The Real Problem at Arrowhead Credit Union is Working With Common Purpose, Not Lack of Capital

In late July, Inland Empire community leaders sent NCUA a letter about Arrowhead’s conservatorship. On August 10, NCUA responded but failed to address the writers’ chief concern — when will they get their credit union back?


On July 27, 2010, more than 66 leaders of California's Inland Empire sent NCUA a letter about Arrowhead’s conservatorship. NCUA responded on August 10 with a letter reiterating previous explanations about its actions. (Click links to read the letters.)

Part 1: An Extraordinary Action

The request from community representatives and Arrowhead members for a clear commitment from NCUA to return the credit union to the members was extraordinary for two reasons.

  1. The signers were from a remarkable cross section of community leaders, representing institutions essential to the well-being of any city: Company presidents, hospital CEOs, university presidents, attorneys, CPAs, MBAs, local council members, pastors and the mayors of three communities (Ontario, San Bernardino, and Rancho Cucamonga).
    In more than 30 years of working with credit unions, including eight years as a regulator, I have never seen a document with such a diverse and widespread public statement of support for a credit union — especially one in difficulty. These are persons who have their own community responsibilities to consider and are putting their reputation on the line in this situation.
  2. Just as important, the letter reminds us the true source of safety and soundness in any credit union cooperative is first and foremost its membership. Their loyalty, not merely their resources, is the foundation on which credit is granted and long-term common wealth created. Working together for the common good or in the face of common threat is fundamental to every credit union’s success.

It is on this foundation that every credit union is built. There is no start-up capital from investors, only sweat equity from members.

In this way, credit unions turn upside-down conventional prescriptions for business success. Their purpose is to address problems and needs traditional financial providers either could not or would not on terms in the members' interest. In other words, they become even more essential in times of economic downturns.

This incredible public demonstration of support is a testament to Arrowhead Credit Union’s fundamental soundness — a fact that cannot be learned from numbers or exam reports.

The Common Purpose

Credit unions exist for members. There is not another separate insurance fund interest or financial model ideal that says one institution is serving members and another not. For the first 75 years of credit union history, for both federal and state charters, there was no common insurance fund. The NCUSIF and other cooperative insurers were a late addition to the cooperative system’s evolution. They are the collective resources assembled to assist individual institutions when circumstances beyond their control or resources create financial difficulties.

Credit union insurance is structured with a 1% deposit not a premium system as exists in banking. These common resources are always on hand to renew and carry forward credit union capability when problems occur. Credit union regulation is unique in that all of these regenerative capabilities (chartering, supervision, liquidity, and insurance) are contained within one structure, the NCUA, which is responsible for managing the only source of the system’s collective capital, the $10 billion insurance fund.

This supportive regulatory purpose is vital to a cooperative system. With no external capital, even the Federal Credit Union Act provides a minimum period of 10 years for a new charter before traditional financial sustainability goals are required. The law recognizes only time can create capital and resolve problems.

Historically, the Agency would recognize its own examiners who started the largest number of credit unions and those credit unions that grew with outstanding savings programs. This renewing role is even more vital today when the efforts of generations of members are threatened by economic conditions. 

The letter from the leaders of Arrowhead’s community have one request: Tell us how we get our credit union back. But that is the fundamental purpose of conservatorship, rather than being a halfway house to merger or liquidation.

Numbers Matter: But Common Purpose Determines Relevance

In its August 10 letter to Arrowhead’s community leaders, NCUA repeated previous general assertions with selective data to support its actions. Numbers are important for they are critical in making good judgments about appropriate actions. As shown in the notes below, there are compelling facts and data NCUA omitted, or in several instances created, to fit the circumstances.

But this is not about numbers. It’s about members and their best interests. Arrowhead is being downsized, experienced and capable staff are being removed and laid off, and loan programs are being discontinued. Instead of playing a proactive role in the Inland Empire’s economic recovery, with a long-term view to the community’s future, Arrowhead is being stripped of its ability to serve the members who founded it. The NCUA overseers and their local contractors do not live in the communities served by the credit union and will not be there to see the effects of their handiwork.  

When will the NCUA give the community back its credit union back so it can be responsible for its future? That is all these writers were asking for and what NCUA did not respond to.

