NCUA Data Confirms Arrowhead Turnaround

NCUA’s June 30 data confirms a turnaround at Arrowhead and prompts serious questions about the agency’s supervisory judgments.


Callahan FirstLook data indicates Arrowhead Credit Union is continuing its turnaround, and the San Bernardino cooperative is back in the spotlight after news reports of its first quarter 2011 profit. There is debate within the industry about NCUA’s actions to speed up that turnaround by slashing costs and decreasing the value of the Arrowhead franchise. The following article first appeared on in July 2010.

On Thursday, July 22, the NCUA released June 30 call report details to support its conservatorship of Arrowhead Credit Union and issued a press release in which it repeated the assertion the credit union was in “declining financial condition.”  

The June 30 call report released by the agency not only documents the credit union’s continuing  recovery but it also raises serious questions about the agency’s regulatory judgments including the critical omission of relevant data in its July 22 press explanation.  

The Facts At June 30, 2010 Using NCUA’s Call Report Numbers

Included with the following observations are graphs showing Arrowhead’s key trends over the past two-and-one-half years.  The outcome at midyear 2010 is entirely the result of the management team and the Board, which NCUA removed on June 24.

Total capital has increased to 8.7% from 8.5% at March 2010. The total dollar capital is $70.5 million.

Net Worth Ratio & Capital Ratio

The core earnings ratio at 3.91% of assets has increased from the 3.48% of just 90 days earlier. This is one of the highest ratios in the country and almost three times the credit union average.  Earnings are the sole source of capital for credit unions.

Core Earnings Ratio

Total delinquent loans declined to $19.2 million, almost $1.0 million lower than the prior quarter end and the lowest amount in more than two years. In June 2009, just 12 months earlier, the number was $34 million.

Total Delinquent Loans

The allowance for loan losses increased to 8.59% of all loans, up from 7.47% at March 30. This allowance is more than two-and-one-half times the average of all California credit unions and more than three times the industry average. 

Allowance for Loan Loss

The credit union’s annualized net charge-offs are 5.49% of loans, an amount virtually identical to the first quarter number of 5.43%. The charge-offs are a full 300 basis points below the allowance account for loan losses (see prior data point);

Year-to-date net charge-off and provision expenses are virtually equal at $18 million, showing the credit union is recognizing loan losses in a timely manner. Moreover, the 2010 provision expense for the first six months was less than one-half the comparable amount ($43 million) for the first two quarters of 2009, showing further the dramatic improvement in the loan portfolio.

C.O. vs. Provision Expense

The coverage ratio (the allowance for loss account divided by total delinquencies) increased to 279%from 247% just 90 days earlier. This ratio is almost three times the average of all California credit unions.

Coverage Ratio

The operating expenses for the second quarter are less than the first quarter and continue to fall from a peak at the end of 2008, again demonstrating management’s continued reduction in fixed costs.

Operating Expense

Efficiency Ratio

These numbers are the fundamental facts used in making safety and soundness judgments about any financial institution’s trends. The balance sheet’s strength is the primary basis for an analysis of a credit union’s financial condition and whether it is improving. The complete absence of any reference to these average ratio trends in NCUA’s press release raises serious questions about the agency’s supervisory analysis.

What About The Reported Negative Income?

The agency focused on the negative net income of $1.4 million for the first six months of 2010.  This number is highly suspect, but even if it is accurate, it would represent an incredible improvement from the $29 million loss reported for the same six months in 2009.

First, the conservator appointed by NCUA failed to include the gain on sale of four Arrowhead branches to Alaska USA Federal Credit Union, which was finalized on June 25 and would have added to net income an amount almost equal to the purported loss. The glaring omission of this transaction, reported as completed in NCUA press statements, suggests the agency is not accurately recording events for the credit union.

The second factor the agency cited for the negative net income is the assertion the credit union failed to follow a loan loss allowance methodology adopted in October 2009, which was itself based on numbers for the prior 12 months.  

This old method was developed before the economic recovery was fully underway and was in fact modified by Arrowhead management – an entirely appropriate and proper change – in March of 2010 when the fundamental economic conditions that were the basis for the old process had altered.  

