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Arrowhead Financial Results

July 22, 2010. Alexandria, Va. — The National Credit Union Administration, in its role
as conservator, today released Arrowhead Central Credit Union’s (Arrowhead Central)
second quarter Call Report, the detailed financial statement issued by every federally
insured credit union. That report corrected earlier errors by the previous management and
showed a continued decline in the credit union’s financial condition as a result of losses in
its loan portfolio.
Arrowhead Central’s net worth ratio declined to 3.00 percent on June, 30 2010, from the
reported level of 3.36 percent on March 31, 2010. Under standards set forth in the Federal
Credit Union Act, Arrowhead Central is “significantly undercapitalized” for a fourth
consecutive quarter.
Also, accurate loan loss expense calculations result in negative net income as of June 30,
2010, of $1,453,890. Assets have decreased approximately $67 million since March 31,
2010, and loans have decreased approximately $40 million in the same time period.
The financial results are available on NCUA’s website, Financial Performance Report
section, available online by inserting the credit union’s name at
http://cuonline.ncua.gov/CreditUnionOnline/CU/FindCreditUnions.aspx. Then, click on
Financial Report and follow the instructions.
Arrowhead Central was placed into conservatorship by the National Credit Union
Administration on June 25, 2010, in an effort to protect Arrowhead members given the
credit union’s declining financial condition. The credit union has continued serving its
members as NCUA has worked to stabilize the institution’s operations.
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
www.ncua.gov
Media Contact: NCUA Office of
Public & Congressional Affairs
Phone: (703) 518-6330
Email: pacamail@ncua.gov
Arrowhead Central had previously posted inaccurate information that distorted the true
financial condition of the institution. In particular, the loan loss reserve account was not
adequately funded in the first quarter 2010 financial report. The corrected statement
indicates Arrowhead Central’s loan loss reserve increased from $49,520,278 on March
31, 2010, to $53,583,827 as of June 30, 2010. The related loss reserve expense has risen
from $6,065,159 on March 31, 2010 to $18,920,542 year-to-date.
The $12 million increase in expense is the result of funding the loan loss reserve account
in accordance with methodology approved by the credit union’s external CPA review in
October 2009. In March, prior management did not comply with approved methodology,
thus understating the amount of expenses recognized and misstating income. The
corrected funding has eliminated all earnings incorrectly previously shown by the former
management team, revealing a loss by Arrowhead Central of $1.4 million year-to-date.
As part of NCUA’s review of Arrowhead Central’s records, 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. In addition, the former management team chose to
revise loan loss reserve methodology less than six months after it was reviewed by an
external auditor, thus reducing the amount of funding that was needed for known and
potential losses. Had Arrowhead Central’s management acted in accordance
with approved and validated methodology, losses would have increased and earnings
would not have shown a positive trend as of March 31, 2010.
Since mid-2009, Arrowhead Central was required by NCUA to submit an acceptable net
worth restoration plan. In four attempts, former management was unable to submit a plan
based on reasonable assumptions and showed positive earnings that would restore net
worth, despite specific guidance from both federal and state regulators about deficiencies
in their submitted plans.
Despite receiving instructions, information and guidance from both the California
Department of Financial Institutions and NCUA, Arrowhead Central’s former
management team did not properly identify and monitor loan modifications to ensure
they complied with generally accepted accounting principles (GAAP) and provided relief
or assistance to the members.
NCUA is the independent federal agency that regulates, charters and supervises federal credit
unions. With the backing of the full faith and credit of the U.S. government, NCUA operates and
manages the National Credit Union Share Insurance Fund, insuring the deposits of over 90
million account holders in all federal credit unions and the overwhelming majority of statechartered
credit unions.

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