CEO Commentary: Underperforming CUs Hurt the Industry

The credit union system lacks an appropriate mechanism for dealing with problem institutions. In the for-profit financial sector, poor performance often results in a merger or take-over by another institution replacing management and the Board of the underperforming one. The credit union system often allows members to suffer years of poor service and falling asset quality.


The credit union system lacks an appropriate mechanism for dealing with problem institutions.  In the for-profit financial sector, poor performance often results in a merger or take-over by another institution replacing management and the Board of the underperforming one. The credit union system often allows members to suffer years of poor service and falling asset quality. The cost to the credit union system in terms of image and lost capital is significant.    

We all know credit unions in our own area that have poor member service.  These credit unions, frequently with double digit capital levels, are not likely to merge or change.   Every business needs a process for culling the poor performers.  We don't have a process.  In fact the credit union process of waiting for regulatory pressure or action may lead to bigger and more frequent problems.

The NCUA and various state regulators have risk based exams that take place about every 18 months. They receive call reports every three months. With insurance losses now reaching over $200 million and estimates of more to come, reliance on the regulatory process is not a sufficient response to underperformance.

Members do not control the operation of the credit union.  They rarely vote to elect Board members—most of the Board is appointed and runs without opposition.  Members have no financial ownership of the credit union. They frequently perceive themselves to have the same relationship as customers have with a bank.  Members most often vote with their feet.  If the credit union is not meeting their needs, they move their account someplace else.  Members need to be given greater incentives to pay attention to what the Board and management are doing.

Credit unions have a lot of capital.  This leads to a false sense of security.  High levels of capital have the effect of extending how long management and the Board can hold on before they have to change.  The returns on capital in many cases are quite poor.  If member's ownership was more tangible then there would be more pressure to improve service and performance.

The quality of member service is a leading indicator of credit union health and financial performance.  It is a better indicator than some of the CAMEL ratios.  Examiners rarely comment on member service in their examinations.  It should be considered in evaluating the soundness of a credit union because unhappy members almost always correlate with financial under-performance.

The NCUA and state regulators often lack the skills or experience to assess performance not readily measured in purely financial ratios.

The long process to move an underperforming credit union to resolution is harmful to both the members and the credit union system. When credit unions do get into trouble the regulatory process often seems ill equipped to develop plans that protect the best interests of members and the insurance fund.

The Credit Union Membership Access Act (CUMMA) passed in 1998 mandated prompt corrective action to prevent failures. This system of capital level “tripwires,” called prompt corrective action, was to prevent failure prior to capital being completely used up. The theory obviously fails to work in practice.

So the challenge remains—how do members in a cooperative system hold each other accountable for responsible use of assets, short of regulatory intervention. For “failure” starts long before a regulator might cite true safety and soundness conditions.

Can credit unions develop a system from the members' perspective that would provide a rating that could be used to compare different credit union's performance?






