Sharp Speaks Out On Conservatorship

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SAN BERNARDINO, Calif.-Larry Sharp has moved on, but he still strongly disputes the reasons NCUA has cited for placing Arrowhead Credit Union into conservatorship.

Controversy over the decision has raged since the regulator's June 25 move, as several notable figures in the CU movement questioned its necessity. Several industry analysts were quick to argue the agency had moved too quickly, while in another unusual move, community leaders in San Bernardino penned and open letter protesting the conservatorship.

As reported in Credit Union Journal ("Arrowhead: Timely Takeover Or Impressive Turnaround Stymied?" July 12), Sharp on June 8 had told Credit Union Journal that Arrowhead had posted positive earnings of approximately $1-million per month and was slowly building its way back to financial health.

But NCUA, in response to the criticisms, asserted Arrowhead management had underestimated its Allowance for Loan Losses by $4.1 million, meaning the $2.6 million in net income reported for the first quarter was instead a $1.5-million loss for the first six months of the year. NCUA reported that the losses pushed the one-time $1.1-billion ACU's net worth ratio, a low 3.36% at March 31, down further to 3% as of June 30, making it "significantly undercapitalized" under NCUA minimum capital rules

Moreover, NCUA Chairman Debbie Matz said in a letter to those community leaders that the timing of the conservatorship was necessary to prevent the sale of loans at a "steep discount" to Alaska USA FCU as part of an agreement by Arrowhead to sell five branches to the AUSAFCU.

Sharp, who has accepted a position as VP of advancement at Cal State San Bernardino, just blocks away from his old credit union, said neither allegation holds water. Addressing the loan sale, he insisted it would have been a bad deal for Arrowhead's members.

NCUA sold the branches, but did not sell the loans," he began. "So if those folks were doing business in the branch, they no longer had a branch in the area where they lived. Did that help them? No."

According to Sharp, the sale involved approximately $77-million in loans that were in the same ZIP codes as the branches Arrowhead had agreed to sell to Alaska USA. Not every loan in those ZIP codes was scheduled to be sold, he noted.

"We had agreed to facilitate the transfer of the dollars on deposit by co-operating those branches for several months thereafter," he explained. "It would have downsized Arrowhead Credit Union. We agreed to a 3.5% discount, which NCUA labeled a 'deep discount,' but NCUA was requiring us to keep 8% on reserve for those same loans, which is inconsistent at best. How can you complain we were making too deep of a discount when telling us to hold an ALL of 8% on those loans?"

The loan sale "would have freed up 4.5% on ALL we wouldn't have had to keep any more," Sharp continued. "The credit union would have benefited from bringing those reserves back from ALL to regular reserves. At the same time, we would have lowered our assets, which would have improved our equity ratio. We would have been pretty close to about 4.5%."

Misstating True Financial Condition?
Sharp similarly dismissed the charge that management under funded its Allowance for Loan Losses. He said Arrowhead already was at 250% ALL to the actual delinquency, which he argued "was probably the highest ratio in the country."

"Then they came back and said I needed to put more in there? The issue we had was we already were over-reserving, given the fact our delinquencies had declined for nine months. In a declining situation, increasing ALL is contradictory to what you would normally do in an accounting situation."

Arrowhead, he said, which had begun posting red numbers as the local California economy was sinking, was seeing charge-offs and delinquencies decline month after month. At the same time, it was rolling forward the time it was charging off loans-charging them off earlier than required. It moved from a six-month charge-off to a 120-day charge-off in August 2009, which Sharp said caused a "bubble" in both dollars and number of loans charged off.

"Our point of view is we did not need to increase ALL," he said. "We disagreed with NCUA, and they were basing their projections off what happened in 2008 and 2009, not looking forward at all. We were looking at the trends in the economic climate and asking why we needed to add more dollars to ALL. NCUA disagreed, and they have the hammer."

Asked about the possibility that the conservatorship of Arrowhead was a personal attack on him, as some have suggested, Sharp acknowledged, "There has been speculation about a vendetta."

"One of my failures is I can be a little outspoken and regulators don't like that," he said with a laugh. "I still stand with our figures and our estimate of the losses. We had hired a CPA firm to come in and look at our methodology. We were in that process when the conservatorship happened, so we did not get a chance to complete it. We felt we were right."

Sharp said his new job, which began Sept. 1, has been enjoyable, and that he remains deeply connected with the community.

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