Merge or die? Small credit unions struggle to stay afloat.

Despite recent struggles including a decline in lending and a loss of membership, Central Nebraska Federal Credit Union has not considered looking for a merger partner.

At least not yet.

“That would be a last-resort type thing,” said Kathy Hilligas, manager at Central Nebraska FCU in Grand Island, Nebraska.

The $12 million-asset credit union lost nearly $13,000 in 2021 after losing $57,000 a year earlier, according to call report data from the National Credit Union Administration.

The tiny credit union, which has just three employees including Hilligas, is not alone — and its plight underscores the challenges many small institutions face today.

According to fourth-quarter data recently released by the NCUA, the largest number of credit unions sit between $10 million and $50 of assets. But those institutions, which held $37.6 billion in total assets, saw their numbers decline to 1,447 institutions in the fourth quarter, down from 1,541 a year earlier.

The second-largest category includes credit unions between $100 million and $500 million in assets. There were 1,082 such institutions at the end of the fourth quarter.

Credit unions in the $10 million to $50 million asset category reported a 9.8% year-over-year decrease in loans in the fourth quarter. Membership declined 12.4%, and net worth fell 7.6%.

For Central Nebraska, total loans fell from $3.7 million a year ago to $3.3 million at the end of 2021. Hilliagas said used car loans are its bread and butter, but lending in that space has been hurt by a myriad of factors in recent years.

Central Nebraska Federal Credit Union has just one branch and three employees, making it hard to cut costs. But merging with another credit union is “a last resort,” its manager says.

She said part of the overall lending problem has been the stimulus money that the government handed out in response to the COVID-19 crisis. In many cases, Central Nebraska members used that money to pay off loans. Others just held onto it.

“They just wanted to keep it because they weren’t sure what was going on,” she said.

To survive, struggling credit unions could defer rate increases paid on deposits, said Jeff Voss, managing partner for Artisan Advisors. As the Federal Reserve raises rates, there should be an increase in yields on loans and other investments. If credit unions can delay paying higher rates on deposits, net interest margins might expand in the short run.

Additionally, small credit unions need to focus on revenue from fee-based products because those products would not increase assets and thus put more strain on capital ratios, Voss said.

Central Nebraska has considered fee hikes and is also looking at ways to add new lending lines, Hilligas said. For example, the credit union recently added loans for recreational vehicles.

The organization had been making those loans in the past but treated them as car loans. Now the credit union has the ability to go out 10 or 12 years with those loans. “Hopefully people will start to buy campers or boats and that will help,” Hilligas said.

Ultra-small credit unions can often be very focused on their field of memberships and on a narrow set of products and services, said Vincent Hui, managing director at Cornerstone Advisors. Many of them recognize that they can only fill certain financial services needs of their members, he said.

Membership at Central Nebraska dipped to 1,208 at the end of last year from 1,261 at the end of 2020. That was more a case of memberships running off the system due to inactivity rather than people moving their business to another financial institution, Hilligas said. There are few options in town other than a branch of Omaha-based Centris Federal Credit Union, she said.

Central Nebraska is considering meeting with some of the larger social groups in town to drive membership. Anyone working or living in Hall County, Nebraska, is eligible to be a member, and the city has information about the credit union that it distributes in its welcome packets, she said.

One solution for small credit unions may be partnering with other credit unions to provide services that they don’t have, but this may not be a long-term solution, Hui said

Voss agreed that partnerships could help, including loan participations. He also said expense control is critical.

“These are tough decisions, but it sounds like survival techniques such as staff reductions might be in order. With fewer members, the need for excess staff is not there,” Voss said.

But with just three people on staff at Central Nebraska, “we can’t cut any more,” Hilligas said. The organization serves Grand Island and its 51,000 residents from just one branch.

A merger is another possible avenue, and one that small credit unions are often forced to take. The NCUA approved 40 mergers during 2021’s fourth quarter, up from 37 during 2020’s fourth quarter. Most of these involved relatively small credit unions.

But Hilligas said that idea is off the table for now, although she concedes that keeping the credit union’s head above water is a daily worry. “It’s all kind of on me,” she said.

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