Did regulators move too fast in taking down Arrowhead Credit Union, as a prominent financial consultant contended?
Or was the San Bernardino nonprofit heading for ruin and misrepresenting its financial condition, as a spokesman for its federal regulator said?
One thing is certain: The dispute over the 152,000-member credit union shows that regulators can expect more pushback as they intensify scrutiny of the financial institutions.
"The kind of [confrontational] situation we're seeing at Arrowhead can occur at other credit unions," said David Chatfield, acting chief executive of the California and Nevada Credit Union League trade group.
"The regulators right now are less likely to get on board with credit unions' plans to restore their financial stability," Chatfield said Friday. "They're less tolerant."
Arrowhead remains open for business under federal control, and member accounts are federally insured up to $250,000.
When regulators seized Arrowhead last weekend, citing its "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."
So John J. McKechnie III, the NCUA's director of congressional and public affairs, sharpened the regulator's response by alleging that examiners had discovered "inaccurate financial data" in Arrowhead's books after putting it into conservatorship.
As a result, he said, Arrowhead had understated the losses in its loan portfolio during the first quarter, when it recorded a $2.6-million profit. McKechnie said examiners didn't know if the misstatements were intentional but were continuing their review of Arrowhead's financial situation.
"NCUA is pursuing a more conservative and stringent course that is aimed at preserving assets and restoring Arrowhead to a stronger financial position," McKechnie said Friday.
That's one reason, he said, that regulators stopped the credit union's planned sale of certain loans. "We came to a different conclusion than did the credit union's former management about the transaction," McKechnie said.
The credit union, founded in 1949 to serve county employees, had expanded to offer membership to any resident of San Bernardino or Riverside counties.
Arrowhead had appeared to be recovering from annual losses of $47.1 million last year and $28.6 million in 2008. In addition to reporting the first-quarter profit, it had planned to raise capital and streamline operations by selling four of its 24 branches, along with some loans, to Alaska USA Federal Credit Union.
Alaska USA, a giant Anchorage outfit with operations in Washington state as well as Alaska, got a toehold in San Bernardino County last year by acquiring two troubled institutions — High Desert Federal Credit Union in Apple Valley and the Members Own Federal Credit Union in Victorville.
Filson, a former NCUA official, said that Arrowhead should not have been pigeonholed as just another troubled credit union. Arrowhead, he said, had created a "documented recovery path."
"That institution was taken away from its members and the community by a government agency without due process or any factual explanation why this immediate and drastic change was necessary," Filson said.
He noted that the NCUA completed the transfer of Arrowhead branches to Alaska USA last weekend — an action that he said would "accelerate the credit union's recovery process even further."
Dan McCue, a spokesman for Alaska USA, said the regulator was allowing his credit union to buy two branches Arrowhead had owned and to take over the leases on two other offices. He said he did not know why the NCUA had prevented Alaska USA from purchasing the loans.
"We're just spectators to this circus," he said. "We just want to make sure that the members' needs are taken care of."
The trade group's Chatfield, who served on the NCUA board during the administrations of Presidents Ronald Reagan and George H.W. Bush, ignited the public dispute.
Chatfield told the Credit Union Times industry periodical shortly after the takeover that some federal regulators had "an axe to grind" with Arrowhead and its former chief executive, Larry Sharp, who the trade publication said had clashed with regulators in the past.
Sharp, 68, of Redlands, has been placed on paid leave by the regulators. He couldn't be reached for comment.
Chatfield said Friday that Sharp and his team had beefed up Arrowhead's reserves against loan losses until they were among the highest in the nation, as appropriate for a consumer lender in the economically battered Inland Empire.
With new loan delinquencies tapering off and capital levels increasing, Sharp believed the loan-loss reserves were sufficient, but the examiners demanded more, triggering a showdown, Chatfield said.
McKechnie said Thursday that even after the sale of the four branches to Alaska USA, Arrowhead remained "significantly undercapitalized."
He wouldn't provide details on what NCUA officials had found in the books.