All the hoop-la over the National Credit Union Administration (NCUA) seizure of Arrowhead Credit Union is coming across like a cheer-leading squad supporting the local establishment.
An area economist, John Husing, is going to demand the regulatory agency explain its actions by way of a letter to the NCUA signed by local business leaders.
After all Husing knows everyone everywhere, and therefore NCUA is wrong.
The problem with this whole scenario is the NCUA as the regulator and guarantor of the institutions deposits has the final say.
Why? Because they shoulder all the risk. The judgement of the soundness of the credit union is theirs alone.
Their decision is final.
All the crying foul by individuals such as Husing, in the end, forces facts and figures to emerge that could ultimately hurt those Husing is trying to defend.
It’s already started.
Information is emerging that tends to indicate managements assumptions for loan loss reserves related to problem loans was questionable. This point directly affects the institutions recently reported profits and capital ratios. Last week, a former Arrowhead executive said in a local news story that the NCUA was also concerned about Arrowhead’s restructuring of certain loans. Arrowhead had been significantly under-capitalized for an extended period of time. Regulators like NCUA can’t and won’t let such a condition continue indefinitely.
Arrowhead had already reduced its balance sheet by more than a quarter billion dollars and was still under-capitalized. Credit unions, unlike banks, can’t raise capital by issuing stock. A credit union has to either shrink in size by selling risk-weighted assets, such as loans or property, or rapidly realize operating surpluses, which increase capital ratios.
A restructured loan usually has to be 100% risk-weighted since it is a problem loan. This means Arrowhead had to backup restructured loans dollar-for-dollar until such a time as the loan repayment history allows for a more favorable treatment.
NCUA is saying that after they reviewed managements financial data, and conducted their own examination, that Arrowhead was in a worse financial condition than they were originally led to believe.
Hypothetically, a higher set-aside for additional loan losses would turn recently reported profits into a loss.
So the NCUA seized the institution, removed the board, and replaced upper management. If the NCUA chose to do so, dependent upon all the facts, it could move to ban the affected board members and executives from the industry.
Be careful what you ask for.