News Of Arrowhead Is A Timely Fourth Of July Reminder

Independence Day celebrates not only our freedom but also the many efforts and sacrifices made to achieve it. The price is eternal vigilance.


As the country embraces its Independence Day spirit, we will hear repeated classic phrases, such as the price of liberty is eternal vigilance, about what makes America special.

Last week, on June 25, NCUA placed Arrowhead Credit Union under conservatorship. This is the most drastic action a government regulator can take.  It not only removes the elected leadership but also takes away the control of the cooperative from its members. Some of Arrowhead’s 150,000 members have contributed to the credit union for generations, building a legacy intended to be passed to future members. Now that future is in the hands of an Agency whose primary goal is to make problems go away.

A regulator would take such drastic action, an observer would hope, only as a last resort and when the facts overwhelmingly support the action as the only option remaining. In the case of Arrowhead, the NCUA made its case for this extraordinary action by stating the following:

  • The credit union “was placed into conservatorship due to declining financial condition.” (NCUA press release dated June 25)
  • “NCUA took this action because of safety and soundness concerns which were deemed detrimental to you as members.” (NCUA notice on Arrowhead’s web site on June 25)
  • “The credit union was not reversing negative trends and was not on a trajectory to return to profitability.”  (John McKechnie, NCUA spokesperson, in a Contra Costa Times article dated June 28)
  • “NCUA spokesman John McKechnie said the agency found ‘inaccurate’ loan data but would not say what that was.” (Press Enterprise article dated June 30, 2010)

The general nature of NCUA’s explanations and absence of factual, objective information causes one to ask whether the Agency had its mind made up to take over the credit union and is now seeking the facts to justify its action. This appears to be what NCUA spokesperson McKechnie is referring to in a June 30 Press Enterprise article where he is quoted as saying in reference to the loan loss reserves: “We’re working to revise those to make those accurate.” Shouldn’t the NCUA have given management and the board the opportunity to review and respond to the regulator’s numbers rather than dismissing them and producing the facts later? Isn’t this why there are examinations?

Arrowhead’s Trends

Callahan published an analysis on May 10 titled Arrowhead Flies Straight in 2010. For that article, our researcher looked at the following trends:

1. Arrowhead Credit Union has maintained statutory reserves and capital in excess of 8% throughout the crisis. The allocation within the statutory capital has been changed, as shown below.

Arrowhead Net Worth Ratio and Capital Ratio

2. Arrowhead has achieved higher core earnings throughout the crisis and today is over 200% higher than the national average.

Arrowhead Core Earnings Ratio

3. The credit union has made a significant reduction from the high point of its delinquency to today.

Arrowhead Total dollar Delinquent Loans

4. Throughout the crisis, Arrowhead has reserved a greater amount in the loan loss account than was necessary to meet each period’s charge-offs.

Arrowhead Quarterly Net Charge Offsvs Provision Expense

5. As a result of its proactive reserving, Arrowhead is extraordinarily well prepared for future losses.

ArrowheadAllowance for Loan Losses as a percentage of Total Loans

6. Today, Arrowhead has loss reserves 275% higher than the industry average.

Arrowhead Coverage Ratio

7. The credit union has reduced operating expenses for five consecutive quarters.

Arrowhead Annualized Operating Expense Totals

8. The expense reduction has resulted in Arrowhead Credit Union achieving an efficiency ratio lower than the industry.

Arrowhead Efficiency Ratio

In addition to these trends, and according to data updated through May, we know the following:

  • Arrowhead continued to report strong earnings of almost $ 1 million per month for April and May and was on track to do the same in June.
  • Its core earnings of 3.5% are one of the highest in the country.
  • Its net worth has gone from 3.07% in September 2009 to 3.7% in May 2010. Its rate of capital growth for the first five months of 2010 was 38% versus an industry average of 4.3%.
  • Its loan-to-share ratio was more than 80% in a diversified portfolio with no concentration in any one area.

The partially completed sale of branches and assets to Alaska USA Federal Credit Union, planned by Arrowhead, will result in a gain of more than $1.0 million on the fixed assets and potentially reduce total assets so that the net worth ratio could improve to 4.5% or higher. The conservatorship stopped Arrowhead’s momentum in its tracks.