This October 2009 estimation process was significantly outdated and has resulted in an extreme overfunding of the allowance account (almost 300% of total delinquent loans) by any objective standard.  

All major financial institutions – such as JP Morgan Chase, Citibank, and Bank of America – that have reported June 30 results have recorded lower loan loss provisions compared to first quarter 2010.

This outdated approach does not even fit the published facts on the ground. On July 22, the same day the NCUA issued its press release, the Los Angeles Times published a lead business story: Mortgage defaults in California at 3-year low. The story reads in part:

The number of Californians entering foreclosure slid dramatically in the second quarter to a three year low as the fallout from the worst of the housing crisis has continued to abate.  Default notices, the first stage of the foreclosure process initiated by banks on troubled homeowners, plummeted 43.8% in the second quarter over the same period last year. . . The plunge in default notices was experienced throughout California, including places such as the troubled Inland Empire and the state’s Central Valley, resulting in the fewest new defaults since the second quarter of 2007.  

Arrowhead’s management had adapted its reserving method to fit these changing circumstances. NCUA is retroactively using a methodology from a period that reflects neither the region’s nor the credit union’s improving current circumstance. 

The result is an overfunding of the reserve and an under-reporting net income. This under-reporting is a misleading presentation of the credit union’s actual financial performance and current condition.

For example, if Arrowhead’s allowance account were funded at the average of all California credit unions (which is 112% of total delinquent loans, the U.S. average is 90%), then the credit union’s net worth portion of capital would be $56.5 million. The net worth ratio would be 7% at June 30 or well-capitalized by NCUA’s own regulatory criteria. 

Asserting a net worth ratio of less than half that amount (3%), not recognizing income from a transaction in June, and completely omitting any reference to the improving balance sheet trends suggest NCUA’s conservatorship of Arrowhead was unfounded.

The Result Of NCUA’s Inaccurate Judgments

NCUA has unilaterally taken Arrowhead away from its 150,000 members at a critical time in the economic recovery – a time when the members, their communities, and their businesses are most in need. Instead of knowledgeable, experienced management making vital decisions about lending and serving the community, the agency has imposed its own version of events, which are out of touch with both economic factors and objective financial analysis.  

In a conservatorship, the members have no say whatsoever in their credit union. NCUA has absolute control.  Members’ savings and loans are now managed by the regulator. Having removed managers and the Board who had demonstrated consistent and documented results, the credit union’s members are now dependent on NCUA in Washington, DC,  to respond to local press inquiries. Arrowhead’s interim management even told the press it is working for NCUA, not the members or the community. 

The members’ only recourse is their freedom to speak out about this takeover with the press, Congress, and the credit union community.

But there is a bigger issue. The sequence of NCUA’s misleading press release assertions and retroactive efforts to produce the “facts” about the credit union’s alleged “declining financial condition” raise serious questions about the management of the federal agency.

The agency provided no facts to support its seizure in the first announcement on June 24.  When confronted with the credit union’s own publicly available trends, NCUA then changed its story line, saying the management had provided incorrect data. As shown above, the agency’s own June 30 call report figures document a record of continuing performance improvement, not decline. 

The omission of these positive balance sheet trends and the agency’s own questionable accounting decisions  in the July 22 press release reinforce the view that NCUA had made up its mind, took an arbitrary action, and is now looking for facts to explain its takeover.

NCUA’s month-long efforts to justify its abrupt actions in the Arrowhead conservatorship point to a much broader issue.  

On June 12, NCUA released audit reports for 2008 and 2009 by two independent auditing firms (KPMG and Deloitte). The NCUA’s four financial reports were a year-and-a-half late for the 2008 audits and cite significant and material weaknesses in the agency’s own financial management.

Material weaknesses were identified by Deloitte & Touche in both the NCUSIF and Central Liquidity Facility (CLF) in 2008. KPMG identified material weaknesses in the NCUA operating fund and Community Development Revolving Loan Fund (CDRLF) in 2009, along with significant deficiencies in the NCUSIF, CLF and CDRLF.