Part 2: Notes on Arrowhead’s Data and Financial Condition as Cited in NCUA Chairman Matz’s Letter

  • NCUA’s letter gives a new set of explanations for the conservatorship — no longer citing Arrowhead’s “declining financial condition” but rather “to improve operational weaknesses, correct financial misstatements, and maintain normal operations.” NCUA has not listed any operational weaknesses prior to this. Arrowhead’s management and board were certainly maintaining normal operations. This is the NCUA's fourth different rationale given since the initial action.
  • California's Department of Finance has not stated publically what its position was; however, members of Arrowhead’s leadership team believe DFI was closely monitoring the credit union but did not participate in the planning and execution of the conservatorship.
  • Arrowhead’s financial condition was stable and getting stronger monthly. Total capital is more than $70.5 million or 8.7% of assets using NCUA’s June 30 numbers. The allowance for loan losses at the same date was 280% of total delinquent loans, a percentage that is three times the national average and two-and-a-half times the California credit union average. The credit union had contracted for a CPA, an experienced auditor who has trained NCUA staff on this process, to validate its numbers. This effort was stopped. By any objective criteria, the credit union is over-reserved and will soon be able to reverse a portion of this allowance account back to the net worth component of capital.
  • The credit union had not only submitted but also met all of the primary goals of its net worth restoration plans. The Board and management believed prudent downsizing rather than reductions in branches, assets, staffing, and other operations was critical to maintaining the credit union’s capability to serve members and the community. NCUA disagreed with that approach and is now imposing a radical reduction in the credit union’s overall operations. 
  • The NCUA implies that because the former management and board did not contest the conservatorship in the 10-day appeal period, they had implicitly agreed with the action or did not believe they had a strong case. It should be noted the June 25 meeting with NCUA was only with the Board and not management. The Board was told they could contest the conservatorship, and they would have to personally pay all the legal costs and NCUA had never lost one of these suits. Senior management had been put on administrative leave with no access to the credit union, records, or phones. They were kept on the payroll during this period and told, as employees, they were not to have any contact with former Board members. Once the 10-day period was over, the four senior managers’ administrative leave was cancelled, and they were terminated. The so-called appeal option is in name only; there is no due process in principal or practice.
  • NCUA now maintainsthe timing was to prevent Arrowhead from selling its “highest performing loans to an out-of-state institution at a steep discount that would not have represented the true value of the portfolio." This assertion completely mischaracterizes the transaction and contradicts the examination valuation estimates given by NCUA examiners to the credit union just 90 days earlier.
  • The so called out-of-state-institution was Alaska USA FCU, which had merged with two southern California credit unions more than a year earlier with NCUA’s blessing.
  • The complete transaction was to purchase four Arrowhead branches with a gain of more than $1.0 million for Arrowhead along with $75 million of various loans to support the deposit and branch operations. 
  • Both credit unions had agreed to the loan pricing of approximately $0.96 ½ per dollar, a modest discount from the face value. 
  • NCUA completed the branch sale as scheduled but stopped the loan sale saying that Alaska was paying too much and there should have been a lower price closer to an 8% discount.
  • These loans were representative of Arrowhead’s entire portfolio including kind of loan, delinquency, and FICO scores. The sale of this $75 million would have reduced Arrowhead’s loan risk pool by more than 15% — and again create an excess of capital in the allowance account.
  • In NCUA’s own exam report given to the credit union in March using estimates from the Agency’s Asset Management Center, the Agency’s estimate of the value of RV loans at 50% of book and MBL loans at 80% of book value. Moreover, it indicated it was unable to value the second liens. All of these loans were part of the sale portfolio NCUA now describes as Arrowhead’s “highest performing loans.” In fact, Arrowhead was getting a steep premium from the examiner’s recent estimates. Obviously, neither Alaska USA nor Arrowhead believed either of these valuation extremes were sound judgments.

The NCUA letter is correct that Arrowhead had not been making member business loans for a year, but the credit union was able to do these loans for less than $50,000 under its SBA program. Those loans have now been stopped. The other critical issue is what will happen to current lines of credit that mature. Will they be renewed?




