How does a credit union wind up in conservatorship — and better yet, what does it take to come out of conservatorship as a healthy, functioning credit union?
This is the first of a series exploring what leads regulators to put a credit union into conservatorship, and how it's determined whether a credit union will be liquidated, merged with another CU or if it's possible to emerge from conservatorship on its own, reinforced, two feet.
According to the NCUA, thus far in 2016, two credit unions, the $69-million Clarkston Brandon Community Credit Union of Clarkston, Mich., and the $1.6-million Cory Methodist Church Credit Union, of Cleveland, have been conserved. Another, CTK Credit Union of Milwaukee, was liquidated.
In 2015, four federally-insured credit unions were conserved, eleven were liquidated, purchased or assumed, and one voluntarily liquidated.
Of the four that were conserved in 2015, one, Montauk Credit Union, New York, has assets of $178 million; Bethex Federal Credit Union, Bronx, N.Y., had assets of $12.9 million, while the other two were very small, with less than $250,000 in assets.
The number of credit unions conserved annually can vary widely — as can the asset size, though the agency said it's more often smaller credit unions that wind up in conservatorship.
John Fairbanks, a public relations specialist for NCUA, explained that conservatorships are carried out "on a case-by-case basis," so it would be impossible to calculate a "typical" length of time for determining whether a conserved credit union will be liquidated, purchased and assumed by another CU or if it can be rehabilitated. "Remember, too, in the case of a state charter, we [NCUA] don't make the determination, the state regulator does," he added.
How Did We Get Here?
There are a number of factors that can lead to a credit union being conserved, including mismanagement, bad loans, noncompliance and fraud.
In pure numerical terms, one red flag that calls regulators' attention is when a when a credit union's net worth ratio moves south of the 6% figure.
But Fairbanks cautioned that it's "less a matter of red flags than a determination about whether a credit union can operate safely and soundly and whether it has the ability to restore or achieve appropriate levels of capital in a 'reasonable time period.'"
Andrew Price, senior director of advocacy & counsel at Credit Union National Association (CUNA), said sometimes a weakening local economy can spell financial disaster for a credit union — citing , for example, the real estate market crash in 2007-2008 in places like Florida, Arizona, Nevada and California. That kind of scenario, in which a boom leads to the issuance of many high-risk loans, is followed by a bust leading to large write-downs and devastating losses on a credit union's balance sheet, played out in a number of "sand state" credit unions.
Seeking An Eligible Partner
While the eventual liquidation of a credit union is the most common outcome of a conservatorship (see chart), it's not unusual for a conserved credit union to be merged — with or without NCUA's assistance — with a healthy credit union. For example, earlier this year, the $26.5-million Montgomery County Credit Union of Dayton, Ohio was merged into the $52-million Bridge Credit Union of Columbus, Ohio.
Montgomery County CU had been placed into conservatorship by the Superintendent of the Ohio Division of Financial Institutions in late April 2015 for alleged "unsafe and unsound practices" and the state regulator appointed NCUA as agent for the conservator.
Working together, NCUA and the Ohio state regulator addressed issues affecting the credit union's safety and soundness and determined that a merger was the ideal solution.
Lance Noggle, assistant general counsel at CUNA explained that in such mergers, the smaller, weaker credit union almost always merges into a larger, stronger institution [as in the case of Bridge and Montgomery]. "Occasionally, you might see a 'merger of equals,' but that's quite rare," he said. "In addition, it's more convenient and practical for a conserved credit union to merge with another one in its region."
Liquidation: The Door Slams Shut
The worst outcome of conservatorship is, of course, liquidation.
Sometimes, the decision by the NCUA to liquidate can come very quickly. As an example, St. Paul Croatian FCU, which was liquidated just one week after being placed into conservatorship in late spring of 2010.
The Cleveland-based credit union, which served members of a local church and had assets of $250-million prior to its demise, was cited by NCUA for poor record-keeping and the rapid deterioration of its financial condition. NCUA also said the credit union was insolvent and had no prospects for restoring viable operations.
But things were actually far worse at the beleaguered credit union, where it later emerged the CU was decimated by massive internal fraud. The scam that destroyed St. Paul Croatian FCU ultimately led to the conviction of about two dozen people, according to the FBI.
In its annual report from 2010, NCUA characterized the collapse of Croatian FCU as the "largest natural person credit union liquidation" of the year and estimated the failure to the National Credit Union Share Insurance Fund (NCUSIF) at more than $180 million in losses.
The scope of the internal criminal activity at Croatian FCU led NCUA to declare that it raised "awareness of the need for examiners to remain vigilant with professional skepticism and curiosity."
Indeed, fraud often plays a large role in credit union liquidations — sometimes leading to huge losses.
For example, NCUA cited, there were 15 involuntary liquidations and assisted mergers during 2014, compared to 17 credit union failures in 2013. The total amount of losses associated with failures in 2014 amounted to $40.4 million, a decrease of 39.5 percent from $66.8 million in the previous year. Fraud was a contributing factor in seven of these failures, at a cost of $36.5 million during 2014.
Escaping Conservatorship: A Success Story
Last, and unfortunately least likely, are those times when a credit union emerges from conservatorship on its own two feet — a process that can take years.
One of the lengthiest periods of conservatorships involved the Keys Federal Credit Union of Key West, Fla., which voluntarily entered conservatorship in September 2009 — a victim of the real estate market implosion. It would be six long years before the credit union finally emerged from that status.
In 2010, the credit union posted a huge net loss of nearly $6-million, according to its NCUA Call Report. But by 2014, a much stronger Keys FCU posted a net income of $1.2 million — almost quadruple the earnings from the prior year.
Also, upon entering conservatorship in the fall of 2009 (during the depths of the recession), Keys FCU had a net worth ratio of only 2.37% — that figure had jumped to a much healthier 5.75% by June 30, 2015.
By early 2015, Keys FCU said it was improving its business performance by focusing on "greater efficiency" and "consumer lending."
In September 2015, the NCUA finally freed Keys FCU from its oversight, leading the credit union to appoint a new board. NCUA board chairman Debbie Matz called Keys' recovery a "great success story."
Noggle of CUNA commented that Keys FCU's rather lengthy period of conservatorship may have had to do with issues unique to that credit union — perhaps the lack of a suitable merger partner, among other possibilities. "A credit union under conservatorship can still be run very well as they attempt to stabilize the business and fix the balance sheet," he said.