A significant deficiency is defined by the auditors as “important enough to merit attention by those charged with governance,” while a material weakness is defined as “a deficiency, or a combination of deficiencies … such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.”

The Arrowhead situation is additional evidence that NCUA does not have its own house in order, including routine supervisory processes.

How many of Arrowhead’s 150,000 members will be shut off from essential financial services now that Washington, DC, is in charge? How many will be denied loans? How many savers will be sent out the door? How many staff will be laid off? 

How many more credit unions will suffer from outdated and arbitrary regulatory judgments about their financial performance?

What can members do to regain the right to manage their own and the common wealth they have created over the past two generations?

Arrowhead is not just a case of the mistaken takeover of a credit union on its way back; it is an example of a government agency unable to manage its own responsibilities in an accountable manner.




July 23, 2012


  • Don't forget about all the employees that lost their jobs because of the takeover. Some of those employees had 20+ years on the job and they were kicked to the curb by the NCUA. What the NCUA did was wrong and they justified it all by saying they were protecting the members. I think they were making a point ... watch out Altura you could be next.
  • Chip and Callahan and Associates are among the very few who are taking NCUA to task for their rogue actions. It seems almost everyone else in credit union land are afraid, because speaking up may bring retribution from NCUA down on their heads, Thanks, Chip, for saying what needs to be said.
  • Great article, Chip! I'm curious and have even more questions. You refer to the NCUA as the regulator, but in this case is Arrowhead not a state-chartered, but federally insured credit union? Conspiciously absent from this whole conservatorship is the State of California Department of Financial Institutions. Makes one wonder if this would've happened if Arrowhead was privately insured. In other conservatorships or mergers concerning state chartered credit unions the State took it over and then appointed the NCUA as conservator. In this instance, there is absolutely no mention of the state. Why is that? Where is the state? What happened to the dual charter system?
    Just Curious
  • Definition of "own" from

    "to acknowledge as one's own; recognize as having full claim, authority, power, dominion, etc."

    The dispiriting truth is that the regulator "owns" the hard-earned net worth of every credit union in the country and they can seize it any time of their choosing. The members and their elected officials are simply caretakers of their credit union while the regulator really "owns" the net worth and ultimately the future of each and every credit union in the U. S.

    As it is structured today, this is a dead and dying industry. With no viable means of renewal or any mechanism to encourage capital formation and the resulting growth that capital provides, it becomes a zero-sum game. Simply extending the current rate of attrition, there will only be 10-15 credit unions left in 20-25 years. Even with their larger size, they will unlikely be able to compete effectively with their larger bank brethren. In addition, creativity and innovation at the remaining 10-15 credit unions will be completely strangled because the regulator will become overly concerned about the failure of even one the remaining 10-15 credit unions. They effectively become "too big to fail" and are over-regulated to the point that they will no longer be relevant to their membership.

  • shame on NCUA, but double shame on all who do nothing about it!
    simon simple
  • It is difficult to focus on the facts because the bias is so evident. Instead of ranting, have you sought to clarify any of your observations? We had a CU in Ohio whose numbers looked fabulous, but was closed. Upon closer inspection, the numbers were falsified and there was dubious lending activity. When the dust settles, the truth will come out (I hope, anyway).
    Kelly Schermerhorn
  • Great article!

    Shame on the NCUA for its heavy-handed treatment of a great community financial resource. Debbie Matz...let's hear from you. How could you let this happen on your watch? Arrowhead has been a friend and leader in your industry and deserves better!
    A Friend of Arrowhead
  • To Comment #5 Above,

    This article starts out by saying "On Thursday, July 22, the NCUA released June 30 call report details to support its conservatorship of Arrowhead Credit Union and issued a press release in which it repeated the assertion the credit union was in “declining financial condition.” "

    These are the agency's own data points -- their own numbers!! That is what is so amazing about all this to me. Bravo to Chip and the team at Callahan for taking the time to do this important analysis and share with the entire industry. We need more of this oversight from independent firms and then it is up to us to take action -- call your league, call CUNA/NAFCU, call your elected reps, tell your members. NCUA is on a crash course to ruin this incredible industry that is doing so much good for so many people.