Sept. 2, 2010


  • For all the times we say our members don't understand how a CU differs from a bank, here is a CU that appears to have done an outstanding job educating their members! Many in Southern CA thought Arrowhead had been doing an excellent job in serving their community and that their members loved them. How wonderful to see that is the case. I do hope they receive some satisfaction...

    Thanks for keeping us informed, Chip!
    Laura Campbell
  • Another story of the NCUA examiners shooting first and asking questions later. Some of the examiners are out of control and operating a cross purposes to the NCUA Board's stated goals and objectives.
    Scott Norris
  • You touted that the "leaders of the Inland Empire" all wrote letters. What about the actual members of Arrowhead? Seems to me that the "leaders" were all receptions of funds that Arrowhead spend in the community. That all makes the leaders a little biased and irrelevant. Perhaps the members owners would rather that Arrowhead spend their excess funds on better serving the member owners.

    In all fairness, full transparency, and full disclosure, were you not under contract with Arrowhead up to the time of conservatorship? Are your actions righting a wrong here or protecting your own brand?

    They have about 3% capital... either shrink their assets or grown capital quickly.. that's the options given other cu's. Why should they get a different treatment? They were the most bank-like cu I've ever seen.
  • Chip Filson for NCUA Board; regulator again!
  • Please note the link to Arrowhead's website in Chairman Matz's letter is not correct. It has a typo and takes you to a squatter site not affliated with the credit union.
  • This shows what can happen when regulators are not accountable to anyone for their actions. It seems they very carefully strategized to bully the board and prevent proper dialogue between management and the board to determine whether or not to appeal.
  • Thanks for the article Chip!! It is good to see more of the facts so we can see how the NCUA is not being fair in its treatment of credit unions (especially by the field examiners).

    In Response to Comment #6 - You commented that the Credit Union should have been required to shrink assets and increase capital. If I am correct, that is exactly what ACU was trying to do with the sale of the branches and loans to Alaska USA - But the NCUA stopped it. They were given different treatment in that they weren't allowed to do those common practices
  • In response to Comment #6:

    Callahan's is not, and was not, under contract with Arrowhead. Our motivation in covering Arrowhead?

    In May, our researchers identified Arrowhead as a turnaround story when reviewing first quarter 2010 data. At that time, we wrote an analysis of their financial performance in Arrowhead Flies Straight in 2010. When news of the conservatorship broke, we took an interest in the case because our analysis contradicted the reports coming from NCUA.

    We subsequently did a full analysis of NCUA's own numbers and the turnaround story was once again confirmed, NCUA Data Confirms Arrowhead Turnaround. The facts of the case do no support the conservatorship. NCUA itself is now running an ad that touts the remarkable turnaround underway at Arrowhead--the same turnaround that was well underway when they took over the credit union.

    In response to the first comment about the leaders of the Inland Empire: The individuals who wrote that did so with their full name, not behind a cloak of anonymity. I am sure they would be more than happy to discuss the positive impact that Arrowhead had on the community.

    Alix Patterson
    Chief Operating Officer
    Callahan & Associates, Inc.
    Alix Patterson
  • Ok... let's go old school to see how they are doing and recovering.

    12/08 ALLL and all equity = $96.1 M

    12/09 ALLL and all equity = $74.9 M

    06/10 ALLL and all equity = $73.5 M with a ytd loss of $1.4 million and no expense for any assessment. That projects to another reduction in capital, no matter how you count it. To save you looking, last year's assessment paid by ACU was $6.9M. Factor that into the above numbers and you will be wondering as I do: WHAT RECOVERY? WHAT TURNAROUND? We are looking at another absolute and substantial reduction in capital/ equity/ reserves / rainy-day fund.. whatever you want to call it.

    I hit on their business plan of MBL because that's known to be more risky and by golly, they haven't done a very good job with consumer lending.

    Take all the risk you want... AS A BANK, but not part of our cooperative know as credit unions. My members and yours will be paying for this for some time. I wonder if our current assessment is increased because of the apparent sitting this one out by ACU?
  • #11 -- you may be missing a central point of this article. How "bank like" the credit union may have been run is not for the NCUA to weigh in on. It is for the members to decide...unless you want the government closing down credit unions because of whatever opinion they happen to have in the morning! Conserving should be the last possible action ever taken, based entirely in the data facts, and only after a credit union clearly cannot be turned around and brought back to safe operations. The data (not your opinion about their business model or opinion about the potential riskiness of their current portfolio) clearly shows a turn around in progress. That is extremely positive and it appears the interium management of Arrowhead have a darn easy job because of it -- continue on the path set by the member hired management.

