Arrowhead Central CU Emerges from Conservatorship

Arrowhead Central Credit Union (San Bernardino, CA) emerged from conservatorship almost 3 years after NCUA assumed control of the credit union. NCUA placed Arrowhead Central Credit Union into conservatorship on June 25, 2010. Arrowhead Central CU is the first credit union since 2007 to emerge from NCUA conservatorship.

Read NCUA's press release.

NCUA's August 10 Letter on Arrowhead Central CU

Below is NCUA's August 10 letter to John Husing and Donald Driftmier about the conservatorship of Arrowhead Central Credit Union. (click on the image to enlarge)

The letter stated that the timing of the conservatorship was to prevent Arrowhead from selling its highest-performing loans to an out-of-state institution.

NCUA Strikes Back at Arrowhead Critics

Tired of being a pinata for critics over its seizure of Arrowhead Central Credit Union , the National Credit Union Administration (NCUA) fired back on July 22 stating that the credit union understated its financial problems and released Arrowhead Central's second quarter financial results.

Critics of NCUA's placing Arrowhead Central into conservatorship on June 25th contend that the credit union was on the mend. David Chatfield, the interim president and CEO of the California and Nevada CU Leagues, told Credit Union Journal (paid subscription) that "NCUA's claim the credit union was in declining financial condition flies in the face of the facts... in this case I see little justification for NCUA doing what it did."

In a highly unusual move, NCUA issued a media release writing that the credit union "had previously posted inaccurate information" distorting its true financial condition. NCUA noted that the prior management failed to comply with methodology approved by the credit union’s external CPA for funding its loan loss reserve accounts. This underfunding of its loan loss allowance account caused the credit union to report a profit of almost $2.6 million as of March 31, 2010. However, when the loan loss allowance account was properly funded, the credit union reported a year-to-date loss of more than $1.4 million at the end of the second quarter.

The press release further states that "NCUA determined that Arrowhead Central’s former management team did not charge off loan losses in a timely or consistent manner, and that historical ratios did not consistently reflect actual losses the credit union was experiencing."

Additionally, NCUA points out that since the middle of 2009 the credit union had failed on four previous attempts to file an acceptable net worth restoration plan.

The press release notes that the credit union has been significantly undercapitalized for four consecutive quarters and as of June 30, 2010, its net worth ratio was 3 percent.

Will the release of this information be enough to quell NCUA's critics over its handling of Arrowhead Central?

I don't know.

Arrowhead Central CU Stops Making Member Business loans

An article in the Press Enterprise stated that Arrowhead Central Credit Union, which was placed into conservatorship on June 25, has stopped making business loans, according to the National Credit Union Administration.

NCUA spokesperson John McKechnie stated that "[w]hile Arrowhead is in conservatorship, NCUA has determined this line of business is not in the best interest of members and does not make sense for the credit union."

But this decision to suspend originating business loans should not come as a surprise. According to Federal Credit Union Act, an insured credit union that is undercapitalized may not increase the total amount of member business loans outstanding until such time as the credit union becomes adequately capitalized. As of March, Arrowhead was undercapitalized.

Furthermore, the decision to stop making business loans is necessary to bring the credit union back into compliance with the aggregate member business loan limit of 1.75 times the credit union's net worth. Arrowhead had $29.4 million in net worth. This means that the maximum amount of outstanding member business loans at Arrowhead would be approximately $51.5 million. However, the credit union reported $83.3 million in outstanding member business loans.

Arrowhead CU Placed into Conservatorship

The National Credit Union Administration (NCUA) placed Arrowhead Central Credit Union of San Bernardino, California, into conservatorship.

Arrowhead Central Credit Union was placed into conservatorship due to declining financial condition. The Los Angeles Times (blog) reported that the NCUA had been unable to find a partner for Arrowhead.

The $876 million credit union was significantly undercapitalized as of March 2010.

Approximately $20.1 million in loans were 60 days or more past due and another $18.4 million in loans were between 30 days and 60 days past due. Arrowhead also reported holding $5.4 million in foreclosed or repossessed assets. However, its allowances for loan and lease losses were $49.5 million.

In recent months, Arrowhead Central has sold off its insurance agency and also sold branches for $7 million to Alaska USA FCU in an effort to stabilize its financial condition.

Executives were put on paid administrative leave and the credit union's board of directors and supervisory committee were dismissed.

The Federal Credit Union Act authorizes the NCUA Board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, protect members’ interests or protect the National Credit Union Share Insurance Fund.