    The numbers are their own facts that NCUA cannot hide behind -- reckless action by out of control (or out their league) regulators. You pick which one it is.
  • I'm sure the NCUA will now make some new excuse for why they did this -- now that their flawed/misguided reasoning is exposed. Just watch, some "new" revelation will be exposed by agency staff that will ultimately be a very subjective opinion. The reality is that this was already a turn around story. The new management at Arrowhead have an easy job ahead -- just keep executing what the member-hired management team was already doing!

    What an unnecessary loss for the community and waste of our NCUSIF fund. Shame.
  • As an former NCUA employee I can tell you that there has to be more to this story than what the numbers or ratios show. I'm not defensing them just stating an opinion because even NCUA understands how important it is to "protect the NCUSIF" and NCUA's actions to conserve this credit union will only cost the funds dollars so this action would've/should've been the last action item left for them to do based on problems at the credit union other than the numbers/ratios.
  • Thank you for shining a light on the heavy handed actions of Regulators in this difficult economic time. Decisions are made hastily and without thorough evaluation. I believe that it is time for us as an industry to fight back. Where was the League during all of this?
  • One area that seems to be missing from the article is the reputation damage done to the employees that have been terminated or laid off. The NCUA swept in and treated them badly and no one is talking about that. Many of these people had worked within Credit Unions for over 20 years. The "experts" who are managing Arrowhead had nothing good to say about Credit Unions in general and if you look at their resumes there are some former bankers that seem to have a general dislike for credit union people.

    I hope at some point someone looks at how the NCUA treats the general employees of an organization that they take over. These are people that have done nothing wrong and they are being treated like dirt. I thought the NCUA was suppose to be working for or at least with Credit Unions. In the case of Arrowhead they were on a mission and there is no turning back.

    Former Employee
  • There's no question that NCUA was heavy-handed in their taking over of Arrowhead. However, the fact remains that management took too much risk, and in the end, it bit them. I'm also very concerned with our alleged industry leaders (Chip Filson and Dave Chatfield, to name two) that came to Larry Sharp's defense so quickly without knowing all of the facts. Why haven't you defended other CEOs in similar circumstances? Would you defend me? Or do you only defend your golfing buddies? This is a very dangerous precedent you are setting.
  • Chip ... congratulations on your analysis of what NCUA is and has done at Arrowhead. Glad to see someone asserting efforts to control a "run-a-way" Federal Agency.
    Jim Williams
  • This seizure is a puzzle to be sure. As an old timer, I am aware that Larry and the NCUA have had their moments over the years. Larry took the NCUA on from time to time and my guess (without knowing much) is that this relationship may have had something to do with it.

    Like many, I am following the numbers at the key CUs at risk. Arrowhead, while in a tough geographical area, was certainly not the worst.

    an old timer
  • Thank you Chip. You are our conscience. No one does more for the CU Movement than do you.
    Dick Johnson
  • It is an unfortunate thing when the NCUA chooses to only provide the data that supports their action rather than "all the facts."
  • To those who say most of the credit unions will be out of business in 20 years; you should pray that they aren't. Big banks are in control even now after playing Vegas with peoples' money and getting bailed out. If no bailout would have come who would be there for the people? Credit unions are there for the people. To the rich go the spoils and crumbs for the rest. Thanks Chip.
    Dave Branham
  • Thank you for sharing this information. The NCUA is wrong for what they have done to Arrowhead. The NCUA is pointing fingers and really the fingers need to be pointed back at them. Larry and his staff were working hard to get the credit union back to being a strong credit union. If any one is to blame it shoudl be the NCUA for coming in during a good economy and giving great reviews about the same loans that they are screaming about now. Wake NCUA and take the fault of having auditors that do not know what they are doing and leave Arrowhead alone. I think that the NCUA should have to pay the salaries of all the staff that were laid off.
    Former Employee