Sperry Associates FCU must submit a net worth restoration plan, charge off $3.1 million in loans and get an outside analysis of its structured securities as part of a letter of understanding and agreement signed between the NCUA and the credit union's leaders.
The LUA, which was released on June 11, cited the credit union for declining capital, participation losses, potential unrecognized investment losses, inadequate due diligence and inadequate testing of high-risk areas.
Sperry Associates FCU, a $360 million Garden, City, N.Y.-based financial institution must restore its return on average assets of 0% by the end of 2010, 0.15% by the end of 2011 and 0.25% by the end of 2012.
As of March 31, its ROA was 0.64%, but it had been negative 1.64% at the end of last year and had a negative ROA during every quarter of 2009. Its delinquent loan ratio at the end of the first quarter was 1.52% and its net worth ratio was 5.15%.
The credit union must charge off $1.2 million in nonperforming loans in the Cal State 9 CU participation loan pool and $1.9 million in South Florida Properties participation loans.
In a statement, the credit union said it had "already completed significant parts of the plan [of action]. Our financial strength can be measured by the fact that the credit union is profitable."
The statement said its problems were partially the result of policing itself against third-party fraud because Fannie Mae tried to buy the credit union's mortgages without its consent. The credit union's mortgages are current and payments are placed in an escrow account until the issue is resolved, according to the statement.
Sperry Associates FCU's capital declined from 6.22% in March 2009 to 5.15% March 2008, according to the financial performance report filed with the NCUA. The credit union also had more than $27 million in participation loans outstanding, mostly business loans. Participations accounted for over 11% of Sperry Associates' entire loan portfolio.
The NCUA stated that the credit union isn't managing its balance sheet to comply with its interest rate risk and liquidity risk tolerance levels. It also said the credit union hadn't tested the effectiveness of its efforts to prevent transaction risk and compliance risk.
The LUA requires the credit union to take several steps to correct its problems, including several outside analyses, including one of its collateralized mortgage obligations. The credit union has three private label CMOs that have been "downgraded below permissible levels."
The credit union must also cease granting loan modifications until it develops a policy and puts managerial procedures in place.