09:35 PM PDT on Wednesday, June 30, 2010

The Press-Enterprise

The federal agency that seized Arrowhead Credit Union on Friday said the institution underreported its first-quarter losses, underscoring the agency’s contention that Arrowhead’s financial condition was worsening.

National Credit Union Administration spokesman John McKechnie said the agency found “inaccurate” loan data but would not say what that was. Such reporting errors could have an impact on other items in the credit union’s balance sheet including its net income and total assets. The agency has said it seized the bank because of its declining financial condition.

Larry Sharp, Arrowhead’s CEO, now on paid administrative leave, said he couldn’t respond to allegations that his credit union’s financial data were inaccurate in the first quarter without knowing the NCUA’s claim first.

“I don’t know what it is they’re disputing,” he said by phone Wednesday afternoon.

“I will stand by the numbers,” he said.

Business and community leaders have said they were surprised by the takeover because the credit union appeared to be recovering from steep losses it suffered by the end of 2008 and 2009.

Sharp and Chip Filson, an independent credit union consultant who had done work for Arrowhead several years ago, both contend the San Bernardino-based institution was improving and had more than enough in reserves to cover delinquent loans.

McKechnie said the NCUA is still determining the actual losses in the credit union’s first quarter.

“We’re working to revise those to make those accurate,” he said.

He wouldn’t say if credit union officials knowingly reported inaccurate financial data.

“We can’t guess about that as to why the mistakes were made,” he said.

The NCUA was responding to claims by Filson that Arrowhead was on track to recover.

In May, Arrowhead’s write-offs, essentially bad debt removed from the books and considered an expense, amounted to $2.7 million, Sharp said. A year earlier, the credit union was averaging about $4 million in write-offs monthly.

Sharp conceded that the loan loss write-offs were higher than normal.

“I’m not saying that we were out of the woods by any stretch,” he said. “No question that NCUA had the discretion essentially to do what they did.”

According to the Federal Credit Union Act, a credit union is considered significantly undercapitalized if its net worth ratio, what regulators use to determine the financial health of a credit union, is below 4 percent.

Arrowhead Credit Union’s net worth ratio was 3.5 percent at the end of March. Sharp said the financial institution’s net worth ratio rose to 3.68 percent by May.

“It’s been continuing to go up,” he said.

Arrowhead Credit Union was largely damaged by its consumer loans, mainly RV loans as well as auto loans and home equity loans, Sharp said.

“We’re a member-owned group, a cooperative, and essentially it’s the plight of our members,” he said, referring to the region’s sour economy.

Sharp said consumer loans accounted for about 90 percent of his portfolio.

Sharp said he was surprised by the takeover on Friday and that there had been no warning from the NCUA. He, along with three other Arrowhead executives, have been on paid leave since Friday. Sharp said he hasn’t been in contact with the NCUA since. The agency appointed P. Kay Woods, a veteran credit union conservator, to serve as interim CEO.

“The economy is recovering,” Sharp said. “We’re seeing our delinquency going down. How do you dispute that?”

Sharp said the credit union had more than it needed in reserves for loan losses, about 2.5 times more.

According to first-quarter figures, Arrowhead had $49.5 million in reserves to cover possible loan losses, about 7.5 percent of its total loans. The average for credit unions in California was 2.9 percent, according to data from credit union consulting and research firm Callahan & Associates, of which Filson is president.

The amount of delinquent loans at Arrowhead in the first three months of the year, the period the NCUA says included inaccurate data, was $20.1 million.

“The level of reserving is extraordinary and would seem to be way beyond what is necessary to cover any reasonable estimate of losses that are out there,” said Filson, who worked for the NCUA for more than four years in the 1980s.

Filson said in a phone interview that it was suspect for the NCUA to say the numbers for the first quarter were incorrect without supplying data to back it up.

Earlier, in an e-mail, he said the NCUA’s seizure of Arrowhead was “arbitrary and capricious.”

“Arrowhead Credit Union has shown a steady and documented turnaround since last September,” he wrote, adding that it continued to show steady improvements in the first five months of this year.

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