Time to Go
Letter to the editor

By Henry Wirz

November 6, 2009

This article is a response to "It's the Best of Times and Worst of Times."

I agree that this is both a time of great opportunity and great challenge. The credit union system has long been in a process of consolidation and change. There are fewer credit unions each year and those that remain are moving from being sponsored credit unions to community based credit unions. What has changed is that the economic crisis has accelerated the consolidation.

The best outcome of this crisis would be a new credit union system that can provide exceptional experiences, best solutions and professional experts to help our members improve their financial well being. The worst outcome would be to resist change and remain the same.

The economy is a lot like the natural world. There is a constant process of destruction and rebirth. This economic crisis is one of those periods. You have to be willing to destroy the old in order to build something new that is better. Credit unions were born during the Great Depression, a period of destruction and rebirth. Credit unions were a new and better way for those left out of the banking system to have access to financial services.

Access to financial services is no longer a challenge. The challenge is to find a trusted financial advisor that helps you improve your financial well being. The lesson of the last 10 years has been that most financial service providers have improved their own financial well being to the detriment of their customers. Our financial system collapsed because banks, stock brokers, mortgage brokers and Wall Street all focused on their own financial well being. They sold option ARM loans and toxic investments and encouraged excessive debt that has ruined many consumers' financial well being.

The credit union system was built to provide access. We still have about 7,800 credit unions, down from about 30,000. More than half of all credit unions are under $25 million in assets and more than 5,500 of them are under $50 million. In terms of numbers we probably still provide good access. But we only have about 9 percent of the deposit market. The most likely problem is that we are not providing what consumers want: exceptional experiences, best solutions and professional experts who can help members keep more of what they earn. A $50 million credit union is far less likely to have the resources to provide consumers what they want. Our market share proves that too many credit unions are not meeting member needs. We need to focus more on service that meets member needs. That will require better management and a rebirth of the credit union system.

The financial crisis could be a great opportunity to create a new credit union system. But in fact the rebirth that is occurring is usually the result of merging very unhealthy credit unions into a healthy credit union. The healthy credit union has to dedicate one year's business plan to the merger. The healthy credit union has to use precious capital. The healthy credit union has to forego other business plan initiatives to focus on the merger project. And a merger of two $50 million credit unions does not create a $100 million credit union organization or culture—it just creates an oversized $50 million culture and organization that takes years to transform.

In many cases the merger partner is an out-of-state credit union. I think that is going to harm the credit union system. Our strength is that we are the local financial institution that knows our community and is a pillar of the community and supports other community activities. If members want an out-of-state institution, they have plenty of choices—pick any of the major banks because they are all out of town. I remember the savings and loan crisis. The regulator also wanted to avoid insurance fund costs and was happy to facilitate mergers as long as it didn't cost the insurance fund anything. The end result was a conglomeration of failed savings and loans that became WAMU. We know how that story ends.

There are some better options that will give birth to a new credit union system. The economic crisis is going to destroy the old and clear the way for something new. We should resolve to build something better than what we have. I suggest the following;

• We should resolve that most credit unions remain local credit unions that have the resources to compete with the biggest banks. I suggest that we copy the ACE Hardware system. The 5,500 plus credit unions that are under $50 million could all jointly own the a cooperative and operate under a common brand like ACE. My local ACE Hardware store, Emigh Hardware, is still locally owned but it has national brand identity, the store provides advice on how to fix anything, it offers a complete line of merchandise, it has competitive prices and it offers a standard of service that is exceptional. We should copy it.

• We must fix NCUA and our 50 state regulators. Their examiners largely missed the problems that are now obvious. The examination process does not determine safety and soundness; it is not based on generally accepted auditing principles; it does not test and evaluate the system of internal controls; and it does not hold credit unions accountable for safety and soundness. We should agree that examination reports are public. Public examination reports will bring accountability to both credit unions and the examiners. The members have a right to know. We make our audited financials public. Failures are very public but at that point it is too late for member involvement. It is better to be transparent.

• We must fix CUMIS. Almost every credit union has its fidelity bond with CUMIS. CUMIS has a responsibility to underwrite the bond responsibly and to deny bonding to those credit unions that do not manage risk appropriately.

• A credit union charter is a privilege and not a right. NCUA and state regulators have to apply the same standard of performance to all credit unions. CUMIS has to hold all credit unions to the same standard for the bond.

• Members don't own their credit union in the most important way. They have no ownership interest in capital. I realize that corporate share holders have generally not prevented corporations form acting badly. But I think credit unions are small enough that if members had an at-risk ownership stake they would pay more attention. Members are not actively involved in their credit union and that leaves management and the board to make decisions.
  
  
  The reason healthy credit unions do not merge often enough is that the real owners of the credit union, management and the board, don't want to lose their control and their privileges. In most merger negotiations the key bargaining points are all about what management wants and what the board wants. We have to counter-act the imbalance and restore member control so that it is in balance with the control held by management and the board. I suggest that we give members an ownership interest in the credit union. We can do that with patronage dividends that are held as capital or we can use other options such as member contributed capital.

• We have to give more emphasis to the M in CAMEL The current emphasis is all on Capital. Capital is very important but it exists because management did the right things. Those of us who are active in the credit union system have recognized that boards are not doing a good job of hiring, evaluating and overseeing the CEO. Most of the credit unions that have failed had bad management. In my opinion it was widely known that there was bad management everywhere but in the boardroom of that credit union. How is that possible? Boards that are isolated only know what the CEO tells them and discount everything else, especially what the examiners tell them.
  
  
  A board can be defined as isolated when directors do not network with other credit union leaders, when they don't use outside professionals to review the credit union and advise them, and when they use outside professionals who aren't competent outside professionals. I was one of the first CEOs to speak out when one of our leading CPA firms also hired and placed CEOs and CFOs. I pointed out the conflict of interest. I don't think the selection process has improved very much. Too often we recycle the same people who failed somewhere else. Headhunters continue to recycle the same people over and over.

• We should add an S to CAMELS for service. The first indicator that a credit union is failing is that service is no longer adequate to meet member needs. The recent failures of Norlarco Credit Union in Colorado, Sterlent Credit Union and Cal State 9 Credit Union in California and too many others happened because the credit union was no longer meeting member needs and decided on a business strategy that served people who were largely outside the field of membership. There are a lot of credit unions that are self-liquidating themselves. They are living on capital that was built up when they were serving members. These credit unions no longer have a franchise because they do not offer anything beyond a commoditized service. The examiners should address how well a credit union is meeting its members' needs. How does the credit union measure member service and what do those measures show?

If we want the best of times to be how we remember this period of time, we need to begin the process of building a new credit union system.

CUES member Henry W. Wirz is president/CEO of $1.5 billion SAFE Credit Union, North Highlands, Calif.