    This is a tragedy for the members, the IE, and our industry. NCUA needs to regain perspective and be an enabling partner to our movement. Instead, they seem bent on a path of over regulation and lack of common sense (we've all seen it in recent exams despite the facts). There is a reason we have a seperare regulatory structure versus banks FDIC: closing a bank isn't a big deal...entrepreneurs will start new ones all the time. Closing a credit union is permanent. Give this worthy credit union back to it's members.
  • Number 7. Didn't you guys do work for the corporates that were conserved? What great advice did you give them?
  • RE #7 - If you were in no way affiliated with Arrowhead or consulting there, I stand corrected. My source was incorrect.

    I'm curious if you did an on-site analysis or just the numbers. Having a fully functional repossessed auto dealership full of repossessed vehicles (not including their numerous motor-homes that never even hit the lot) while still promoting "fog a mirror financing" argues for the take over by NCUA. This credit union was a run away train of risk taking.

    Their almost exclusive financing of a local motor-home sales facility was a strong contributor. This from their prior VP who worked on restoration plans and knew all the vehicles that were coming back daily.

    Perhaps if Larry spent more time on operations instead of being in Washington promoting even more risk-taking by expanding MBL... they would still be here.

    Was NCUA 100% right and Arrowhead 100% wrong. No way. But my nod goes to NCUA on this one.

    The newspaper atricle by NCUA appears to be a plea for not having a run on the bank. But, you tell me... how long before they become well capitalized under the current conditions and given their current capital position? Do you expect a sudden reduction in the ALLL because of the great economy? Are we to expect no more loan losses? Is there ALLL currently correct or even underfunded? They are holding the equity of a $300M CU, but they have $800M in assets.

    Also, as of June they had no expense YTD for the NCUSIF assessment. If that's because they were under consevatorship and they are not required to pay.... then their recovery isn't as strong as anyone is computing. I don't see the reason for the special treatment. Merge them into someone paying the full share of assessments and get the monkey off the back of my members!

    I personally hope the "leaders" of the IE never get their cu back. I really hope the members do.

    You did not address the bank-like running of Arrowhead. Do you see that as the "CU of the future"? We've seen a trend in the bank-like operations for some time in this industry that has a philosophy diametrically opposed to that supposition, but no one talks about it.

    #8 - No, ACU made the mistake of actually growing assets in the quarter prior to being taken over. They did not have an approved capital restoration plan in place because they kept arguing that -- things are better now and this isn't 2009. BTW - if you did like 2009, you're just going to love 2011. They were out of touch and unrepentant. Whether by merger or other action, ACU needed to be stopped. My members a grateful for the change in direction and the lower cost they will bear as a result of NCUA's action.

    #10 - I'm no operative for NCUA if you are referring to me in your post. I'm more critical than most of their actions.
  • I love the way NCUA and their operatives work. Let's try to discredit those seeking to work openly and cooperatively to actually improve our industry and deflect from the facts and issue at hand. Engage in the facts and not the rumor mill, personal attacks and accusations, and anything else they can throw at the messenger. 

    Thank you for keeping a light on Arrowhead and the broader reasons for why this is so important for all of us. It is not just arrowhead but an entirely over the top destructive mentality in the name of safety and soundness.  I fear we have a regulator that is too set in course and too afraid to admit mistakes. An effective leader would stand up after reviewing the facts in hindsight, let the staff know they were wrong, and find the most expedient way to get the credit union back to it's members. Personally, I'd fire a few of them involved, regain perspective and control of the Agency, and be a positive force engaged collaboratively in nursing the struggling parts of this industry back to health.   But, hey, that would require admitting the Agency has made some bad decisions. Not going to happen with our current NCUA "leaders". 
  • Maybe the real answer to the problem at Arrowhead lies with the former CEO. Maybe he should be asked what he did wrong. Why didn't he correct it when he had the chance, and why did he let his community down after years of their support for Arrowhead. He enjoyed a big salary and substantial benefits. He traveled to all the conferences in exotic places, he portrayed himself as a leader in the movement, but he forgot to take care of his own shop and he is the one that should be answering to the community. He is like many out there who enjoy the fruits off the vine while they let it wither. They have met the enemy, and it is them.
    Jody Major
  • Thanks Chip for all that you are doing. Your thorough reviews and carefully considered analysis are unmatched (publically at least). I am heartened to see that freedom of the press can remain alive and well among at least one independent CU industry firm. Anyone can write a summary of an NCUA press release or speech to in effect help this desperate government agency amplify their voice. Not everyone writer can step back and see the forest through the trees. Bravo!

