2: I also recently posted something on LinkedIn regarding the underrepresentation of small credit unions on most league and association boards. IE: Even though 80% of credit unions are small, we only make up about 20% of the leadership boards at most, so our voices can easily get overridden (or we just aren’t at the tables when or where decisions are made).
Hence, those organizations are likely to spend most of their time and money on big credit union priorities, rather than small. I get it, the squeaky wheel gets the grease, so my goal was encouraging small CU CEOs to get more involved and active with their leagues and associations.
In response to my post, the board member of a big credit union shared an alternative perspective: Since big CUs serve 80% of the members, maybe small CUs only deserve 20% leadership representation? IE: Small CUs serve fewer members, and members come first–so is there really a problem that ratio of representation?
Story 3: Lastly, a couple months ago I had a chat with a woman who had been an employee of a small local credit union that later got merged into a bigger one. At the small credit union they had an elderly special-needs woman who needed help balancing her checking account, once each month (it took about 30 minutes). Well, after the small CU got merged into the bigger one, she was told by the new management they were only allowed to spend a maximum of 3-minutes per member, so she would need to inform this member they could no longer help her.
Let’s unpack that
I think most people in the small CU ecosystem will instantly recognize some problems with our cooperative “movement” – or at least a narrative that has been growing.
For the rest of you, please consider this perspective (and background): Credit union membership used to be restricted to strict common bonds, so we didn’t really compete or overlap much. Until HR 1151. Now, we are starting to see giant aggressively growing credit unions moving into distant locations, and driving the small local ones out of business. Of course, this isn’t always the case–small CUs need good merger partners sometimes, and it’s not like the big ones are out preying on small ones. But sometimes they kind of are (albeit indirectly).
Some Questions
- Are the large, aggressively expanding credit unions winning the new members and loans because of better service, local flexibility and better rates?
- Or are they growing only as a function of their enormous marketing budgets?
- Are the local members winning when they lose their local, flexible credit union that knew their names and approved loans that big institutions wouldn’t?
- Are the small CU members really benefitting from the “expanded services” of dozens of branches located in distant cities or states (which they are unlikely to ever visit)? Members first?
Small, hyper-local credit unions are known to be the unique community lifelines for people often underserved at large institutions, and they fill a role that large institutions simply cannot duplicate (often by nature of size).
You know those “tug at the heartstrings” stories of credit unions helping members in need, who had been turned down everywhere else? The vast majority of those stories come from small credit unions (a dwindling number of them).
This begs the question: Is anything lost when all the small ones are gone and there are only a few giant credit unions left? What happens to the hyper-local “special sauce” provided by small CUs. When there aren’t any small ones left, will our tax exemption endure, since generally the public considers big credit unions as indistinguishable from big banks?
If you are interested in hearing more of my ideas and experience, check out my new book on Amazon: Keep it Simple, CEO, a DIY Profitability Guidebook for Small Credit Unions.
Doug Wadsworth is CEO of Tri-Cities Community Credit Union in Kennewick, Wash. Doug Wadsworth is also the president of a new non-profit advocacy group exclusively for small credit unions, the Endangered Small Credit Union Defense (www.endangeredsmallCUdefense.org). He can be reached at [email protected] or on LinkedIn here.
21 Responses
If the large credit unions are taking the 25 million CU’s share, it’s because those other credit unions are offering that CU’s members a better value than they are. Maybe that CU CEO should wonder its members are disloyal to irreplaceable valuable niche they provided. Maybe that credit union is hoarding their members capital – as they often do, instead of investing in better rates and fees and convenient services. “Enormous” Marketing budgets only drives more growth when the products and services being marketed are superior. That CU’s CEO recognizes that is what is happening is a symptom of market dynamics and an operating environment in which CU’s below 100 million will not be able to sustain themselves. She should merge. Her members are already voting for it – with their feet.
The board representation is another woe is us story for small credit unions. How does representation on a league or association give your more of a voice? And to who? The decisions the league makes that affects your credit union is whatever dues they charge you. Just another perspective about being beholden to others and anti-large credit union rhetoric. You know you’re allowed to engage with your regulator or advocate with your federal and local officials without going through the league, right?
