12:26 AM PDT on Saturday, October 9, 2010

The Press-Enterprise

For several years before Arrowhead Credit Union was seized by federal regulators in June, it regularly outspent its peers on travel, salaries and political campaigns, and lost millions in for-profit ventures.

The credit union — a nonprofit like all credit unions, whose customers are considered shareholders — was also growing in physical size and touted having more than $1 billion in assets for the first time in 2006.

The financial institution regularly spent between $1.2 million and $1.7 million on trips from 2002 to 2008, according to data culled from federal reports. Executives traveled for strategy sessions and managers were sent to conferences to learn the latest about credit unions, say former leaders.

It spent $292,259 donating to state political campaigns since 2004. Businesses were bought to expand the credit union’s reach. Last year 25 branches dotted the Inland region.

Former Arrowhead CEO Larry Sharp defended the credit union’s spending, saying that trips were made to educate the board of directors and managers, and that for-profit businesses were bought and maintained, despite losing money, to benefit the members.

“If we don’t take any trips or get in any training, OK, we’re not going to be good managers,” he said. Those who would advocate managers should stay home and not be trained would be ignorant to business realities, he said.

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Arrowhead also bought and operated for-profit businesses that, collectively, never turned a profit and instead lost more than $18 million. According to Sharp, they also increased travel and salary expenses compared to credit unions that didn’t delve into the insurance, trust and ATM businesses.

Since Arrowhead was seized by the National Credit Union Administration on June 25, the regulatory agency has provided few details as to why it took the action except to say that Arrowhead’s financial condition was declining, that executives had misstated that condition, that management hadn’t set aside enough money for potential loan losses and, more recently, it was about to sell off valuable loans to Alaska USA at a clearance price.

Arrowhead’s higher-than-average employee compensation and travel expenses didn’t factor into the NCUA’s decision to place the credit union under conservation, said agency spokesman John McKechnie.


The agency has said that according to its calculations, which included adding more funds to cover possible loan losses, the credit union lost $1.5 million in the first six months of 2010. Arrowhead managers on the other hand had reported earning a profit of $2.6 million in the first quarter, before the credit union was seized.

But observers have pointed to lavish spending and failed business enterprises as more reason the credit union suffered financially in the years leading up to its takeover.

Data from the NCUA show that Arrowhead’s spending on travel and employee salaries regularly earned it a ranking among the top five — if not at the very top — of credit unions with assets of $600 million to $1.2 billion.

“When times are good, people end up relaxing the purse strings a bit,” said Daniel Marciante, Arrowhead’s former chief financial officer, who arrived in mid-2007 about six months before the credit union’s good times started to end.

He and other executives including Sharp, who had led Arrowhead since 1982, were dismissed by the NCUA when the agency took over in June.

Arrowhead’s former executives and community leaders have remained adamant the takeover was unwarranted because the credit union was on the mend.

“Not only were we close, it was turned around,” Marciante said.

The former CFO said the credit union was two years into cutting costs during which the financials got worse, then started to improve and then turned into a profit.

“That’s why it was so surprising that they came in,” he said.

The NCUA, however, disputes that Arrowhead earned a profit in the quarter before it was seized.

Marciante acknowledges that the credit union regularly outspent its peers on travel for quite a few years. He said the high cost for salaries and benefits was due to the larger work force spread throughout numerous branches, unlike other credit unions that may have had more in assets but had fewer locations.

Marvin C. Umholtz, president and CEO of a credit union consulting service based out of Olympia, Wash., as well as a former lobbyist and association executive for the industry, said Arrowhead’s spending on travel and conferences in particular was “questionable at best” and certainly raised flags about the credit union leadership’s judgment.

“The credit union had some money-losing years recently in which they might especially be legitimately criticized for not tightening their travel and conferences belt more,” Umholtz wrote in an e-mail after looking at data collected into spreadsheets.

Unlike banks, credit unions are nonprofit organizations owned by the members who do business there. While banks can raise capital to cover losses, credit unions have to cut costs and stick it out until revenues return, hopefully using reserves raised and stored during the good years.

Craig Schubert, of Barstow, joined Arrowhead Credit Union in mid-2008 to deposit an inheritance.

“So many banks were failing and I felt a credit union would be a safer place to deposit my money,” he said. “I had complete faith in the management of the credit union. Blind faith, I’ll admit.”

But then Arrowhead announced it was going to sell its High Desert branches, including the one where Schubert had his deposits, to Alaska USA, a credit union based in Anchorage.

He was upset that his financial institution could be sold to an out-of-state company and he didn’t understand why Arrowhead needed to make the sale. He started asking for Arrowhead’s financials and questioned why it needed to spend $750,000 on a 10-year deal to sponsor the San Bernardino 66ers minor-league baseball stadium, for example.

Sharp defended the credit union’s 10-year stadium deal, saying it was ultimately the same price as a couple of the billboards for one year and the stadium provided a consistent method to get the institution’s name out.

“And it worked,” he said.

He also defended the credit union’s visible sign off Interstate 215. Sharp estimated the credit union made $250,000 a year in profit in the past four years off the sign by selling advertising space.


In 2004, Arrowhead had $7.5 million in profit, double the previous year, and employed 491 full-time workers, the most it ever had. That year the credit union spent $1.79 million on travel and conferences and $35.3 million on salaries and benefits.

Riverside-based Altura Credit Union, a peer in asset size but with a staff of 250 and 12 branches compared to Arrowhead’s 23, spent just a third of that on travel and conferences in 2004, a total of $578,123. Since 2002, Altura has never spent more than $655,488 on travel and conferences.

