The news on Arrowhead Credit Union wasn’t pretty last week.
Like I wrote about a week or two ago, the National Credit Union Administration (NCUA), the credit unions regulator, wouldn’t have seized the institution without cause. I said the most likely scenario here was inaccurate financial data reported by Arrowhead’s management.
That assumption was correct.
The NCUA has now disseminated information that Arrowhead’s management was low-balling its set-aside for future loan losses.
Financial institution managers have disagreements with their regulators all the time. But, when you are severely under-capitalized, you better be correct. In the instant case with Arrowhead, management was painting a cheerier picture from what really existed at the time.
This NCUA finding directly affected the institutions operating surplus numbers or bottom line. In other words a previously professed operating surplus or profit was actually a loss.
The number affected Arrowhead’s reportedly improved capital ratio. Instead of improving, the number fell to a ratio in the low 3% range. A number almost fifty-percent below the 6.0% required to be a healthy well-capitalized credit union.
If Arrowhead were a bank, the FDIC, the NCUA’s bank counterpart, would have seized Arrowhead long ago.
Several community business activists jumped the gun immediately after the credit union’s take-over by federal regulators. Most were shocked and dismayed. A few, without the true facts, were crying foul.
After all, the seizure is a blow to the community image. There was pride associated with the institution that had grown from a small business serving only county employees, to become one of the areas largest.
As Arrowhead’s insurer, the NCUA was required to act to limit losses it has to cover in the event of a failure. Nothing more, nothing less.
The NCUA is not required to take management’s word, but instead look for themselves.
They did, and obviously didn’t like what they saw.