Arrowhead Credit Union Hours

No credit union in America has come close to the bottom-line financial results of Arrowhead Credit Union’s 3.75% return on assets (ROA) for both 2011 and 2012. Not one. First quarter’s 3.13% ROA was equally strong,given the 14.25% unemployment rate in San Bernardino County,the credit union’s primary market.

How can this off-the-charts financial performance be explained? How can a financial cooperative’s net worth ratio (with no access to external capital) go from 3%,according to NCUA’s June 2010 conservatorship 5300 filing,to over 10.5%,just two and a half years later? Is this astonishing financial performance—indeed a miraculous turnaround—or is it just a mirage,an example of regulatory financial alchemy? Let’s look at the results to see what explains this phenomenon.

The Reserving Judgment: Management’s Approach and the Regulator’s

Arrowhead’s near-incredible financial performance from June 2010 through March 2013 is due primarily to the management of one account: the reserve for loan losses. The Credit Union’s CEO,Larry Sharp,and his team were adding to the allowance account at a rate of $6 million per quarter as of March 31,2010. The allowance total was more than 250% of total delinquent loans at this level of expense; the credit union also had shown a 1.20% ROA for the first quarter of 2010.

The NCUA took over the credit union by conservatorship on June 24,2010. The entire management team and board were removed. The examiners and managers brought in by NCUA doubled the loss expense in the second quarter to $12 million. The full-year expense totaled $36 million and resulted in an allowance account of $49.2 million at December 2010 – more than 400% of the $12 million total delinquent loans at the same date.

This increase in loan-loss expensing resulted in a bottom-line loss of $4.7 million (after the NCUSIF insurance premiums),for an ROA of negative 50 basis points for 2010.

So was this a sound judgment? Were the examiners correct or was the assessment of the situation by Larry Sharp,the veteran CEO of more than 25 years,and his team more accurate? Fortunately,we know the results because two full years have passed and we can see if the level of reserves was too much,too little or just about right. These numbers are NCUA-generated,so we know they must be right.

Over-reserved By More Than Double

Arrowhead entered 2011 with $49.2 million in the allowance account. In 2011,the credit union’s net charge offs were $22.2 million; in 2012,the amount was $9.7 million,for a total two-year net write-off of $31.9 million. This leaves more than $17 million in the reserves set up two years earlier.

Arrowhead Credit Union: What Happens When Member-Owner Governance Is Removed From A Credit Union

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