Credit union incorrectly said it had adequate reserves
A credit union, which has gone into liquidation, was granting loans to members to service existing loans and repeatedly incorrectly claimed to have adequate reserves to meet regulatory requirements.
It has also emerged that Charleville Credit Union (CCU), where 10 members accounted for almost 10% of the €42m loan book, did not make members aware of its financial position.
A Resolution Report by the Central Bank, published this week, said CCU had been unable to hold an AGM since August 2012 to “prevent destabilising consequences” — such as a run on members’ deposits — if its financial position was made public.
Members had not received a dividend since the financial year ended September 30, 2007, the report said.
A litany of independent reviews of CCU’s viability by different accountancy firms going back to 2007 recommended the need for additional bad debt provision and expressed concern about recoverability of loans and inadequate reserves.
Credit unions are legally required to have 10% of total assets in reserve, but CCU had not achieved this since 2009— despite financial statements to the contrary.
In 2010, the reserve was minus 9.3%, although CCU had presented it as 0.4%
The Central Bank report said CCU’s financial position deteriorated between 20092017, particularly during the period prior to 2009, when a large number of commercial and property loans — “a number of which were only repayable by the borrower from the sale or refinancing of property assets” (bridging loans) — resulted in a significant level of write-offs.
The Central Bank report said a significant number of loans were not performing and top-ups were provided “thereby masking the true underlying performance of non-performing loans”.
Part of the problem was that arrears in principal and interest payments on these loans “may have been cleared when new [loan] facilities were made available”.
The report also outlines how the Registrar of Credit Unions repeatedly imposed lending restrictions on the credit union largely because of its concerns about failure to meet the reserve requirements.
Concerns are also raised that CCU overvalued its premises on Main St, Charleville. The carrying value recorded in draft 2011 accounts was €1.9m. An evaluation by GVM in December 2011 put it at €650,000. In 2017, as CCU was attempting to merge with another credit union, it was valued at €380,000.
CCU made at least three separate attempts to merge with other credit unions, among them Clonmel (the only one confirmed publicly), recognising it could no longer operate as a standalone entity. However, each attempt was unsuccessful.
Liquidators BDO accountants were confirmed in their role this week following a winding up petition from the Central Bank.
CCU had about 10,900 members, 99% of whom have received compensation totalling €39.2m, under a deposit guarantee scheme.
ITS membership of approximately 11,000 is drawn from Charleville, Ballyhea, Newtownshandrum, Ballagran and Effin, taking in parts of Co Cork and Co Limerick, but it seems few knew about the precarious state of Charleville Credit Union’s (CCU) finances.
A report published this week by the Central Bank, explaining the rationale behind its decision to apply to the High Court for the credit union to be wound up, says members were “not aware of its current or recent financial position and have no knowledge of the impact of loan and premises impairment” — notwithstanding widespread media coverage of a potential merger between CCU and Clonmel Credit Union in February 2017.
It was against this backdrop, of the need to prevent “de-stabilising consequences” — such as a run on members’ deposits if its financial position was made public — that Charleville Credit Union had been unable to hold an AGM — the forum where members get to ask questions — since August 2012.
A read of the Central Bank’s report shows the Registrar of Credit Unions (RCU) has been repeatedly asking questions of CCU for more than a decade.
An RCU inspection in March 2007 identified significant concerns in relation to the loan book, namely that CCU had a significant number of large loans and that the top 100 accounted for 42% of total borrowings.
In April, RCU wrote to CCU, asking for an independent review of the loan book, conducted by Susan Morrissey and Co, chartered accountants. It recommended additional provision of €1m against specific loans, which would have increased CCU’s bad debt provisions to €3m.
The Morrissey report contained a list of large business/property-related loans to 10 members amounting to €4.1m or 9.7% of the total loan book of €42.1m, as of June 2007.
The report said most were not meeting their scheduled loan repayments.
The RCU wrote to CCU in July 2007 asking it to confirm it was increasing its bad debt provision and requesting quarterly updates on those loans. It also required CCU to “cease granting additional loans to members to service existing loans or to make interest repayments on lump sum repayment loans” and to amend the credit policy to reflect same, noting this practice “is not considered prudent”.
In 2008 and 2009, RCU asked CCU’s auditors, PriceWaterhouseCooper (PwC) to carry out an assessment of provisioning requirements on specific loans. PwC was asked to review all top 100 loans to assess adequacy of bad debt provisions. That report “failed to give an opinion on the adequacy of bad debt provision” despite PwC undertaking to do so. Subsequently, CCU engaged Burke and Associates, public and forensic accountants, to review the top 100, and that review identified additional bad debt provisions of €4.4m, on the top 100, resulting in total provisions increasing to €6.6m as of September 30, 2009. In December that year, RCU asked CCU to engage Burke & Assoc to do a full loan book review. It also advised CCU to commence discussions with the Irish League of Credit Unions (ILCU) regarding funding support through its Savings Support Scheme (SPS).