June 9, 2008


  • Mr. Wirz clearly states what many of us see each day. An ailing credit union can continue on this path for many years before erroding the capital. By this time, the credit union is not serving their members or fellow credit union community.
  • Mr. Wirz continues to be clear-eyed about the industry''s challenges and bravely unafraid to articulate contentious views.
  • I agree with comment #1. Far too many credit unions, mine included, continue to act like the "bankers" in those WAMU commercials, and refusing to think outside the box. The status quo is safer for them, rather than taking a chance at losing a bit of money on a fresh and new product idea. Without mandatory board terms, this stagnation can last as long as the credit union remains viable.
  • Mr. Wirz should shop his own cu as we are a local credit union that has and have found that SAFE''s service is no better then the banks he refers to. Mr. Wirz has also been very aggressive in trying to merge out his smaller local "brethren". He preaches about helping smaller cu''s but in practice is a wolf in sheep''s clothing. His board is highly adept at working other cu board members about the benefits of merging with SAFE and how smaller cu''s just don''t have the scale to compete in today''s market place. Its not that these cu''s aren''t serving their members well, in fact many of us are or they would leave to SAFE or the Golden One since everyone in Sacramento is community chartered. If a particular credit union isn''t serving there membership well then yes they will walk, however membership size in and of itself is not a matrix of how well a particular cu is serving it''s membership. The matrix I believe in is the average total relationship of our members. If this matrix is declining then you are doing a poor job of serving your membership but if this number is increasing then you are obviously doing a better job of serving your membership. SAFE is not doing better then other local credit unions because of their service, it''s because of there pricing. Luckily for the Golden One, SAFE is nothing more then a nuicance but for all the smaller cu''s SAFE is trying to buy away all their members and force these "underperforming" credit unions to merge with them. Please do not fall victim to the rhetoric that Mr. Wirz spews out, as it is exactly these type of CEO''s who are underming the small cu. These cu''s who are still living and breathing the credit union philosophy, that yes many cu''s have strayed from, with there members. Meanwhile Mr. Wirz whispers in their ear about how impossibile it is for them to continue to survive in such a competitive marketplace and how their membersihp would be better served by merging with them and unfortunately many boards of smaller cu''s are listening.
  • It seems Mr. Wirtz can point out what he thinks is wrong with underperforming credit unions as he defines them. It''s quite apparent he doesn''t have any solutions had he had any I’m sure he would have shared them. I think to have creditability and be responsible; one needs to ensure there is a common definition of the subject they are talking about. If you''re talking about good member service, some could use as a defining metric membership growth, loan growth and share growth. If members like what they’re getting they are going to use your services and tell others. But we know that can''t be the only metric that’s important because we don''t know the whole story regarding the long and short term strategies of the credit union. So to use this type of broad brush approach is irresponsible.
  • I find the following allegorical story provided by consultants Glenn Tecker and Marybeth Fidler to exhibit great practical wisdom that is useful for any organization. It illustrates the point that as we wrestle with complex challenges in a competitive marketplace, we need to look for a root cause of our problem or challenge rather than just treat the symptom. There was once a small town in the Midwest, fed by a fast-running river through the center of town. Just outside of town the river turned into treacherous white water rapids. One day screams came from the riverbank. Several of the town’s children were floating down the river at great speed heading towards sure death on the rapids. Those nearby immediately began to rescue the children, pulling them from the river. The call for help from rescuers immediately drew all of the townspeople to the task of rescuing the children. As they worked, more and more children floated down river, and the rescuers were barely able to keep up with the challenge. They could not even stop to rest as the children came one after the other. Eventually, one of the townspeople began to walk up river, away from the task at hand. The others were furious, screaming things like, “Coward, how can you walk away from our children?” until the would-be deserter was heard to say, “I think it is time for someone to go see who is throwing our children into the river!” The moral of the story is simply that responding to an obvious crisis is the job of many. Remembering to walk up river and find the root cause is the task of contemporary leadership. Thank you Mr. Wirz for seeking the root cause.
    Marvin Umholtz