Thanks for commenting, “anonymous,” all perspectives are valuable.
Interesting you don’t seem to believe that a large credit union’s radically larger marketing budget is a significant factor, I would urge you to dig into that a bit deeper, because asserting that marketing investment only yields a return when tied to truly superior products and services is…kind of absurd?
Actually, why don’t you put your money where your mouth is, and reduce your marketing budget to what a small CU has, and see what happens? Really. Prove it, if big CU “value” is the primary driver of your growth? I remember hearing your common refrain of rationalization/justification when I worked at a billion dollar credit union many years ago.
Yes, some small credit union are “hoarding” member capital, and should give more back (thus helping differentiate themselves by returning even better value). Amen! That’s a message I am trying to spread.
You also assert that small CUs having greater representation (and thus more support and advocacy) from leagues and associations is essentially irrelevant, also seems kind of absurd.. sure, anybody can go try to lobby solo, but how effective will that be? And yes, I am very aware small CUs can find their own voices for advocacy, as a matter of fact I started the Endangered Small Credit Union Defense, for that very reason: http://www.endangeredsmallCUdefense.org.
Lastly, do you have any feedback on what being a cooperative actually is? Or what about the future of the tax exemption, based on the current trajectory of this “movement?” What about the the value of small and truly hyper-local institutions that fill a community lifeline niche that can’t be replaced by big institutions? Thoughts?
Thanks again for your perspective.
-Doug
Agree and to one of the questions – Small credit unions are taking excessive risk by approving loans big credit unions won’t? That’s the small CU value prop you’re selling? You don’t become big by not lending, and guess what, credit unions over 1 billion have caring humans who kmow how to ask questions and understand a members situation, too. Your credit unions has negative loan growth. Is that from approving loans others won’t?
Maybe there is another explanation about lending. Here is 4Q 2025 NCUA Data:
570 credit unions, 50-100 million in assets
-PCA 13.60%
-Annual Loan growth: -7.9%
-Annual Membership growth: -9.23%
-Annual loss rate: .45%
739 Credit Unions, > 500 million in assets
-PCA: 11.12%
-Annual Loan growth: 5.5%
-Annual Membership growth: 3.61%
-Annual loss rate: .82
Why is the small CU loss rate about 45% lower than large credit unions? They’re better lenders? Make better decisions? Or, should smaller credit unions, who think they can’t afford to reserve for losses like everyone else, use their excess capital to take more reasonable risk, offer better rates and try and meet the lending needs of their members? Whose fault is it when a member leaves a small credit to have their borrowing needs met? Their fault, because they are disloyal? The large CU’s fault, because they their capital to add value to members?
I did a little more research and learned Jim Blaine grew his credit union to be the 2nd largest in the world without traditional marketing spend. How? By offering superior products, rates, and service. How was that possible? He gave his members owners back THEIR capital and held 7% not 14%. COF to assets for that 75-100 million segment? 1%. Over 500 million CU’s? 1.91%. The 75-100 million cu’s have a higher NIM, too! So they pay their members less and make more off of them. So when your members leaves to a cd rate that is .75% higher, it was because of an enormous marketing budget. Or likewise, I guess you’re saying they’d even accept a lower rate because they were marketed to? Interesting.
Naturally a 5 billion cu will have a larger budget than a small cu in absolute terms. But as a % of total expenses, assets or on a per member basis? Not so sure about that. Do you have any objective data that supports the claim that larger CU’s have radically larger or enormous marketing budgets?
You seem concerned the large cu’s are hurting the movement and risking the tax exemption. Part of the justification of the exemption was we only have net income as a way to add capital and support growth. If small credit unions don’t give their members their capital back and have inferior products, how is their tax exemption justified? What data would you point to that small cu’s are a “lifeline” niche that larger CU’s can’t fulfill. It’s not more lending, not better rates, not more community impact. What is it?
