ANN ARBOR, Mich. — When the real estate boom was booming, Huron River Area Credit Union boomed right along with it. But as the tide turned, so did the CU's financials.
The contrast offers a lesson for CU managers and boards now that speculating in real estate development by mid-sized CUs isn't the best way to achieve a positive balance sheet. The CU's second-quarter loss is $58.9 million. Huron's total loan portfolio was $193 million at the end of 2005 then jumped to $311 million in 2006, a remarkable 61% increase. At the end of June, HRACU had to put aside $61.5 million for loan loss reserves to cover loans likely to go south. But the bleeding wasn't over; it further beefed up reserves as delinquencies kept mounting. So far this year it has reserved $73.1 million.
What a difference a year (and a down mortgage market can make) as Huron posted a profit of $2.6 million at the end June 2006. After Michigan regulator Roger Little declared it to be near insolvency, the federal regulators took it over in February.
Hopes that the CU can be made whole again appear murky, given that many of the real estate loans it made to out-of-state residents through a Michigan corporation, The Construction Loan Company (see related story) are tied up in lawsuits.
Neither the Michigan regulator, Roger Little, officials at the CU or NCUA representatives are willing to address the appropriateness of a CU conducting its lending business in this manner. But one CU CEO who spoke off the record (and is not involved) offered that when a CU goes outside its comfort zone and the normal pattern of CU operations it is courting disaster. "What were they thinking?" he asked. "When they're looking to just make money even CU folks can lose their way, and it appears these guys made some very poor choices in who they did business with. The whole thing will end up giving credit unions a black eye and give bankers fodder to say, 'See! Credit unions are making risky loans! They're speculating! Credit unions are not supposed to be doing that sort of thing."
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