  • Ill-informed, opinionated article. Obviously the viewpoint of an enlightened large credit union. What a noble visionary you are. Regulators should gladly allow all the "underperformers" to be taken over by those credit unions who truly "know" what they are doing. How fortunate to have a credit union of your stature stand up for the "rights" of the poor members in these poorly run credit unions. Actually, here me out. I was a state credit union examiner for 7 years handling problem credit unions. I have also been president of a credit union for 15 years, had budget analysis and planning experience at the Federal Reserve, did commercial loan review and have an MBA. I think that I also understand credit unions and the financial arena. In a capitalistic society if a business is out of touch and providing poor service, customers go elsewhere. It happens fairly rapidly, even with credit unions. (The number of credit unions have shrunk rapidly the past 15 years.) As a businessman, their loss is your gain. Why are you complaining? Actually, I don''t know that you have walked a mile in their mocassins, and you can speak for these "downtrodden" members. They may not think that the service they receive is as bad as you seem to think. Defining "good" member service depends upon your perspective. Member service at a lot of large credit unions is "slop" on a plate, barely more personal, better or cheaper than service at a bank. They don''t know their members, could care less about their members other than from a profitablility standpoint, and prefer to conduct business with members via unanswered voice mail or some other impersonal manner. As a former examiner I don''t agree with the conclusions you draw. You seem to think that credit unions with large capital levels, poor service and an emphasis on slower change will bring down the insurance fund. Don''t think so. These credit unions typically are smaller in assets, are more conservative and more risk averse. Usually the credit unions that impact the insurance fund are the "know-it-alls", who don''t have the expertise to enter into commercial lending or other venues that can quickly wipe out a credit unions capital.
  • just because a solution wasnt offered does not mean the "question" should not be asked, great article. for the CU that has evolved from single sponsor to community or seg, a consideration is that the "market" (the cu, the member/unsold member/competitor) decide and hold accountable all the players...and thats the "rub", it happens subtley and you see it in slow/no growth (over time) and a slow erosion of earnings and, in some cases a "stretch" for yield in investments or worse, loans. and then, it is too late in most cases.
    Peter Duffy
  • Amen to Mr. Wirz and for the courage to publically say what we all know is the truth. Poor performing CUs are not the result of size or lack of scale...instead, it is most often poor management and/or Board of Directors. These credit unions do not deliver meaningful marketplace differentiation or new value to their members and dilute the positive brand reputation of those credit unions who are succeeding. We need to consider these issues seriously and not simply throw stones at the messenger....even if his message makes some poor performing CU managers and BOD uneasy.
  • As a consulting company that has worked with credit unions over a 20 year span, KDA Holdings has seen all types. In juging our clients we look at several items to get an initial feel for the type of credit union we are dealing with. We look at a six year growth rate, the ROA for the six year period, the capital level the credit union has maintained and the membership growth rate. This permits us to make some judgement as to weather it is under performing or a high flyer. Many of the consultants in our firm grew up in the banking industry. We all think back to the days when community banks were judge to be high performing banks by a certain consulting group. I would dare say the average member does not even look at the annual report when its mailed to them so any jugement of the finacial health of the credit union is of little concern to them. For this reason it probaly has to fall to the regulators to be more vigiliant during examinations. Realistically I believe each CEO in a given market kind of knows if one of his competitors in the market is experiencing problems.
  • Take a look at Canda Credit Unions and you mayl see the future of the US
  • Mr Wirz clearly has the right to say, "From my distant viewpoint, there are CUs that are not doing as well as my CU on the things that are important to me." That''s quite different from saying that those distant CUs are no meeting their goals and serving their members in some extraordinary way. Maybe their strategic plan calls for an investment of net capital. Maybe they''re planning an expansion that will rock Mr Wirz'' world! Maybe they would appreciate Mr Wirz'' heartful offer of cooperative assistance.
    Bill Myers
  • Before this discussion descends into a food fight between various Sacramento-based credit unions, I think it is important to consider what I believe is the central point of Mr. Wirz''s article. That is, should credit union leadership (board and management) be insulated from the discipline of the market? Although we pride ourselves on the democratic foundations of the credit union movement, in at least some respects, credit unions may be less responsive to its owners than your average corporation. An underperforming corporation generally will not remain underperforming for long -- either management will deliver better results for its shareholders or it will be replaced (possibly by an acquirer). The recent offer by InBev to acquire Anheuser Busch is instructive. The Anheuser Busch board may accept the offer or they may reject it, but if they do the latter, there will pressure from their shareholders to perform. If they fail, another takeover offer will be difficult to refuse. Does this model of shareholder governance, essential to the modern