Fishers-based Forum Credit Union was on the upswing from a sizable loss in 2008 when a slew of challenges hit late last year.

The institution became embroiled in a lawsuit after partnering with another credit union on $6 million in unusual life-insurance loans that defaulted.

Forum lost $4.7 million in the fourth quarter and was in the red for 2010. It was the second year since 2007 that the state’s fourth-largest credit union lost money.

And last winter, Forum’s top two officers—CEO Gary Irvin and Chief Financial Officer Bill Dailey—left within about a month of each other. Forum officials called the departures planned retirements, but Irvin left without a successor in place. Jeff Welch, another member of Forum’s leadership team, replaced Dailey.

Now, after all that, Forum is rebuilding its earnings—and looking for a new leader to steer the company.

Forum’s board recently chose San Francisco-based O’Rourke & Associates to lead the search for a CEO. The quest begins in earnest this month, and credit union officials expect to hire Irvin’s permanent replacement by the end of the year.

Michael Peterson, the company’s former chief risk officer, is leading Forum in the interim.

Credit unions, like banks, take deposits and issue loans. But they’re owned by their depositors, rather than outside investors, and are exempt from paying federal taxes.

Forum officials say the insurance-loan losses were an anomaly and not a reflection of larger problems. They note the credit union, which has about $975 million in assets, earned $4.3 million in 2007 and $6.4 million in 2009.

The $12 million loss in 2008, they say, stemmed from turmoil sweeping through the financial services industry during the depths of the recession, not issues unique to Forum.

Forum had been profitable in 2010 until the fourth quarter. For the full year, it lost $2.8 million.

Profit totaled $926,000 in the first quarter of this year, putting the company on track to reach its goal of $4 million in earnings for the year.

The goal, said Andy Mattingly, Forum’s chief marketing and retail officer, is to get the company “on that path of where we were before” and keep it there.

“We’re doing the things to grow the revenue sources,” Mattingly said, including providing more services, such as commercial loans, to existing customers.

Financing premiums

The life insurance lawsuit, which Forum filed in December, stems from the credit union’s foray four years ago into the business of providing loans to pay the hefty initial premiums on high-dollar life insurance policies taken out by the wealthy.

The loans were designed to be short term, with principal and interest repaid in a few years, after the underlying policies were sold to investors on the open market.

According to the suit, Forum was approached in 2007 by Carmel-based Allied Solutions—a provider of insurance, lending and marketing products to financial institutions—and offered the chance to partner with Michigan-based Capital Community Credit Union on financing two policies.

Forum agreed and provided $6.1 million—90 percent of the loans for policies issued to Gene Philips and Arlene Kane. The suit doesn’t provide details on either person but says both ended up defaulting.

Forum contends it is entitled to recoup its loans, plus interest and fees totaling $700,000, by requiring the other credit union to repurchase them.

It cites language in the 2007 agreement requiring its partner—now known as DFCU Financial because of a 2009 merger—to repurchase loans in default.

DFCU so far has refused, arguing that another agreement signed in 2008 does not include the repurchase requirement. It says that agreement, not the 2007 agreement Forum cites, is the legally binding document.

Last year, Forum wrote off the entire $6.8 million as a loss, though Mattingly expressed confidence Forum eventually would recover the money and record a gain.

Experts say financing life insurance policies is an unusual business for credit unions to get into.

“I would say anecdotally that this type of loan is rare,” said Lydia Cole, director of industry analysis for Callahan & Associates, a credit union consultancy based in Washington, D.C.

Mattingly acknowledged the loans were an experiment.

“We were looking to diversify our portfolio without putting money in long-term investments,” Mattingly said. “It was something we were just looking at to see what kind of loan product this would be.”

According to the lawsuit, Forum had discussed other premium-finance loans with Allied. Former CEO Dailey told an Allied representative in 2008 that the company had $3 million to $4 million for the “right deals.” Mattingly said the company only made the loans to Phillips and Kane.

Because the insurance lending proved unsuccessful, Mattingly said, Forum won’t do more of it.

The problems didn’t have anything to do with the departure of CEO Irvin in December or CFO Dailey in January, Mattingly said. Forum filed its lawsuit five days before it announced Irvin’s departure.

Both Irvin and Dailey had been with Forum about 30 years, Mattingly said.

Getting back on track

Forum still faces difficulties. Its classified assets—those where full repayment is questionable—make up about 18 percent of net worth.

Banking experts say that number isn’t unusual for financial institutions during these challenging economic times. But it exceeds the median of about 5.3 percent for the 14 Indiana credit unions with more than $400,000 in assets.

Forum’s profitably ratio—0.39 percent of average assets—also ranks well below those credit unions’ median of 0.7 percent.

Nonetheless, Forum boasts the industry’s highest level of safety ratings, and has plenty in reserves to protect against loan losses, said John Reed, a longtime banking expert who leads the Indianapolis office of investment firm David A. Noyes & Co.

“Most financial institutions have taken their lumps, and these guys have taken lumps, but they don’t look like they’re especially threatening,” Reed said. “They seem like they’re in decent shape.”

Consultant Bill Kelly, a former banking professor and economist for the Wisconsin-based Credit Union National Association, said he was surprised by how much Forum had borrowed—about 20 percent of its assets—to free up funds for lending.

That’s typical activity for banks, Kelly said, but not credit unions.

The risk, Kelly said, is that Forum wouldn’t be able to repay those loans if its own borrowers defaulted.

“This is kind of pushing the envelope in terms of how much you would be borrowing to add to your assets,” Kelly said.

Mattingly said Forum had done its borrowing from the Federal Home Loan Bank of Indianapolis and had locked in a long-term interest rate to protect itself from fluctuations in the market.

He said that money was used to provide liquidity needed to expand its residential lending activity. Mattingly added that Forum’s mortgage portfolio has strong credit quality.

In coming months, though, the credit union will focus primarily on adding to its commercial lending business.

The idea is not so much growing market share, Mattingly said, but “share of wallet,” meaning encouraging current customers to use additional Forum services.

“Our primary focus is making sure all of our members are taking advantage of all the services we offer,” he said.•