Howdy again, “anonymous”
Point 1: When it comes to marketing budgets, actually it is ALL about absolute terms (obviously). We can spend $5k/month in ads while a big CU can spend $500k/month in ads. Gee, I wonder which will grow more new accounts? And you want objective data to back up the claim that a $10B CU has a bigger marketing budget than a $50M CU? LOL
Point 2: Ratios don’t tell the whole story, so how do you know CUs have inferior products, or are hoarding capital? While there are certainly some that are (regardless of size), that is quite the generalization. Big and Small CUs are valuable for communities, I celebrate that, and hope we can coexist.
Point 3: You challenge whether small CUs really a local direct “lifeline” to small community niches, approving loans and members that often get denied at bigger institutions? Let me guess, you have never worked at a small community CU, have you? I have worked at a billion dollar CU, and at tiny CUs. And of course how “value being returned” is can be defined in different ways. A big CU saying they are “giving back” by spending hundreds of millions of member capital to build branches in distant cities or states that already have their own local CUs… is that really “giving back” or just “aggressively growing?”
Point 4: I love many big CUs, they make a huge positive impact at a broad scale small ones never could, and are often helpful partners to small local CUs. It is sad that a few ‘bad actor’ big ones seem out to gobble-up all the little ones/ I would suggest that is kindof like driving this movement off a cliff (and likely will be goodbye to the tax exemption). I think that’s a shame, for the people who rely on us all.
Appreciate the discussion.
Counterpoint 1: No, nothing obvious about it being all absolute, not relative. Of course, the larger CU will have larger absolute generate more new accounts than the smaller CU absolute terms. I sincerely hope that that’s not a revelation to you. So what are you saying – it could cost you the same dollar amount, in absolute terms, to grow your 5,500-member base as what > 500 million spends to grow their member base? Wow. You might want to think about why your member acquisition costs are so high. Just facts. Not opinion. So if ratios don’t tell the story, what does? Then, can you comment on how the 2nd largest credit union in the world was grown with no marketing dollars?
Counterpoint 2: How do you know how credit unions are hoarding capital? By looking at their capital ratios. You hold 14% capital, yet your COF / assets is .74, even far lower than the 75-100 million peer group, and your net interest margin of 4.29%, which is way above the 75-100 million asset peer group, and your 1.10% ROA which makes for-profit banks envious.
Counterpoint 3: Hmm… so mergers are one thing, but large CU’s are building new branches outside of their footprint? Or in “distant cities and states” as it were. Can you name just one large CU that us building branches where they don’t have an existing footprint or FOM. Just one example will suffice. Otherwise, you are completely deflecting the point or question. Allow me to re-ask, can you describe in objective terms how small credit unions are providing a lifeline that large CU’s aren’t when small CU membership and loan growth is negative, their loss ratios reflect they are inhibiting credit access for their own members, and the pay shockingly low relative rates to their depositor members? Your COF is .74 bs compared to 1% for other 75 million, and 1.91% for CU’s > 500 million, while you are making for profit bank returns and hoarding your members captial to the tune of 14% of their assets. Can you explain why you’re proud of that, and how that benefits your members? Bonus question: Is that possibly why you have negative YOY membership growth?
Counterpoint 4: Well, your thinking is indicative of the issues with the CU industry. Driving your movement off the cliff? Dramatic much? This is not a movement. This is an industry. Industries remove weak players, which in this case is smaller CU’s that play victims to large CU’s. What exactly does a “bad actor” CU look like? The safe and sound CU that operates 100% within regulatory guidelines and mandates? Is a bad actor one that offer better prices or rates than you do because they choose to give back to their member owners than retain and hold hostage the excessive profit (e.g. 1.10% ROA) they make from members?
Howdy a final time: Your anonymity is inherently untrustworthy in regards to motive and only qualifies for minimal efforts to “justify” or explain the credit union movement to a likely BANKER like you?
Perhaps you are trying to stir up conflict within our movement, to improve your ‘for-profit’ bottom line by getting rid of all of credit unions big and small? Yes, I have specific examples and specific evidence to prove my points. Despite that, I believe most CUs (big and small) are still devoted to a movement that helps consumers better than banks ever will and I want us all to coexist (despite a few bad actors).