Repeated reviews of CCU’s finances were carried over the next few years. An Ernst and Young (EY) report in November 2011 again raised concerns about bad debt provision, as well as about CCU’s solvency and viability. A report by Moore Stephens Nathans (MSN) chartered accountants recommended additional bad debt provision. The final MSN report said it was “difficult to understand how 108 non-guaranteed loans have not been written off as they are either over 52 weeks or have had no principal payments made in the last 12 months”. Some €4.08m worth of loans were both over 52 weeks and had no principal payment. In July 2015, accountancy firm EisnerAmper reported “material issues” regarding CCU’s viability. Audit firm DHKN did likewise in their review.
With negative reviews ongoing in the background and with little to reassure the Registrar that CCU was getting a handle on its finances, the RCU began to issue regulatory directions requiring CCU to limit members’ savings and loans. In October 2011, CCU was told the maximum savings limit was €50,000 per member (loans up to €100,000 are guaranteed under a deposit guarantee scheme); that lending o per member was restricted to €10,000 plus shares, and no more than €200,000 could be lent in a calendar month. CCU was also required to maintain liquidity of 35%.
These limits were further reduced in February 2012, despite appeals from CCU to ease or remove them.
RCU contacted CCU in March 2012 looking for an explanation for significant increases in the level of loan arrears greater than nine weeks as reported in their quarterly report of December 2011. CCU said the increase in arrears from 38.5% to 50.1% was due to a large amount of bridging loans that became due and subsequently fell into nine-weeksplus in arrears.
Later in March, CCU wrote to RCU asking that restrictions be lifted, saying it was being “forced to refuse loan applications to members in good standing” and that loans were being withdrawn at a faster rate, amid “rumours among members that the credit union was in serious difficulty”. However the RCU refused because it remained concerned that CCU was not in a good financial position.
According to reports, ILCU pumped €8m into CCU in an effort to save it. Several attempts were made to merge with another credit union, once CCU realised it would not survive as a standalone entity. ILCU was prepared to make further funds available should this merger, known as a “transfer of engagements” (ToE) take place. It deposited funds (the amount is redacted in the Central Bank report) into an account at the National Treasury Management Agency in the name of CCU, for drawn down if the merger went ahead. The Central Bank says CCU “tired but failed” on three occasions to implement a ToE, including with an unidentified credit union in 2016, with Clonmel in 2017, and with at least one other unidentified credit union in 2017. The Central Bank report says the Clonmel merger failed, due in part to risk identified in a due diligence review.
Other shortcomings highlighted in the Central Bank report include that a greater proportion of CCU surplus funds derived from members’ savings were invested in short term investments “rather than being extended as credit to members”. However because of a low interest rate environment with diminished returns available, this had the effect of lowering CCU investment incomes. The report says CCU’s cost income ratio was “exceeding 100% in recent years” It said the loan book “contracted year-on-year since 2009 due to loan repayments, impairments and write-offs”. At June 30 2017, the value of the net loan book was c€6m (gross loans minus bad debt provisions), while expert reviews said CCU needed a performing loan book of between €13.5m and €14m to generate sufficient level of interest income.
In 2007, CCU had total assets of €73.4m and reserves of 9.3%; in 2008 it had €71.5m and reserves of 10.1%, in 2009 it had assets of €62.7m and reserves of 0.4%. In fact the latter was a misrepresentation in the financial statements for that year, - the reserve was actually minus 9.3%. Since 2009, CCU failed to meet the regulatory 10% reserve requirement.
In 2014, CCU reported reserves of 10.7%; the Central Bank report says “in fact as is clear from financial statements submitted in April 2017 for the year ending December 30, 2014, the actual reserves were 3.5%”.
On a number of occasions, initial figures submitted in draft financial statements were materially different to figures subsequently submitted to RCU.
From the Central Bank’s account of CCU, its demise seemed inevitable, even though its board of directors continually defended its operations, accusing the Central Bank of limiting its ability to grow.
In one communication to the Registrar, the board said the “ongoing existence of draconian lending and investment restriction over such a duration has had the inevitable consequence of limiting the credit union’s ability to grow and develop its business base”. It blamed the RCU actions for its “inability to generate the required level of operational income”.
It said the key issue was the “continued decline of the loan book and associated loss of business to other financial institutions as a direct result of its inability to trade normally”. It was never going to reach the required 10% reserve “because the Central Bank, the very organisation insisting that reserves be restored, were at the same time preventing the credit union from being in a position to do so”.
However the RCU rejected the argument and the final upshot was a petition by the Central Bank to wind up the credit union in the public interest, arguing that there was “no meaningful plan to address the reserve shortfall”.