Sometimes, a troubled credit union escapes conservatorship entirely.
In late 2009, John Tippets was brought in to turn things around at North Island Financial Credit Union, in San Diego, Calif., which was on the verge of implosion in the wake of the Great Recession, which ravaged the housing market in Southern California.
Tippets, a former CEO of American Airlines CU (now a $6-billion behemoth based in Fort Worth, Texas), was in retirement at the time and already had a long career in the industry.
"I knew there were, at that time, serious challenges [at North Island] and I had indicated to a few friends that I would be interested in a CEO or consulting-type position where I could be of help," Tippets said. "Retirement was okay, but I liked the prospect of a challenge and really helping save North Island."
Recommended by the NCUA, Tippets was selected to take over North Island by the California State Commissioner of Financial Institutions and North Island's board of directors.
Once he looked at the books, Tippets found a long list of problems, including the collapsing real estate market which negatively impacted the loan portfolio, extreme competition, poor employee morale, regulatory worries, among other woes.
But Tippets explained that before he undertook any changes, he listened to the advice of "all possible knowledgeable parties," including the credit union's staff, volunteers, and even competitors and other California credit union CEOs, regulators, local economists and bankers.
"Then [by] listing, ranking, and working potential solutions and recognizing that all [measures] take time, and ultimately having the credit union start growing again was the only real definition of success," he noted.
Eventually, North Island closed seven branches, laid off almost 200 workers and cut operational expenses by 40% to 45%.
Shrinkage and cost cutting, Tippets pointed out, were tactical moves, not strategic ones.
"If [it is] extended too far, shrinkage contributes to the classic 'Doom Loop,'" he said, describing a vicious cycle in which a solution to a problem makes things even worse.
Tippets pointed out that the restructuring process involved the input of entire board, management and all employees of the credit union. "In particular, most of the then-remaining management/staff were essential elements of North Island's recovery," he said. "The necessary [staff] shrinkage had already been well started and making smart next moves were hard work. We did continue to reduce headcount—but with each change carefully thought out. I was extremely grateful for that management team."
North Island avoided conservatorship and/or collapse, Tippets explained, because "we kept all parties and stake-holders informed, including the community, local press and especially the regulatory personnel. At the NCUA level we had the benefit of a really outstanding official named Beth DiNapoli—our opportunity case officer."
On the whole, North Island faced challenges in its commercial lending business, Tippets said, but the business lending portfolio and the business lending staff were "great strengths" and "contributed materially" to its survival and turn-around.
"Improving the capital levels was an important financial target but growing 'quality' loans, and revenues were of greatest importance to North Island and any credit union," he added. "For North Island, building diversified revenue sources was a material tactic."
And it all paid off.
By the second quarter of 2011, North Island posted net income of $1.24 million and was well on its way to recovery. The credit union's net worth ratio, once as low as 2.16% had more than tripled by that point.
Of course, taking over a troubled credit union is usually a temporary position. "From the start I was prepared for it to be from one to three years," Tippets said. "There are no short-term miracles for such a situation with that balance sheet and external economic situation."
He remained there for almost three years, leaving in November 2012—by which point North Island had started to grow again and was meeting some critical balance sheet and profit and loss benchmarks.
North Island is now a $1.2 billion credit union which generated net income of about $10.6 million last year.
