Problems at credit union first surfaced 10 years ago

Issues at Newbridge Credit Union (NCU) came to a head in an emergency, late-night sitting of the High Court on Sunday night. However, the problems began years earlier.

For almost a decade the Central Bank had been in communication with NCU and its board about a range of issues, but the opening salvo came in 2004, when the then financial regulator, Liam O'Reilly, raised concerns that NCU had too many long-term loans.

Under the rules governing credit unions at the time, loans exceeding 10 years were supposed to be capped at 10 per cent of a credit union's loan book. Reportedly, 30 per cent of NCU's then €105 million loan book fell into this category. Mr O'Reilly and Brendan Logue, the then registrar of credit unions, travelled to Newbridge in early 2005 for a meeting with the NCU board. It is unclear whether the long-term loans issue was resolved then.

In the midst of the Celtic Tiger boom in the following four years, NCU’s assets expanded rapidly. Its loan book peaked at about €150 million in 2009.

In addition to issuing traditional credit union loans to personal borrowers, it also became involved in issuing larger loans to businesses, including several property developers.

From 2008 the regulator became more deeply involved in NCU’s affairs, raising concerns about a number of alleged breaches. These included holding too many loans above €1 million each, alleged under provisioning by NCU for bad debts and maintenance of allegedly inadequate reserves.

Property market collapse
The board of NCU rejected, and continues to reject, many of the concerns of the Central Bank.

As the property market collapsed, concerns were raised about the value in NCU’s accounts of the Kildare premises, which it valued at about €14 million. The Central Bank now values it at just €3.9 million.

The bank also imposed Grant Thornton as auditor in 2008 against the board's wishes.

Some of the alleged breaches are outlined in an affidavit to the High Court by Patrick Casey, head the Central Bank's Special Resolutions Unit. Alleged breaches are also referred to in a report sent by the unit last week to Central Bank governor, Patrick Honohan.

Special management
Full details of the breaches are in a separate 2012 Central Bank affidavit, sworn at the time the credit union was placed under special management. The bank, however, says it is unable to release this 2012 affidavit for legal reasons.

Sunday’s affidavit says that at the end of September 2008, NCU had bad debts provisions of 3.4 per cent of its €145 million loan book and had a reserves ratio of 14.6 per cent.

By 2011, there had been a “serious deterioration”.

During the 2008-2011 period, loan write-offs were €3.9 million, bringing an extra provisioning requirement of €36.3 million, or 30.5 per cent of the loan book. Regulatory reserves also slumped to 5.4 per cent by 2011, breaching a 10 per cent floor set by the regulator.

The affidavit says NCU failed to properly analyse many borrowers’ repayment capacity.

From a governance perspective, it criticised NCU for failing to dedicate sufficient resources to its credit control department. It also says that the rescheduling of loans was also not properly recorded “in line with regulatory requirements”.

“Of particular concern” was the fact that 603 loans, or 7.7 per cent of loans outstanding by December 2011, were identified as problem – tagged for write-off, or so called “bullet” loans, where the repayment is made in bulk at the end of the term. About 26 of the problem loans were business, averaging €550,000 each.

Median loans across the sector were about €7,800. At NCU, it was €17,300.

The report to Honohan details other breaches. In 2009, NCU reported it had a single loan of €3.2 million, in breach of a rule that no loan should be more than 1.5 per cent of total assets. By September 2013, this loan had €2.8 million outstanding, still in breach of the rule.

Other breaches include too many deposits over €100,000 each and too many loans of more than five years duration.

On Sunday, the Central Bank pulled the ultimate trigger, forcing NCU to be subsumed into PTSB. Its board has two weeks under the legislation to object.