corporation, resemble anything that occurs in the credit union world? Granted, there have been some celebrated instances when members have challenged credit union leadership, but this has typically occurred over conversion proposals. There have been few, if any, member uprisings regarding poor credit union performance. Most often, unhappy members simply vote with their feet (and deposits). Probably most readers of this post can name at least one credit union that has registered declines in virtually every objective performance measure over a sustained period of time. And yet, the credit union''s board and management carry on, regardless of the results, as long as their credit union''s net worth ratio meets regulatory guidelines. In response to the article''s central question, I concur with Mr. Wirth''s contention that insulation from market discipline is ultimately not healthy for the credit union movement and, in particular, for its members.
    J E. Mooney
  • Henry makes good points, albiet some based upon arguable premises. But does the system really lack a mechanism for problem institutions? I think the mechanism may be already here. CUMMA and other legislation have simply highlighted, and in some cases accellerated, the changes that were already taking place in the industry. As most know, the credit union industry has evolved into two types of credit unions, the large market-share-driven credit union and the traditional single-sponser. Market driven (and some innovative) credit unions will continue to face challenges and thrive. The remainder will not survive as the average age of membership continues to increase, and these institutions are unable to reinvigorate themselves. Poor asset quality most surely leads to a quick death, and poor service may likely result in a slow death. Nevertheless, those credit unions who wish to compete in the future can afford neither.
    Neil Marshall
  • It sure makes it easy to rip on people and the credit union when you can be an anonymous voice. That takes a lot of courage.
    David Jensen
  • Mr. Wirz''s comments are true for the entire industry! I work for a large "healthy" credit union. Our management is terrible! This is a fundamental flaw of the not for profit, protected market model that has been established. The board is weak because there are no shareholders. Publicly traded, for profit companies generally elect very strong boards that push management to maximize profits. The only way to do that is through excellent customer service. Credit Union management has no incentive to do such a thing. They frequently pull the wool over the eyes of the board. Why should the board push them? Most of them are not even paid! Management does whatever they want. They could care less about the members. They only care about protecting their fat salaries. They take virtually no risks at all. They refuse to empower their people to innovate because innovation could create risk, which might threaten their positions. I think eventually the laws of economics will force this to change, but I am not going to wait around hoping for a change. Profits are good!
  • Mr. Wirz paints with a very wide brush in his call for a more efficient capital market vis-a-vis credit unions. He does, however, shine a light on credit union processes (e.g., Board (non)turnover, lack of an effective voice for members and management complacence) that could stand much improvement. Predictably, his opinion drew a mixed response from turf-guarders, ax-grinders and many others who seem unwilling to see the gold nugget of change which he elicits because of the bucket of mud in which that nugget resides. Unfortunately, Mr. Wirz does not buttress his opinion with research and he characterizes the continuing contraction in the number of credit union as due to poor performance without documenting that claim. I would posit that there were and are many, many market forces at play in the reduction in our numbers, including poor financial performance and poor member service, but also including economies of scale, sponsor failure, area-specific economic downturns, etc. It is simplistic to blame wide-spread outcomes on narrow causes. Indeed, since a large majority of remaining credit unions are small by general banking measurements, it may very well be true that those smaller institutions are doing a fine job of meeting their members'' expectations for product, service and price delivery, irrespective of their ROAs. Again, though, let''s don''t throw the baby out with the bathwater (even if the bathwater is murky). We should all be striving to examine calls for change for their valid and constructive advice. Often the greatest wisdom can be garnered from contrary opinions to our own. My opinion for what it cost you.
    Mike Murray
  • Here in California, the board of our state-chartered CU can direct member proxies toward their slate of board nominees--always the incumbent or a hand-picked choice. These become volunteer positions for life and become unwilling to hold management accountable. Which CUs out there are willing to add board term limits to their bylaws? Who is willing to try reforming the proxy regulations?
  • With exposure to CUs'' on a national basis I couldn''t agree more with the basic tenet of this opinion column. If CEO''s and Board of Directors were measured in terms of results (or lack there of) that they are responsible for there would be a tidal wave of corporate and board level change in the credit union movement. 5300 reports are a strong indicator and many times shine light on the offenders who are beholden to each other for protected income and quid pro quo.