NCUA Board Upholds Denials of Secondary Capital Plans

The National credit Union Administration Board in October upheld the Supervisory Review Committees (SRC) affirmation of the denials of two unnamed low-income credit unions' applications to accept secondary capital by Regional Directors.

In one appeal, the Board on September 9, 2019 denied a request for an oral hearing from a low-income credit union (LICU); but agreed to consider the merits of the appeal on the basis of the written record.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

In its October 24 decision, the Board found that there was ample evidence that the LICU's secondary capital plan was unsound.

The Board viewed that the LICU's secondary plan reflected inadequate due diligence.

The pro forma financial statements lacked detail and had material omissions, which did not allow the agency to properly evaluate the safety and soundness of the plan.

Moreover, the secondary capital plan failed to adequately align with the LICU’s forecasts and strategic plan. Specifically, both the Region and the SRC have determined, and the Board agrees, that because there is a negative spread between the projected interest rate for the secondary capital loan and the average rate of return for the assets in the safety net plan, this negative spread will become a stress on earnings and a duration mismatch between funding sources.

The Board concluded the SRC was correct in affirming the Regional Director's denial.

In the other appeal, the Board on August 8, 2019 granted the LICU's request to present its case orally before the Board. The hearing was held on September 24.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

The credit union contended that its secondary capital plan that met the criteria in §701.34(b)(1). Therefore it should receive the requested capital. The LICU stated that the three deficiencies identified by the Region were subjective and should not be a valid basis for denying the secondary capital plan.

The Region, on the other hand, argued that the five enumerated criteria provide for the minimum components that are required to be included in a secondary capital application.

The SRC found ample support for the Region’s assessments that the LICU's secondary capital plan was not sound, and concluded the denial of the plan was reasonable.

In its October 11 decision, the Board did not find the LICU's arguments to be persuasive. The Board stated it should not substitute its judgment for the SRC. Therefore, the Board affirmed the SRC decision.

The Board stated that in both cases the credit unions choose to reapply for secondary capital. But if they decide to re-apply, the agency encourages ongoing dialogue to address deficiencies discussed in previous denials.