Big versus small shops operate differently, and there is more to the story than the ratios you see on paper (especially regarding the operation of tiny credit unions). Unless you have worked at a small CU you will simply never understand how they operate, or why (especially from your corporate “profit” perspective).
Got it, you missed the point. It should seem clear I’m advocating against making excessive profit off your members and then keeping it from them. 1.1% ROA’s aren’t a good look for the movement, and you may have missed your calling as a banker.
This is being posted on behalf of Scott Prior, president and CEO of Connection Credit Union.
There is some important context missing from “Anonymous”. How about some specific examples of what is contributing to these challenges from our state (WA)?
* Intentionally targeting and undercutting relationships small CUs have built with local dealers and community partners often times in place for years. Buy the business and targeting long standing relationships to ‘make a splash’. With a full understanding we don’t have the resources and budgets to compete with that. Is that really ‘members voting with their feet’? I see it as buying the business. That’s different. Let’s be real about what’s going on.
* Throwing more money at community events so they can be the lead sponsor and get the signage and kick the local CU to the curb. Often times it’s something that the smaller CU has sponsored for years and the few opportunities we have are now gone. ‘Big CU $’ that they KNOW the smaller CU can’t compete with. Also buying the business in my book.
* Offering lower rates AFTER the loan is booked when the local CU’s member got pushed to finance with the big CU from the dealer. The small CU just wants their member loans back (yes, they were pre-approved, but the dealer sent them to their big CU partner because they pay more and it’s easier for the dealers). What happens when the small CU tries to get the loan back with a recapture campaign? Our member is now offered a new ‘retention rate’ from the big CU that is usually 1+% lower than what they got at the dealer. This has nothing to do with rates or the product. An auto loan is an auto loan. The small CU’s rates are typically very competitive. They have to be otherwise those of us that are left wouldn’t still be here. It’s the dealer reserves, immediate decisions/funding that they KNOW we can’t compete with. Is this really ‘voting with your feet’? I call it buying the business. It seems predatory to me. This is important context that seems to be missing and it’s the reality of what’s actually going on. This exact scenario happens at least weekly at my credit union.
Every one of these scenarios has been experienced this year in our state from an out of state CU. The vast, vast majority of the larger CUs in this state (WA) respect the smaller CUs (on some level), so this is not bashing on all larger CUs at all. Unfortunately, a couple bad apples spoils the whole bunch in the minds of many.
Or do you believe that all small CUs should just merge out so the billion dollar ones can get to whatever next billion threshold you think you need to get to? If that’s the case, have fun on the road to taxation because that’s exactly where you are headed and you’re driving the bus. At $40 million, I’m not worried about that one bit. Small CUs do not advocate for taxation, but this type of behavior just means more smaller CU voices will remain silent when the fight comes. Again.
The BANKER’s logic is faulty. A high ROA and even high NW Ratio doesn’t mean anything in isolation. Factors such as asset growth and how ratios change over time is vital to the story (as well as considerations of unique memberships, and strategic value return methods).
Right. When those ratios are high because asset growth is flat or declining, because rates are uncompetitive and marings and net income are higher than they should be, is that a good thing? Where would we see the strategic value return?
Then remind me, how did I become a banker? By questioning cu’s that make too much profit off their members and then keep it from them?
Hey banker, your logic is faulty (correlation is not causation). You assume that the asset growth of a small CU must be declining because of lower value offerings. Small CUs with tiny advertising budgets are often going to struggle to gain market share *even with the best service, lowest rates and best fees,* because they can’t compete giant CUs marketing budgets that are 1,000X bigger.
Likewise- net income looking “too high” depends on many factors, especially at a small CU (are they preparing for a jump in deposits, or for a major investment like a new core), or maybe recent rapid growth requires boosting the NW Ratio to examiners off their back.. You just don’t understand the small CU ecosystem (and why would you).
If you’re a community chartered credit union, don’t you compete with every credit union that has that same community? Not sure why being small but having the same FOM makes the big one evil?
If you are a community chartered credit union, don’t you compete with every credit union that has that same community? Not sure why being small but having the same FOM makes the big one evil?
