NCUA Says Arrowhead's Books Were 'Inaccurate'
The controversy over whether or not the NCUA was justified when it seized the $876 Arrowhead Credit Union June 25 dissipated five days later when John McKechnie, NCUA director of congressional and public affairs, said Arrowhead officials posted inaccurate call report data.
Specifically, Arrowhead underreported loan losses in its March 2010 financial performance report, he said.
"Arrowhead Credit Union posted inaccurate financial data in its March 2010 Financial Performance Report, specifically regarding losses in the loan portfolio," said McKechnie. "The credit union presented a safety and soundness concern, necessitating last week's conservatorship."
"NCUA took the action to preserve credit union member assets and ensure continued service to members. NCUA also put in place expert management in an effort to improve Arrowhead's declining financial condition," he added.
The news came not long after Dave Chatfield, who returned to the California and Nevada Credit Union Leagues as interim CEO on July 6 after four years in retirement, said the NCUA was premature to place Arrowhead into conservatorship (see article, page 3).
Chatfield said he reviewed Arrowhead's May 2010 financial reports, Callahan & Associates President Chip Filson's analysis and spoke briefly with former Arrowhead CEO Larry Sharp post-conservatorship. "It was pretty darn clear they were on their way back to recovery," Chatfield said. He cited reductions in delinquencies and other improvements.
According to Arrowhead's March 2010 call reports, the credit union had claimed progress toward improving its delinquency and charge-off ratios during first-quarter 2010. Delinquencies improved to 3.03%, down from a peak of 4.25% in second-quarter 2009 and 3.37% in fourth-quarter 2009. Charge-offs logged in at a problematic 5.43% for first-quarter 2010 but had improved from more than 7% during second-half 2009.
While consumer loan quality improved as of March 31, member business loans showed a sizable increase during the first quarter, up to 5.19% from a previous high of 2.34% in fourth-quarter 2009, and only 0.46% as of March 31, 2009. Of Arrowhead's $88.5 million worth of business loans, nearly $74 million were also reported as real estate loans. A little more than $23 million worth of member business loans were granted during 2009, though only $951,700 was funded during first-quarter 2010, an 83.5% annualized reduction.
However, Arrowhead had reduced its provision for loan losses by an annualized rate of 70%, setting aside just $6 million, compared to $16.6 million in first-quarter 2009. Reported total delinquencies shrunk by 15.5% annualized during the same time period, and reported total charge offs decreased by 34%. Total loans decreased from $841 million in first-quarter 2009 to $663 million as of March 31.
Arrowhead had been significantly undercapitalized since September 2009 and reported 3.36% net worth as of March 31, 2010. It ended 2009 with a $47 million net loss but had reported a $2.6 million profit during the first quarter.
Chatfield, who in addition to his league experience served on the NCUA Board under Presidents Ronald Reagan and George H.W. Bush and also was an executive at Arrowhead branch buyer Alaska USA FCU, didn't return a call for additional comment after McKechnie announced the erroneous reporting.
But before the revelation, he said NCUA decided to seize Arrowhead because some in the agency had "an axe to grind" with the credit union, and former President/CEO Larry Sharp, who had a reputation for challenging regulators.
When asked if, given his experience on the NCUA Board, he thought some at the agency would abuse regulatory powers to settle a grudge, he replied, "Yes."
However, he stopped short of naming names, saying "it may have just been an attitude on the part of a number of folks who took advantage of an opportunity to take over this credit union."
Sharp and senior executives, who include Chief Financial Officer Daniel Marcicente, Senior Vice President of Lending Gene Shabinaw and Senior Vice President of Strategic Development Ray Messler, were placed on paid administrative leave rather than immediately dismissed by the NCUA. McKechnie downplayed the decision, saying that while the NCUA reviews a seized credit union's operations, retaining certain employees helps protect member assets.
The strained relations between Sharp and NCUA examiners couldn't have improved after the agency's public accusations that Arrowhead's management team, at best, utilized poor math skills while reporting March's loan losses.
Tax forms posted on nonprofit reporting website Guidestar.org reported Arrowhead paid volunteers more than $27,000 during 2008. All but one of Arrowhead's nine board members received reportable compensation from the credit union or related organizations in 2008. Former directors James Ferguson and Robert McNitt, both dismissed by the NCUA upon conservatorship, led the board with $9,006 and $7,035 in annual credit union income, respectively.
Year 2008 tax documents also reveal the then-$1 billion credit union spent $77,000 on political campaigns, more than $1.5 million on travel expenses and nearly $2.9 million on compensation for nine directors and 12 officers and key employees. Compensation included travel expenses for companions, as well as dues and initiation fees for health and social clubs.
Arrowhead has a history of trouble with board members and travel compensation. In November 2001, the credit union made trade press and local media headlines when FBI investigation transcripts from a San Bernardino County fraud case revealed one county administrator said another used the credit union as his "personal travel agency." Both county officials were Arrowhead board members at the time and were accused of submitting fraudulent travel compensation forms to San Bernardino County. Board member Harry Mays served federal prison time for the offense, in which he was also forced to disclose unreported income from the credit union, according to a 2007 story in The San Bernardino County Sun.
Sharon Gilbert, who worked as a secretary to county employee Marie Alonzo, a long-time Arrowhead volunteer, said the cooperative had been "controlled" by county officials for as long as she could remember.