On October 31 2012 the National Credit Union Administration announced the liquidation of Women’s Southwest Federal Credit Union (WSFCU) of Dallas, Texas. NCUA states that it made the decision to liquidate WSFCU “after determining the credit union was insolvent and had no prospect for restoring viable operations.” A key question is whether the deteriorating health of this credit union was a recent phenomenon. Our analysis suggests it wasn’t.
According to the NCUA call report data and the agency’s publically-available statement, the “credit union served 743 members and had deposits of approximately $2 million. The credit union was originally chartered as Feminist Southwest Federal Credit Union in 1974, at the time of closure WSFCU served numerous select groups centered primarily on women’s advocacy, interest, and affiliation. The credit union also served an underserved area in Dallas and other affinity groups.”
After analyzing the health of this credit union using our HealthScore method, it would appear that it had persistent long-standing problems. The chart below, which compares ten years of credit union score calculations to the industry average, illustrates this conclusion.
Of course, in the grand scheme of things this was truly a very small credit union whose failure barely registered. Its size and relative obscurity made the story easy to miss. However, we should not ignore two critical concerns drawn from the WSFCU failure. Our first concern is that new credit unions chartered to serve “underserved” areas continue to be approved for operation. Our suspicion is that these credit unions will suffer a similar fate, a suspicion based not only on the performance of credit unions such as WSFCU, but also on the fact that larger credit unions granted underserved field of membership segments find them to be costly to support and have begun inching away from their commitment to market service. Clearly underserved-focused credit unions need a better business model given the unique risks associated with the charter type.
Another, perhaps greater concern is that we calculate over 600 credit unions (as of second quarter data) that have a similar comparison disparity to the industry’s broader HealthScore. That these credit unions seem to continuously ignore opportunities for survival, such as through merger with better-capitalized credit unions, seems a disservice to member-owners. One can appreciate the determination any management team has to overcoming poor performance and health, but at a certain point allowing long-term underperformance such as that illustrated above is far from admirable.
We certainly don’t wish for any credit union to perform poorly, let alone to find itself mired in the process of forced liquidation. We do wish, however, that those credit unions with chronically poor financial health or challenging markets use the experience of WSFCU as motivation to find solutions for health and service improvement that allow for members to retain their voice. Forced closure and liquidation is not it.