Increase in credit union failures unlikely despite 2 early '21 conservatorships

Two credit unions have already been placed into conservatorship in 2021, but experts say the number of credit unions that fail or are placed into conservatorship is unlikely to increase steeply in 2021, as government stimulus and other measures will help credit unions stay afloat through the economic disruption of the COVID-19 pandemic.

Since 2019, only two credit unions have failed while five have been placed into conservatorship. In 2021, Charleston, S.C.-based C O FCU was placed into conservatorship on Jan. 5, while Indianapolis, Ind.-based Indianapolis' Newspaper FCU was placed into conservatorship on Jan. 14.

Indianapolis Newspaper FCU reported a negative return on average assets in both the third and fourth quarters of 2020, as well negative share and deposit, loan and asset growth. C O FCU reported negative net worth growth in two quarters in 2020.

Conservatorship occurs when the National Credit Union Administration, the credit union regulator, takes control of the credit union in order to fix operational problems that affect safety and soundness. The credit union remains open and accounts remain insured. Conservatorship can be lifted if the credit union fixes its operation problems, merges with another credit union or is liquidated by the NCUA.

Conservatorship by the NCUA does not necessarily mean the credit union will close, said Christopher Pippett, chair of Fox Rothchild LLP's financial services industry practice, in an interview.

"The fact that there's a conservatorship doesn't mean it's the end of the credit union," he said. "When they come in to do a conservatorship, in an ideal world, they kind of come in and fix the problems, and then get it back on its feet so it can move forward."

As in the banking industry, experts in the credit union space do not see these conservatorships as indicative of a larger trend or a signal of significantly more credit union failures in 2021 than in recent years. Most credit unions remain well capitalized, said Pippett.

Low delinquencies and net charge-offs, combined with an increase in reserves at the beginning of the pandemic, have helped credit unions remain healthy, said Mike Schenk, Deputy Chief Advocacy Officer and Chief Economist at the Credit Union National Association, a trade group for credit unions.

But the government stimulus, which has helped maintain those delinquency and charge-off rates, could simply push problems down the road rather than solve them, said Pippett. Some measures, such as additional mortgage forbearance, may even harm credit unions in the long run.

"It rarely benefits the institution if the loan isn't paid as agreed," said Pippett. "We've seen credit unions that have a problem because they may have foreclosed or are in the process of foreclosing, and that all got brought to a halt by forbearance and other moratoriums that have been put in place, and that leaves the credit unions in a position where they can't recover assets."

Although failures are not anticipated, credit unions are not through the worst of the pandemic-related problems. Net worth ratios at credit unions have suffered as deposits have increased faster than assets, Schenk said. "The return-on-assets numbers that we're seeing at the moment are lower than they were pre-pandemic," he said. Credit unions also experienced a drop in interchange income as a result of declining consumer activity.

The length of time before the economy is back to normal may be longer than some anticipate, Schenk believes, which could affect credit unions.

"At the end of next year, 2022, the unemployment rate will remain higher than it was pre-pandemic," he said, noting many have lost jobs permanently and small businesses have been especially hard-hit. "Whether you're a bank or a credit union, you benefit when the community you operate in is healthy."

Pippett sees the industry heading more toward consolidation than failures. The cost of compliance and increased technology costs have also driven consolidation, especially since credit unions, on average, are smaller than their bank counterparts.

"There undoubtedly will be, in the future, at some point, additional credit union failures, but given the level of support in the marketplace from a policy perspective, and the relatively conservative operations of those institutions, based on their structure, suggests that more than likely they'll weather the storm," said Schenk. "Those high levels of capital and the current payback on loans is a really hopeful sign."