Golden 1 Credit Union was eight times the size of Arrowhead and the state’s largest credit union with $7.2 billion in assets. It spent about the same amount as Arrowhead on travel and conferences, between $635,536 and $1.6 million annually.

“The high comparative numbers suggest that Arrowhead’s expenses for travel and conferences were questionable at best and they certainly raise questions concerning leadership’s judgment,” said Umholtz, the credit union consultant.

Trips for strategic planning among Arrowhead officers sometimes involved flying somewhere else for a meeting.

“Some of that could have been more local, instead of taking a plane trip someplace,” Marciante said. “When times were good, the trips were a lot more frequent.”

Sharp said there may have been opportunities to have gone to a conference in Los Angeles, for example, rather than fly to Dallas. But other factors may have been at play, including schedules, he said.

“That’s easy to go back and say, you shouldn’t have done that; you should have gone here,” he said.

Sharp said he didn’t think Arrowhead was traveling abnormally more than its peers.

“You would expect that if you’re doing well, there would be more travel,” Sharp said.

In 2009, travel expenses dropped to $335,739.

Any travel outside the area that required an overnight stay would be budgeted in the travel and conferences line item. Costs for educational conferences that were local or involved things like webinars would be taken out of the educational and promotional expenses budget, Marciante said.

He said he had heard about trips that were taken to faraway locales before he arrived there.

“When I was there, that wasn’t happening,” Marciante said. “I didn’t really go backwards and look at that.”


From 2002 to 2009, Arrowhead was consistently the top spender on employee compensation and benefits among credit unions with assets between $600 million and $1.2 billion.

Despite Arrowhead being 68th in terms of asset size among the 173 credit unions in that asset range nationwide last year, it still spent the most on salaries and benefits.

Marciante said when he started in mid-2007, the staff size “was probably heavy at that time.”

By the time it was seized, the credit union was attempting to cut costs, reduce its work force and slash benefits, he said.

Chip Filson, a credit union consultant with Callahan’s and Associates, talking generally said that no more than 50 percent of a credit union’s operating expenses typically is spent on salaries and benefits, calling it a “good rule of thumb.”

Arrowhead’s salaries and benefits had not accounted for less than 50 percent of expenses since 2002. It was 52 percent last year and 54.4 percent in 2005.

Board members of the nonprofit financial institutions are supposed to be volunteers, but according to Arrowhead’s IRS filing in 2008 it paid four of its nine board directors a total of $20,179. Eight directors reported another $27,038 in “other” total compensation.

Sharp said board members were allowed to bring a spouse to a conference or seminar. Once the reimbursed amount exceeded $700, they were required to report it to the IRS.

None of the board members were formally paid for their work, though, he said.

By comparison, none of Altura’s board members were paid that year. Same goes for Golden 1 Credit Union in Sacramento.

For Altura, salaries were often determined by looking at competitive data and annual salary surveys, said CEO Mark Hawkins. As for travel, it has depended on economic conditions and which educational trips its volunteers and staff might benefit from, including classes offered through the Wharton School, the University of Virginia and others.

“Right now it’s not in the budget,” Hawkins said.

Usually there’s an annual government-affairs conference in Washington, D.C., where credit unions join their trade association leadership to lobby their legislative representatives.

“This year we’re spending nothing,” he said.


In 2002, Arrowhead went on an acquisition spree, buying other businesses such as Sawyer Cook Insurance, Integrity Planners, Garry Nichols and Associates and Ray Lusby Insurance Agency. It also formed a new subsidiary company: Members Business Services LLC.

In an annual report from that year, the credit union predicted “positive earnings for 2003 and beyond.”

As of the end of 2009, Arrowhead’s for-profit businesses collectively had lost $18.8 million.

Marciante said someone, a CFO, should have been looking at each business long before to determine which ones were making money and which weren’t, and known what each was worth before buying it.

Marciante said it was those entities that he focused on changing when he stepped in as CFO, outsourcing what he could to keep expenses down.

Arrowhead had bought them for far more than they were worth, he said. Sawyer Cook, which was sold in March, “was a heck of a deal” for the buyer, he said.

Sharp said Arrowhead may ultimately have gained business that it may not have gotten otherwise without the companies.

Arrowhead Trust Inc. provided services related to estate settlement and portfolio management. Members Business Services LLC provided business loans and deposit services. Arrowhead Financial Group Inc. oversaw Arrowhead Investment Center, Sawyer Cook Insurance and Integrity Planners Inc.

Of all of the businesses, Arrowhead Investment Center was the only entity to earn a profit in 2003 and 2004.

Sharp stood by the businesses — some of which succeeded, some didn’t, he said.

“I don’t think we would have done them if it weren’t with the intention to serve the members better,” he said.


Arrowhead was also one of the more politically active credit unions, which Sharp said was a product of being in a highly regulated industry.

Between 2004 and the end of 2008, Arrowhead donated $292,259 to political campaigns, according to data on the California Secretary of State’s website.

The recipients are a who’s who of Inland leaders. A handful include:

$4,150 for former San Bernardino County Supervisor Dennis Hansberger.

$3,900 to the Committee to Elect Brad Mitzelfelt (a current San Bernardino County supervisor).

$5,450 to San Bernardino County Supervisor Paul Biane.

$4,800 to Friends for Mike Ramos (the current San Bernardino County district attorney).

Ramos was among those who signed a letter sent to the National Credit Union Administration recently, questioning the agency’s seizure of the credit union.

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