    My credit union will be working more closely with our league and CUNA to influence constructive change in direction at NCUA. This is a major reason we pay our dues to them each year after all and it is time for real results. I hope they are already mobilizing given the realities. If not, I will encourage them to do so. Hopefully they have already been talking to you.
  • I read Chips in the first place and I disagree... Chip is not God... he doesn't speak and the earth moves. He is not the last and only word.

    "Lets be real, the primary factor in the difficulties faced at Arrowhead are a function of bad luck" .... ah, NO! Luck had nothing to do with it... any business plan will work until it's been tested. The economy spoke and Arrowhead failed. Bad Luck? Check out other cu's in the area.. not all were conserved and not all fell below the well capitalized level.

    "one data point"... yep, negative ROA resulting in disintegration of capital is a single data point. It's also the sum of the effects of all the other data points taken together.

    When management takes no actions to return to profitability or shrink assets to fit equity... NCUA has an OBLIGATION to take action... they were right here.

    "Management was in the midst of proving their worth: a turn around was clearly underway. All data supports this fact." - Actually the data proves the opposite..If you can't even turn a profit without the assessment... your toast now or later, but toast none the less.

    Show me a profit and we can calculate when they will return to being well capitalized. No profit = no return. You pontificate all you want.. but those facts trump all else.

    We can argue all day... NCUA is now in the drivers seat and we'll all have to live with the consequences.

    Right now I'm more concerned about the legacy investment plan of NCUA. We may ALL be toast if this goes wrong.
  • Blaming the roots of Arrowhead's troubles on management is a very weak argument. Your personal feelings about management shoukd jot matter: the members decide to hire or fire and compensation structures -- not other credit unions and not NCUA. Lets be real, the primary factor in the difficulties faced at Arrowhead are a function of bad luck: one of the hardest hit areas in the country in terms of real estate depreciation and unemployment. Are they concentrated in this region? Of couse they are! How many of us would be loosing money if our local economy was hit so hard so fast???

    Management was in the midst of proving their worth: a turn around was clearly underway. All data supports this fact. Now, NCUA is continuing the previous management's strategy and time (only time) will continue to improve the position. What an amazing regulator. Wow. They should run all our credit unions!
  • Old school: you are narrowly choosing one data point and concluding "conserve!" without a view of the complete facts. You would make a great regulator! Before replying again, re-read the COMPLETE facts above in the article and in more detail on Chip's previous article: If this is not an incredible turn around in the making then I don't know how you would define one?? Or, is it not about the facts? Is it more your personal dislike of the former credit union's management and business strategy? That is why you are supporting NCUA? Give me a break!

    You are right about one thing: this conservatorship will cost all of us and our members a lot. Who do think pays for all this?

    I have no idea if NCUA's management of ACU will pay the assessment. However, one thing is certain: had they not been conserved the member appointed management would have. A benefit to the entire industry if you want to look at it that way. However, I don't even want to get started on NCUA's flawed analysis for the assessment calculations!!!

  • In response to comment #7

    Los Angeles Times, July 3, 2010:

    "When regulators seized Arrowhead last weekend, citing it's "declining financial condition," they said the action was part of a stepped-up campaign of vigilance, boosted by the hiring of 107 examiners and more frequent reviews of credit unions financial health. But that explanation didn't sit well with one industry expert, Charles W. "Chip" Filson, a credit union consultant whose past clients have included Arrowhead, charged this week that the takeover by the National Credit Union Administration was unnecessary and premature, calling it "arbitrary and capricious."

    Arrowhead a past client... Did I miss that in the original article?