o NCUA's restated Arrowhead Central CU financials show a $1.45million net loss and significant increase to loan lossreserves.

o Former CEO Sharp disputes restated numbers, explains allegedmisstated financial reports.

o Outsiders tend to blame both sides for the conservatorshipsand the fallout.

The $808 million Arrowhead Central Credit Union's June 30 callreports, released by the NCUA July 22, show a $1.45 million netloss, primarily due to an increase in loan-loss provisioning from$6 million as of March 31 to nearly $19 million.

In a release, the NCUA said dismissed Arrowhead management hadnot charged off loan losses in a timely or consistent manner,historical ratios had not consistently reflected actual losses, andthe credit union did not adhere to GAAP accounting standards.Furthermore, Arrowhead's own external auditor did not agree withthe methodology the CU used.

Former CEO Larry Sharp disagreed with the NCUA's restatedfinancials, saying the regulator is “stuck in 2009″ when estimatingfuture loan performance and reserve needs.

Sharp confirmed the NCUA's charge that the agency had rejectedfour consecutive net worth restoration plans he and his executiveteam submitted, saying his numbers were “too optimistic.”Specifically, Sharp said his decision to switch from a 12-monthhistorical period when figuring loan-loss reserves to a six-monthhistorical review had drawn criticism. He said Arrowhead hadexperienced nine consecutive months of dropping delinquencies andsix consecutive months of dropping charge-offs. He called thedecision “perfectly acceptable according to GAAP.”

The June 30 financial reports posted on the NCUA's website showArrowhead's delinquencies have fallen from 4.25% in June 2009 to3.08% as of June 2010. Sharp had reported slightly lowerdelinquencies of 3.03% as of March 31.

Net charge-offs were 5.85% as of June 2009 but rose to 7.52% inSeptember and remained high at 7.06% as of 2009 year-end. However,Sharp reported a much lower 5.43% net charge-off ratio as of March31, which the NCUA increased slightly to 5.49% as of June 30.

The steep third-quarter 2009 increase represents charged-offloans that had remained on the books beyond California's 180-daydelinquency maximum, he said. “We said okay, we'll even go back to120 days to be conservative” he said. “We were charging loans offahead of schedule, not behind.”

Sharp also said the NCUA did not record profits from the sale ofhis high-desert branches to Alaska USA FCU, which he said nettedabout $1.5 million.

Arrowhead's June 2010 financial performance reports reveal loan,investment and other income reporting all increased per a usualannualized pace. The other income category increased from $9.2million to $18.4 million. Nonoperating income lost annualized pace,increasing only slightly to $1.24 million as of June 30 from $1.13million during first quarter.

Arrowhead would have netted another $3 million from the AlaskaUSA deal had NCUA not repudiated the $77 million loan package thatwent along with the branch sale, Sharp said.

Former NCUA examiner and Lafayette FCU CEO Bill Brooks said hecan find blame on both sides of the conservatorship debate. On onehand, he said, Arrowhead's historical losses and current 8.5% loanquality ratio suggest “incompetence” in loan underwriting andindicates “the board wasn't watching the shop.”

The NCUA “quite possibly did the right thing” when it placedArrowhead into conservatorship, he said, but the reasons providedin the regulator indicate the decision was made for the wrongreasons.

“When you read that press release, it's all focused on Arrowheadmanagement, they did not do this, they did not do that. It's alljustification,” he said. Instead, the NCUA should have citeddeteriorating conditions and a loss of confidence in management, headded.

“Whenever the government exercises their authority, they must beable to say it was used appropriately,” he said. “They never wantto look arbitrary or capricious because in the long run, thatdoesn't serve anybody.”

He pointed to Arrowhead's 7.38% average yield on loans asevidence that the credit union's performance may not be as bad asthe NCUA claims. Peer averages have not yet been posted for June,but in March Arrowhead's peers were yielding slightly less than6%.

Brooks also scolded both sides for failing to negotiate a networth restoration plan, saying egos got in the way of negotiation,adding that “an adult should have intervened” if communication hadbroken down to such a drastic extent.

Jordan Levine, research manager in the Los Angeles-based officeof Beacon Economics, said his team thinks Los Angeles'keyindicators like unemployment will peak this quarter, then slowlyimprove. He doesn't anticipate a dreaded double dip recession.

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