I am optimistic about the focus of the anticipated new Chairman of the NCUA, John Crews. Note his Small Credit Union comments to Congress today (particularly to the “one regulation size fits all” suspected banker:
“….The overwhelming majority of credit unions are quite small, and they need and deserve a regulator that respects their limited resources with an efficient risk-based approach to supervision.”
….Asked about the decline in the number of community-based financial institutions, including credit unions, Crews responded, “I agree it is a serious concern…especially in rural America. As I mentioned in my opening statement it will be a priority of mine to find ways to support that de novo chartering of new credit unions. In my opinion, we’ve seen the downward trend for the last two decades and some of that is competitive. But much of it is a regulatory response. In an effort to weed out too big to fail, we have created another problem, which is too small to succeed.”
“At the top of my list when it comes to being an efficient an effective regulator is thinking through how we can tailor our regulations to support the success of our smallest institutions and, in particular, our rural institutions.”
Thank you for recognizing this reality, Mr. Crews, and I look forward to working with you on behalf of my own small CU, as well as the Endangered Small Credit Union Defense. – Doug
Gosh, probably not the first time someone panders to his new stakeholder base, now is it? Sure, by number small CU’s are his primary base, but he will soon realize he needs to protect the assets and member capital dollars, and make things easier for large CU’s including expedited approval of bank acquisitions and small CU mergers. Then he needs to focus on all the small credit union fraud and failures that are costing the industry.
To the other “anonymous” asking about community chartered credit union: Great question, thanks for asking. I suggest you research HR1151, and how the FOMs have expanded over the past 20 years, which has resulted in giant CUs moving into distant small communities without any reasonable “common bond” association, and then increasingly driving the small local original ones out of business. Again, often just by virtue of a giant advertising budget, not necessarily because of “superior value” at the bigger institution. Enormous advertising budgets trump value offering. And again, what happens when all the small ones are gone… you really think the tax exemption or this movement will endure when the general public considers big CUs as indistinguishable from banks? Why did the industry associations allow this to happen? Who is driving the these decisions? Follow the money. Are we a really not-for-profit “cooperatives” – that is the big question. -Doug
Just more divisive rhetoric. Who decided that consumers can’t tell the difference between big CU’s and banks. You? The member owners of those large credit unions? Respectfully disagree about these “enormous” marketing budgets. Marketing is largely about brand awareness and consideration, not just product specific marketing. Maybe you would accept a 1% lower CD rate because you saw a nice billboard or tv commercial, but you aren’t representative of most consumers. Do you have any objective data or facts around these enormous budgets? How much more does a large credit union spend per member than a small CU? Saw a commenter raise State Employyees as an example. Do you have a perspective on how they grew to 50+ billion with no traditional marketing? How do you square that with u supported hypothesis that marketing dollars will sell inferior products?
Most big CUs are awesome, and focused on members and helping, and I would happily merge with them if I had no other options or if it was in the best interests of my members. Big CUs are especially awesome when they serve their communities and members in their *own original communities,* without reaching across state lines by buying out distant small ones to get a FOM foothold to take over there. Actually, that is fine too… unless and UNTIL they start driving all the small existing local ones in those other communities out of business in the process, I think that is very short sighted, and will eventually drive our movement right off the cliff (losing our tax exemption). Read my next article: If this “industry” can’t keep small well run cooperatives alive (and instead starts cannibalizing its own children), we aren’t a cooperative movement anymore, we are a market with a tax exemption (that is unlikely to last long). -Doug
We already are just a market with a tax exemption. Movement is a myth and should not be an aspirations. Maybe you should research the more common and popular movements – they had one thing we don’t – Unity. Small CU’s are divisive and try to segregate themselves.
You also don’t “buy out” smaller credit unions. Credit unions aren’t bought and sold, and CU mergers are not involuntary endeavors. The smart leaders of small CU’s understand the current and future market forces at play. If a small CU is weak enough, and irrelevant enough to their members to be driven out if business, well that’s just a market reality. Maybe they don’t provide this mythical hyper local value no one else can provide after all.