Credit union in­cor­rectly said it had ad­e­quate re­serves

Irish Examiner - - Front Page - Cather­ine Shana­han

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”.

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