The Rundown

• By 2025, the United States will have around 4,500 creditunions.
• Many smaller credit unions don't have the wherewithal tocompete with banks.
• The cost of technology and regulations will continue totake a toll.

Every day, six days a week, a credit union closes and neverre-opens.

That has been going on for many years. More than 3% of creditunions have annually closed for the past decade. By 2025, theUnited States will have around 4,500 credit unions.

Do the math. Look to your right, look to your left. One inthree credit unions will vanish by 2025.

“The herd is thinning,” said Ted Bilke, president of San Diego-based core system providerSymitar Systems, who said that Symitar, in its market analysis, isassuming a continued 3% annual attrition.

That mortality rate raises questions. First, who is likeliest todie?

“The ones that go away are the smallest credit unions,” saidMike Schenk, a CUNA vice president in Madison, Wis.

How small is small? “Opinions vary about the smallestsustainable size,” said Bill Myers, head of the NCUA's Office of Small Credit UnionInitiatives. He said, however, “below $30 million in assets,it is hard to establish a fully functioning, sustainable creditunion.”

Other experts pick higher numbers. Consultant MarvinUmholtz said a minimum of $100 million in assets is necessaryfor viability, and he noted that as of September 2012, there werearound 1,400 credit unions with that bulk.

Stuart Perlitsh, CEO of Glendale Area Schools, a $327 millionCalifornia credit union, also sees $100 million as the number tohit.

“Credit unions less than $100 million in assets aremerging,” he said. “[They] lack the resources to provide theproducts and services required of a financial institution. Credit union members want home banking, bill pay, ATM access,remote-deposit capture. And they want it free. At the sametime, debit interchange income is declining. The compressionto the bottom line is huge. The speed of mergers andconsolidation will move quickly.”

But some see the bar set higher. Peter Duffy, managingdirector at investment bank Sandler O'Neill in New York, said,“Somewhere around $500 million you start to have scale. Ifyour management is good, you can be competitive at $500 million.Below $500 million it's mathematically difficult to becompetitive.”

Size matter, but the death of small credit unions is notan inescapable conclusion. The NCUA's Myers did not in hiscarefully selected words issue a death sentence for many thousandsof small credit unions He said $30 million is the minimum tobe fully functioning, but that's a hedge and outside that perimeterare the many institutions that are in effect savings clubs with acredit union charter. They often have no paid staff. and theirservices amount to savings products and issuance of loans, oftenunsecured signature loans, and maybe car loans.

Fred Becker, CEO of NAFCU, pointed to Shiloh of Alexandria FederalCredit Union, a $2.4 million credit union affiliated withShiloh Baptist Church of Alexandria, Va., as a case in pointof a successful, tiny credit union with a future. “I have beenthere. It will be around as long as it has the support of itschurch deacons, and there is no reason to think that will change,”said Becker.

Have impassioned support of a membership that believes, theimpossible become possible, and credit unions that on paper shouldevaporate can stay alive.

The ones in peril are the ones that find themselves competingacross the product spectrum with much larger institutions, andtheir difficulty, said consultant Tom GlattJr., is that they don't have the money to grow. They also arewhipsawed by not having the size to effectively compete on anefficient basis with larger credit unions and banks.

Bilke wrapped grim specifics around his forecast. “When you lookout to 2025, among credit unions with up to $50 million, there willbe 50% fewer”

Very few of these institutions actually fail. Conservatorshipsby NCUA are rare. Mergers, typically into bigger credit unions, arethe preferred exit route and a good merger solves twoproblems. It puts a small credit union out of its pain, andit also enables a bigger credit union to grow by delivering memberswho already are sold on the credit union difference. And that isprobably the biggest challenge for any credit union to communicateto nonmembers.

In Arlington, Va., Theresa Mann knows a lot about mergers as shecarves out a path to survival for small credit unions with ThePartnership, a federal credit union where she serves as CEO. It now has $144 million in assets. In 2008, when itessentially was just the credit union for employees at the FDIC, ithad $70 million in assets.