At a time when a number of locally owned banks have failed because of economic conditions, Arrowhead is an important and significant contributor to the Inland Empire’s economic well-being. The community is losing a vital resource that has served members and businesses faithfully since its founding more than 50 years ago.

Why Credit Unions Should Be Aware Of Arrowhead’s Conservatorship

Two Callahan writers attended the June 28 MACUMA (Metropolitan Area Credit Union Management Association) membership meeting in Washington, DC. During a speech that evening, Chairman Matz said the industry was experiencing the “calm before the storm.” The second half of this year, she said, will be more severe and there will be more conservatorships. Arrowhead is the first…there are more to come. It’s important to be prepared.

In a cooperative system interlinked by design, the fate of any one part and the fate of the whole system are inseparable. This action not only removes the credit union from its 150,000 members and the local communities it serves but it also sets a precedent for how the regulator will treat struggling credit unions.

What Can Credit Unions Do? 

Speak up. Tell the interested parties your point of view and let them know you are concerned. Important points of contact include:

  • NCUA Board:
    Chairman Debbie Matz [703.518.6300;];
    Board member Michael E. Fryzel [312.332.3737;];
    Board member Gigi Hyland []
  • The Congressional delegates from the communities Arrowhead serves:
    Rep. Jerry Lewis, CA-41st [909.862.6030(CA); 202.225.5861(DC); Email];
    Rep. Gary Miller, CA-42nd [714.257.1142(CA); 949.470.8484(CA); 202.225.3201(DC); Email];
    Rep. Joe Baca, CA-43rd [909.885.2222(CA); 202.225.6161(DC); Email];
    Rep. Ken Calvert, CA-44th [951.784.4300(CA); 949.888.8498(CA); 202.225.1986(DC); Email]
    Rep. Mary Bono Mack, CA-45th [760.320.1076(CA); 951.658.2312(CA); 202.225.5330(DC); Email]
  • California Credit Union League: Interim CEO Dave Chatfield []

The Issue Behind Arrowhead

Is this the kind of action that will enhance the system’s safety and soundness, or will it undermine confidence in the regulator’s judgment? Are the reasons NCUA provided for the conservatorship how a government agency should justify using its extraordinary power to take away the members’ ownership? More than 150,000 members lost their credit union. The NCUA removed four career employees and a small volunteer board without due process and without the benefit of any information to which the Arrowhead representatives could respond.  Who is next?

The Fourth of July celebrates not only our freedom but also the many efforts and sacrifices made to achieve it. The price is eternal vigilance. So who is watching?




June 28, 2010


  • A very biased article, and full of, silly but popular, libertarian "tea party" political rhetoric as well.

    Your statement that the 250,000 + "members" lost by this action, is self-serving and foolish; presuming that the "members" were not in the status of stockholders, but were only (protected) depositors and debtors.

    Of course the closure of some branches is inconvenient for some members. And, yes, some employees [who will hopefully either be retained by the successor CU or will find other and better jobs] and the top managers [some of whom will, hopefully, not] "lost".

    The interests of credit union members are NOT synonymous with those of the top managers and Board members, i.e your constituents; and demonstration of that fact is probably one reason for the failure of AFCU.
  • I would hope that the NCUA regulators would be able to show the members, employees, and public exactly what caused them to act swiftly.

    I would not want to be in the Credit Union business with an agency displaying absolute power, with no recourse or any checks/balances to be held accountable for their actions. I think NCUA needs to speak up and fully disclose their reasoning behind their actions outside of generalities. The last thing we need is more unemployment, and financial institutional failures to stimulate recovery.

  • Chip, great article!

    "The Fourth of July celebrates not only our freedom but also the many efforts and sacrifices made to achieve it. The price is eternal vigilance. So who is watching?"

    For the people... by the people... per your point absolute power can be a very dangerous thing. I think a sound argument based on facts can be something we can all accept, but to just say because I said so, does not hold any water. It reminds me of the referees at the World Cup.
    Chad Davis - FMSI
  • There is more to this action than what is being said! But the unfortunate thing is that we might never know what it is for sure unless NCUA reveals it. Things such as conflicts of interest or self servicing by executives/officials are seldom part of press releases since maintaining member/public confidence in the credit union is critical to working out a solution. I suspect the action by NCUA against this credit union is a lot deeper than the surface numbers/ratios would indicate.