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SAN BERNARDINO, Calif. – A 10-year run and a $300 million acquisition of a bank’s retirement plan portfolio couldn’t stem off several recent years of lackluster profits for Arrowhead Trust Inc., forcing the unit to begin the painstaking process of shutting down its operations. It recently took the first step in that direction by selling its self-directed individual retirement assets to Fiserv Investment Support Services, a unit of Fiserv, Inc. The transfer of 1,063 accounts valued at approximately $48 million in assets took place Nov. 4, according to Fiserv. The accounts hold both traditional investments such as mutual funds and alternative investments such as private equity, real estate, mortgages and trust deeds. With this acquisition, Fiserv ISS now has 320,000 accounts and custodian accounts valued at $38.3 billion. What has ultimately led to ATI’s path to shutdown is attached to the very nature of the trust service business: industry experts say it takes at least five, sometimes 10 years or more to be profitable. “Trust services are a very difficult thing to accomplish but it can be profitable,” said Thomas Huettner, ATI president/CEO. “(It’s) a much longer-term business decision and we weren’t willing to wait longer (to have it be more profitable).” Founded in 1995, ATI was part of the vision Larry Sharp had as president/CEO of $926 million Arrowhead Credit Union to bring non-traditional services and products to members. In addition to offering a full range of trust products such as estate settlement, trust administration, and custodial services, it added other related offerings such as employee benefits, including 401(k) plans. Other lesser known specialties like unique asset IRA products, real estate, closely held companies, and limited partnerships were also available. A spokesman from Arrowhead Credit Union said Sharp did not have any comments to offer on ATI’s future and told Credit Union Times to refer all questions to Huettner. As early as 2002, ATI saw some profits but it “(had) declined in profitability over the last several years and the short-term prospects for profitability are not good,” according to Arrowhead CU’s 2004 annual report. As a result, the credit union’s board of directors had required ATI to divest itself of trust-related business, a move that was supposed to improve earnings this year, the report said. When Credit Union Times profiled ATI more than a year ago, it had $520 million in assets under administration, 18 employees and two offices. Huettner declined to provide current figures. A veteran trust services professional, Huettner said he has been offered another position under the Arrowhead corporate umbrella. “We’ve been reducing staff in line with assets under administration,” Huettner said. According to the credit union’s annual report, some initiatives were undertaken to boost profitability. “Compliance was a major initiative in 2004. We significantly improved both our policies and our procedures, while keeping pace with the ever increasing regulatory environment and the new statutory requirements. We addressed privacy issues, new demands for risk control and countless other related issues.” Volumes Grew, But Not Enough Still, the measures weren’t enough: “these efforts have not been without a substantial cost to the bottom line of ATI,” Arrowhead CU reported. The trust services division’s loss for 2004 was $1,000,394 and in 2003, $889,611. As of June 2005, the value of ATI’s investments were $5.8 million, according to NCUA 5300 Call Report-Schedule D. The aggregate cash outlay was $9.9 million. ATI said it became the largest independent trust company in Riverside and San Bernardino counties here and not only served Arrowhead members but also corporations, employee benefit plans and nonprofit organizations. Huettner said ATI does not distinguish between member and non-member clients and could not provide a breakout of the two categories. In 2000, it scored a significant win when it acquired an estimated $300 million from the retirement plan operations of Sanwa Bank California. That deal tripled the size of ATI, doubled its staff and moved Arrowhead to the forefront of the retirement business with 401(k), profit-sharing, and employee stock option plans for more than 100 different companies in Southern California. Under the terms, Sanwa and Arrowhead were to share in a percentage of the revenue generated from the retirement portfolio over the next three years to ensure the companies smoothly shift clients. ATI initially approached Fiserv Investment Support Services in the fall of 2004 about a sale of not only its IRAs, but its qualified plans and personal trust accounts, said Joan Owens, vice president of investment administration services for Fiserv ISS. The company was only interested in the IRAs because of its expertise with them. Fiserv ISS declined the personal trust account offer because it would mean adding a new service the company had yet to offer itself. The qualified plan offer was also shunned due to their small numbers and the idiosyncrasies of having to learn the nuances of each plan, which involved a number of employers and employees, Owens said. “We made the transfer as painless and seamless as possible,” Owens said on the IRA acquisition. “We did a joint notification (to clients) and then a subsequent mailing on how to do business with us.” For his part, Sharp has been an advocate of credit unions having the ability to provide trust services to those who don’t meet the higher minimums typically set by banks. In April 2001, he testified before the California Assembly Banking and Finance Committee, which had just approved legislation supported by the California Credit Union League that would authorize state-licensed credit unions to provide their members with trust services. At the time, Sharp said that a number of large banks had raised the minimum initial value for a trust account to $1 million or more. But many of the living trusts that California consumers want to establish, and the inheritances that California residents are receiving from their parents and grandparents, are far less than $1 million. “Credit unions are the major financial institutions within many California communities, especially those outside our major metropolitan areas,” Sharp said at the time. “This legislation would allow local credit unions to provide a service their members increasingly need and want from their credit union, with the personal, affordable service credit unions traditionally feature, and without high balance requirements.” Huettner said the Fiserv acquisition is the first sale ATI has finalized, adding the division will continue to sell off other areas but emphasized no time frame has been set on when ATI will fully cease operating. ATI went with Fiserv mainly because of its expertise in “unique IRA asset accounts.” “We want to make sure we do it properly so that we can ensure that customers are properly served,” Huettner said. “We’re giving customers the option now of naming their own successors (and ATI is currently making transfers).” Huettner would not say how many transfers have been made only that they started three months ago. -

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