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Huron River Area Credit Union Placed into NCUA Conservatorship - What Does This Mean?

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The NCUA has just issued this media release which states that the State of Michigan on February 16th has placed Huron River Area Credit Union into Conservatorship under the NCUA.

This is of particular interest since Huron River Area CU has been advertising 6% CDs for the last several months (see my last Huron post). It's a moderate size credit union with $348.8 million in assets and 39,318 members. Also, their easy field of membership has allowed many people outside of Michigan to join.

So what does this mean? The Credit Union National Association had an article regarding a past conservatorship action by the NCUA. In that article, it states:
Conservatorship means NCUA will run the credit union in an attempt to restore its safety and soundness and return it to members.

I also found the following information about conservatorship in this CUNA document (doc) regarding pending federal legislation:
NCUA's conservatorship authority, originally granted in the Garn-St Germain Act of 1982, has proven to be an effective administrative tool in ensuring the safety and soundness of credit unions. It permits the agency to freeze an institution's activities and there-by prevents a dissipation of assets. Conservatorship is particularly valuable where publicity may trigger substantial withdrawals and thus endanger the soundness of the credit union. In some cases obtaining control of a credit union's operations and assets has precluded criminal officials, from tampering with or destroying records of their activities. It is also beneficial where the true causes of a credit union's problems are not easily learned. By taking control of the credit union to examine the nature of the credit union's problems, the Committee expects that the interests of all concerned will be best protected. If problems are not sufficient to warrant liquidation, it allows the NCUA Board the flexibility to work with credit union personnel to reopen the institution while at the same time preserving its integrity.

In short, NCUA will assume the management of the credit union. Here are some possible outcomes: 1) It may be merged into a stronger credit union, 2) The safety and soundness issues may be resolved by the NCUA management, and the credit union will be handed back to the members, or 3) If there are problems too severe to resolve, it could be liquidated. NCUA would ensure all insured deposits are returned to members.

It'll be interesting to see if the 6% CD deals and easy membership continue. Perhaps they'll need those promotions to keep deposits. I guess it'll be up to the NCUA management.

Some experienced readers made some good suggestions for members of Huron (which applies to members of any credit union). First, make sure your deposits are under the NCUA insurance limits (see post). Second, make sure you keep good account records. One reader mentioned the problems he had when his old credit union was merged into a new one and the records weren't fully transferred. He had to bring in original records to resolve the issue.

This incident also points out the advantage of NCUA membership. Some credit unions like Patelco are not NCUA insured and only have private insurance through American Share Insurance. As we see in this case, the NCUA does more than just provide insurance. It also takes actions like conservatorships to reduce incidents of credit union failures. I'm not sure how much ASI does in this respect.

It's interesting to see what financial ratings Huron River Area Credit Union has received. One problem with ratings is that it's often based on data that can be several months old. For example, the current ratings are based on September 30, 2006 financial data. BauerFinancial gives Huron 5 out of 5 stars (superior). Bankrate.com gives Huron 3 out of 5 stars (performing) with a G status which designates high growth. A reader also noticed this growth in Huron's financial data mentioning that it had grown from $252M to $363M in the last year which seems unusual in Michigan. Also he noted it had been making a lot of loans.

To review more of Huron River Area CU's NCUA status and financial reports, please refer to this NCUA page. Thanks to the readers who noted this NCUA action and provided their experience on this issue.
  Tags: Michigan

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Comments
16 comments.
Comment #1 by SVG (anonymous) posted on
SVG
Banking Guy,

Kudos to the reader who spotted the growth of assets from $252M to $363M last year. Indeed this is quite unusual.

Monitoring this situation as it unfolds will reveal how the NCUA operates in a real-life.

- SVG

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Comment #2 by Anonymous posted on
Anonymous
To ensure you remain under the NCUA or FDIC insured limit, especially with longer term CDs, a calculator is easy to use at http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp

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Comment #3 by Anonymous posted on
Anonymous
Membership is now not so easy. Basically I was told by membership services today that unless I lived in Michigan or was related to an existing memeber I was not eligble to join. I was also informed about the Conservatorship and that this was the cause for the change in the membership requirements.

