Regulators pulled the plug on a Salt Lake City credit union that had been a candidate to change its charter to that of a mutual bank.
The Utah Department of Financial Institutions took possession of Beehive Credit Union on Dec. 14 and immediately appointed the NCUA as liquidator. The NCUA, in turn, announced that the $5.9 billion Security Service Federal Credit Union, in San Antonio had purchased Beehive.
The decision to finally close the $145 million credit union had been on the horizon for some time, and the institution's condition had been a topic some apparent confusion within the NCUA and the Utah Department of Financial Institutions. Neither regulator would comment directly on Beehive's condition in the days immediately prior to the closure, but a document from the NCUA's inspector general, William DeSarno, signaled how darkly the agency considered the CU's future.
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In his 2011 annual performance plan, the IG detailed proposed audit losses to the NCUSIF for the coming year, including one of Beehive.
"The Federal Credit Union Act requires the OIG to review and report on any credit union material losses exceeding $25 million to the NCUSIF. Beehive Credit Union's loss exceeds this amount," the inspector general wrote, adding "We will review Beehive Credit Union to: (1) determine the cause(s) of its failure and the resulting loss to the NCUSIF; and (2) assess NCUA's supervision of the credit union."
This although the credit union, at that time, had not been declared failed, or seized, merged or conserved.
But further details about the sale clarified why DeSarno included the credit union's audit in his plans. According to an executive familiar with the Beehive situation, Security Service and Beehive signed a management agreement facilitating the transfer on Oct. 29, and Security Service personnel had been working with Beehive staff on the merger during the six remaining weeks of Beehive's life as a credit union.
Michael Jones, a spokesman for the Utah DFI, said the department had known that the NCUA was seeking merger partners for Beehive and said such searches were routine if it looked like a credit union might be failing.
"Certainly you don't want to take possession of a credit union and then wait six weeks to get a merger partner in place," Jones said.
John Worthington, senior vice president with Security Service, pointed out that Beehive members will also see additional services after the takeover. Security Service issues both Visa and MasterCard, for example, and the CU is a member of the CO-OP Financial Services Network.
Paul Allred, deputy commissioner for the Utah Department of Financial Institutions expressed mystification about why the NCUA's inspector general would have included Beehive in the plan since the credit union had not yet become a failed institution.
"I don't know why NCUA would say that," Allred said of the IG's statement. "Perhaps you should ask them?"
But as though foreshadowing the department's actions just a few hours later, Allred seemed to acknowledge Beehive's struggles, saying at one point that the department is not calling the institution a healthy credit union even though the regulator had not yet seized it.
The NCUA did not respond to a request for a comment or clarification of the IG's plan.
That Beehive has been struggling for some time has not been a secret. As of Sept. 30, NCUA data shows the credit union had a net worth ratio of negative 0.38% and a return on average assets of negative 5.03%.
NCUA's data for the same period also shows the CU has been significantly hurt by the housing downturn. According to the NCUA, Beehive has 62 properties worth $6.5 million that it has foreclosed on. The CU also had another $6.3 million in delinquencies, mostly on real estate loans.
Allred explained that the state regulator is constrained by state statute on the conditions that lead it to take control of a financial institution, whether a bank or credit union.
Most of the eleven are reasons that presumably would meet the approval of both regulators include not being in "safe and sound condition to transact its business" and notification "by its primary account insurer of the insurer's intention to initiate proceedings to terminate insurance."
If one or more of these 11 are not in place, in the judgment of the regulator, the state department will not take over a depository institution, Allred explained. Just having losses, or even negative equity, is not enough to mean a CU is not in a safe or sound condition, he added.
The state regulator cited Beehive's negative net worth and said it was not in a safe or sound condition to transact business in making the failure announcement.
Beehive had steadfastly declined to comment or take questions about its condition or its future, but there have been signs that the CU might have had financial issues going back to the time before it sought a charter change.
Beehive gained notoriety in 2007 when it filed an application to convert to a mutual bank charter, a decision that was questioned and opposed by some members. But after winning member approval for the change in 2008, the CU backed off its proposal early in 2009.
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