WASHINGTON, DC (June 18, 2013) With the May 30, 2013, return of Arrowhead Credit Union to its member/owners, the industry can now look back at what happened with the Credit Union from its performance early in 2010 through the conservatorship. A spreadsheet providing detail of the credit union’s financials is available on the Coops4Change website.
In an opinion/editorial on the CreditUnions.com website, Chip Filson, Founder of Co-Ops for Change and Chairman of Callahan & Associates, offers thoughts in a post-conservatorship review.
“No credit union in America has come close to the bottom-line financial results of Arrowhead Credit Union’s 3.75 percent return on investments (ROA) for both 2011 and 2012,” said Filson. “The Credit Union’s first-quarter 3.13 percent ROA was equally strong, given the 14.25 percent unemployment in San Bernardino County, the Credit Union’s primary market.”
Filson maintains that Arrowhead Credit Union’s financial performance from June 2010 through March 2013 is primarily the result of one account: the reserve for loan losses. As of March 31, 2010, the Credit Union was adding to the allowance account at a rate of $6 million per quarter – an allowance total that was more than 250 percent of total delinquent loans. Further, Arrowhead had a 1.20 percent ROA for the first quarter of 2010.
“Whether one takes a one- or two-year view of matching the allowance with probable losses, the Credit Union overstated the loss expense in 2010 between $17 million and $27 million. Had this not occurred, [Arrowhead] would have reported a positive net income of between $13 million and $23 million, equal to or even double the first-quarter net income that management had reported.”
Filson says there are three key lessons to be learned from the over-reserving and subsequent takeover of Arrowhead Credit Union:
- Gather/review facts before taking action. While the stated reason for conserving Arrowhead Credit Union was its “declining financial condition,” general safety and soundness issues were cited, without hard evidence Yet, we now know the inflated reserve amounts gave a distorted view of Arrowhead’s situation.
- Keep member-owners involved. Many community leaders who were members of Arrowhead spoke out in opposition to its seizure, but their views weren’t included in decision making. Care should be given to the thoughts of those who know and own the institution. Their input provides the regulator with a valuable perspective. And to retain member-owner confidence, transparency and communication should be a priority.
- Apply balanced analysis to improve assessment tools. There should be an innovative, balanced approach to regulatory oversight – one that includes analysis, performance trends and reflection. Flexibility should be inherent in the regulatory process and should include understanding the credit union’s business model, its membership and its goals.
While Arrowhead is one case study, Filson believes the industry can learn from its experience and then innovate new tools to improve the process.
“Going forward, it would help both the regulator and credit unions to look at a longer time horizon. A key success factor would be to keep credit union member-owners involved at all times when intervention is required,” he said. “And rather than falling back on conservatorship, it may be preferred for the CEO to voluntarily resign or be replaced, yet allow the credit union to continue on its own. This avoids loss of goodwill and, as a result, member capital.”
About Co-Ops for Change
Co-Ops for Change is a grassroots movement to increase awareness both within the credit union community and among elected policymakers that our regulatory leadership should understand and support the seven cooperative principles. The regulatory process should consider credit unions’ cooperative character, as well as the shared economic value they create for people and communities. Credit union members, volunteers, professionals and industry supporters can learn more about the campaign at www.Coops4Change.org.