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Comment #4 by traderprofit (anonymous) posted on
traderprofit
shI downloaded the detailed financials of this CU and here are my thoughts:

Management has been engaging in unsafe and unsound lending practices, and the institution faces a liquidity crunch. It's not simply the growth of the institution that is in question. When you drill down to see what they have been doing, they made well over $100 million in 1st mortage loans that were in the category of "balloon/hybrid, less than 5 years,"just in the past 12 months. Many of these were originated "indirectly" which I take to mean by a third party, whether a related entity or not.

In addition, Huron had, at September 30, 2006, over $90 million in borrowings falling due within 12 mos,although this decreased somewhat in the December quarter. Those borrowings are likely to lead to a liquidity crisis if not managed properly.

I looked at a few other fast growers like Silver State Schools in Nevada (ASI insured--provides less financial information). These institutions had some similar characteristics except the majority of their originations were not balloon loans of less than 5 years, they were borrowing over a range of years with varying maturities, and, more importantly, their growth seemed to be consistent with expansion of the economy in their markets.

We really need to be getting more info on manangement of these CU's.
Apparently, a long track record can be irrelevant. It's really current management--and they are difficult to evaluate, which is the opposite of management in a publicly traded company.
The ratio of loans to shares is also well over 100%. The borrowings and large-scale non-traditional mortgage lending seem problematic, although I would have to admit that I would have looked at their net capital--seen the 11%+ ratio and probably looked no further as the institution has been in business for 72 years.

The whole situation is sad, and I think NCUA acted this morning to cut off memberships via the Learn and Earn organization for a reason--perhaps (and I am speculating) this organization was set up merely to allow for CU membership. That's not allowed.

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Comment #5 by SVG (anonymous) posted on
SVG
Traderprofit,

>>I think NCUA acted this morning to cut off memberships via the Learn and Earn organization for a reason--perhaps (and I am speculating) this organization was set up merely to allow for CU membership.<<

Indeed ... it sure sounds as if the main (only ?) purpose of 'Learn and Earn' was to facilitate bringing in funds from those who normally will not qualify to become members.

- SVG

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Comment #6 by Banking Guy (anonymous) posted on
Banking Guy
Just found a news article on this conservatorship here.

Yes, I see the easy membership is over. I wonder if this Learn and Earn Organization was officially part of the credit union's FOM.

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Comment #7 by Anonymous posted on
Anonymous
Good analysis of the detailed numbers. Get them emailed to you from NCUA at
http://webapps.ncua.gov/ncuafpr/FPRRequestSingle.aspx?cu_number=

Huron River Charter Number 62465

Any NCUA-regulated CU's basic financial data is at
http://webapps.ncua.gov/ncuafpr/OnlineFPR.aspx

That shows that they grew 16% in three months between March and June. In Michigan of all places!
The State regulators can hardly say they had no clue.

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Comment #8 by Lance (anonymous) posted on
Lance
OMG! What are the fracking chances!?! We mailed our notarized application to them on 2/15. 80K CD. Jesus! We're in CA. on 2/20, an email was sent to us telling us that they received our application and the CD has been opened. It also said that they are no longer using the $1.00 for the other membership which was previously required. They deposited that $1.00 into the the savings account along with the $5.00 to become a member. They asked that we signed documents which was being mailed out to us and to return it as soon as possible. Jesus! This is scary man! Thank god it's NCUA insured.

What I don't understand is how they can still accept our application as we're in CA. They should have told us that they can't accept these funds because of the new rules.

I'm still very concerned regarding this issue. I don't think I will place my trust in any out of state banks/CU anymore. Will stick with local brick and mortar places where I can actually go visit and see the place.

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Comment #9 by Banking Guy (anonymous) posted on
Banking Guy
I guess they decided to grandfather you in with the old membership eligibility rules. You might want to check with the credit union and ask if there are any issues with your membership if you applied via Learn and Earn.

I just noticed that the credit union placed a big NCUA image on their front page to remind everyone of the safety of their deposits.

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Comment #10 by Anonymous posted on
Anonymous
I'm not sure what you would have discovered by being able to visit the banks in person. I'm sure if you had gone into an office of the Huron CU last week, no one would have been acting suspiciously and you wouldn't have seen the officers carrying bags of money out of the place.