But at that size, Mann realized, its future was perilous. So she engineeredbringing in other credit unions, from the National ScienceFoundation's employees to employees of Fannie Mae.

Those moves have doubled her credit union's size but, said Mann.“We are not big enough to do what we want to do at our currentsize.” She added that she is on the hunt for additional mergerpartners that will help achieve economy of scale.

Is she doing enough, fast enough? Mann lately has come to thinkthat maybe the $500 million number is the right size for creditunion health, so she knows she needs to stay alert to growthpossibilities. “We want to get bigger,” she stressed, “so we canoffer our members more.”

Merger may be the exit route of choice for some institutions.But what about the small credit unions that are not there yet?

In San Bernardino, Calif., Gregg Stockdale, CEO of $35 million 1st Valley Credit Union, knowsthat he is sitting on a sharp stick. “We used to think weknew the answers, now we know we don't even know the questions,”sighed Stockdale who, incidentally, is said by experts to berunning a small credit union that has a good future despite itssize.

“Most small credit unions aren't making headway, they just arestruggling to keep bobbing in the waters,” he said. And, suggestedStockdale, the waters are getting deeper and more turbulent, atleast for small credit unions.

“The biggest challenge is adapting to technology,” saidRed Bank, N.J., CPA Bob Fouratt, amanaging partner in the Curchin Group, an accounting firm withcredit union clients. He pointed to home banking and mobile bankingas must haves that nonetheless baffle many smaller institutions,both technologically and in terms of costs to implement.

But there is not much choice, suggested banking futurist BrettKing who indicated that the typical credit union customer isnearing 50 years of age, and the younger demographic that is neededto forestall marketplace irrelevance sees the technology tools as amust-have.

Another cause of death, and a surprisingly common one,- iswhat some experts calling “aging out” of an institution'sleadership, meaning the CEO and the board of directors. Fewhave succession plans in place. Faced with the need for a new CEO,some institutions decide that it just is simpler to merge theinstitution out of existence.

Experts said regulatory burdens that are the sharply risingcosts of complying with primarily federal regulations also woundsmall credit unions. That price tag is on a straight uptrajectory. Small credit unions are having a very hard timecoming up with the money to pay the bills to stay compliant.

Another factor behind that dearth of small credit unions is thatonly two new credit unions are chartered each year, saidMyers. Of those two, one will die within five years, addedMyers. That means that new institutions are a negligible factor inany count of small credit unions.

As for solutions that will help small credit unions prosper,many eyes now are shifting to collaboration. That will help moresmall credit unions survive, said Myers.

“Credit unions are learning that before we all built silos, nowwe are turning more into a network,” said Stockdale. “We reach outto other credit unions for assistance. We are outsourcing. We can'thave staff to do everything.”

On the drawing board, or in pilot programs, said experts, areeverything from shared compliance officers (the New Jersey CreditUnion League has a case in point of pooled compliance assistance) to shared core systems andother hosted computing services.

Expect to hear more ideas for shared services because that isthe way to deliver state of the art service at digestiblecosts. “Small credit unions can approximate the coststructures of large institutions when they pool together to buyservices.” said Myers.

Such measures doubtless will help save many hundreds ofenergetic small credit unions. But the inevitability is that by2025, several thousand smaller credit unions will be pared from therosters.

And that will have impacts on the living.

How will healthy credit unions be impacted? That question israised by Henry Wirz, CEO of SAFE Credit Union, a $1.9 billion credit unionheadquartered in North Highlands, Calif. “Healthy credit unions donot merge,” said Wirz. He wonders how the 4,500 credit unions thatare expected to be standing by 2025 will have been able to safelyand profitably absorb perhaps 2,500 credit unions to get from nowto then, particularly since almost all of the 2,500 are troubled byone definition or another.

“The capital cost [of merging a credit union with a troubledbalance sheet] will also slow growth because absorbing troubledcredit unions will mean there is less capital to meet regulatoryrequirements,” said Wirz. “The required capital levels aresure to grow and add to the problems caused by using capital tosupport mergers.”

Wirz, in that respect, wonders if it might be better for theindustry just to liquidate the failing credit unions.