IG Report on Ensign FCU Failure

NCUA's Inspector General issued a Material Loss Review on the failure of Ensign FCU in Henderson, Nevada. The expected losses to the NCUSIF from this failure should not exceed $30 million.

Ensign failed because management adopted a high-risk strategy that allowed up to 80 percent of its loan portfolio to be concentrated in real estate secured loans. The combination of rapidly declining real estate values and increasing unemployment caused the delinquency rates by September 2009 to exceed 13.6 percent compared to 0.30 percent two years earlier.

The IG study found that there was little evidence in the monthly Board minutes to suggest that management was actively monitoring the concentration levels and the associated risks.

The report also concluded that management had flawed allowance for loan loss methodology and lenient lending policies allowing loan-to-value ratios on Home Equity Lines of Credit (HELOC) loans up to 100 percent and 40-year terms on mortgages.

Additionally, management failed to implement an effective collection program.

Ensign experienced significant losses in its real estate loan portfolio, as 80 percent of all losses coming from the real estate secured loans.

The report noted that in December 2007, examiners identified violations governing Member Business Loan (MBL) limitations for Construction and Development loans, MBLs to one individual or associated group, and aggregate MBLs, respectively. The credit union was cited for the same violations during a 2004 examination. Ensign also granted certain MBLs in excess of 15-year terms in violatation of the FCU Act.

For example, the credit union approved two large member business loans ($2.2 million and $3.6 million), one of which represented 25 percent of net worth when it was approved, and ultimately foreclosed, costing the Credit Union over $1.5 million in losses due to property devaluations.

The report noted that Ensign exceeded the fixed asset limit. At failure, fixed assets were 11 percent of total assets.

Management also demonstrated poor liquidity strategies. In December 2007, management accepted a $12 million share account from one member and did not establish a contingency plan in the event this money was withdrawn. In January 2009, the member requested to close this account but Ensign did not have sufficient liquidity to process the withdrawal. With NCUA's assistance, Ensign obtained a $12.5 million 30-day loan from the Central Liquidity Fund (CLF).

The IG report states that the credit union signed a Letter of Understanding and Agreement (LUA) on February 26, 2009 and agreed to seek a merger partner. The LUA was never published by NCUA.