There is absolutely nothing you can tell about the condition of a bank by visiting the office, short of auditing their books (which they will not allow you to do). The friendly B&M bank down the street could be closing tomorrow and you'd never know it.

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Comment #12 by traderprofit (anonymous) posted on
traderprofit
It seems wise at this point to let everyone know about discussions I have had with NCUA lawyers on the topic of "field of membership."

Technically, if the CU makes you a member and you were not actually within the field of membership, then your deposits are uninsured.
(see Part 745 of the regs on NCUA's site).

I don't want to scare anyone as one of the attorneys there said he had never challenged FOM status in making liquidation payments. But, the law and regs are indeed littered with examples of people who didn't understand NCUA coverage. The reg specifically states that it is not intended to provide insurance to accounts that are not qualified for insurance.

I have an existing problem with a CU that accepted me as an association member when the Charter of the CU only allowed them to accept employees of association. I don't know a practical way to check the charter. They don't even have access to them in every NCUA office.

As more weird associations are formed for the purpose of expanding membership, everyone should take some precautions. I think my first precaution will be to not EVER call the NCUA and ask them about a specific charter again as they will tell the CU to close your membership. You can ask the CU for it's charter and they MUST send you a copy. The NCUA attorney I talked to said he had this specific problem with one of his personal CU's and he didn't tell them he worked in the Office of General Counsel. If they won't send you a copy of the charter, send an email to NCUA via the links on their website. They were very quick to call the CU about me even though that's not what I wanted.

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Comment #13 by traderprofit (anonymous) posted on
traderprofit
Comment about ASI-insured CU's


I have come to the conclusion that private insurance is inappropriate for financial institutions. Don't get me wrong, ASI has $240 million in reserves and can assess up to 3% of members' assets while NCUSIF has about $6 bill and a LOT more CU's under its' wings.

What it comes down to is that virtually every other private insurance plan has failed.
Moreover, I can't think of any other type of insurance where there is UNLIMITED liablility to the insurer. What this means is that although a CU may show $10 mill in deposits, executives of CU's could (and have), by fraud, issued unrecorded certificates in any amount. I know of one case where unrecorded deposit liabilites were 15 times the recorded amount. There just isn't any backstop to a massive fraud like this other than the federal government's guarantee.

I realize ASI has been around for 33 years, but recent CU liquidations and conservatorships have been for CU's whose history dates back 75 years.

All this being said, I have ASI-insured deposits. I will not renew certificates at those institutions as they come due. Unlimited liability just doesn't exist in the private insurance World, except with perhaps individual worker's comp---but that's just unlimited liability for injuries to an individual, not something where people can have a "certificate party" and create unlimited liabilites for an insurance fund.

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Comment #14 by Anonymous posted on
Anonymous
Trader,

I'm not sure what you've heard about Part 745 of the NCUA regs. I scoured the rule (http://ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/f-745n.pdf)
and couldn't find where that is stated. I hope you are wrong. As an employee of a Credit Union I know that we are pushed to "find a way to qualify someone for membership". I would not want to leave someone vulnerable to a loophole in the NCUAIF.

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Comment #15 by Anonymous posted on
Anonymous
http://www.access.gpo.gov/nara/cfr/waisidx_06/12cfr745_06.html


PART 745_SHARE INSURANCE AND APPENDIX--Table of Contents

Subpart A_Clarification and Definition of Account Insurance Coverage

Sec. 745.0 Scope.

In general, all types of member share accounts received by the credit union in its usual course of business, including regular shares, share certificates, and share draft accounts, represent equity and are insured. For the purposes of applying the rules in this part, it is presumed that the owner of funds in an account is an insured credit union member or otherwise eligible to maintain an insured account in a credit union. These rules do not extend insurance coverage to persons not entitled to maintain an insured account or to account elationships that have not been approved by the Board as an insured account.

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Comment #16 by Anonymous posted on
Anonymous
In addition to Huron
River Area, there are at least two other credit unions involved in this real estate issue. They're both in Colorado. One is Norlarco and the other I can't remember its name.

In addition, given the potential losses from this situation may affect consumers' view of the credit union industry and prevent credit unions from increasing their lending powers through pending legislation.

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