Robert B. Kimmett
‘Best charter’
Since Massachusetts Division of Banks Commissioner Thomas J. Curry appealed the Suffolk Superior Court ruling that Postal Community Credit Union could become a federal savings bank, members of the banking industry are keeping a close eye on the outcome of the case, which could pave the way for other state credit unions to eventually become federally chartered savings banks.
On April 1, the division filed an appeal to the ruling hoping to block the credit union from converting its Massachusetts charter to become a federal savings bank.
A source close to the case explained the reason for the credit union wanting to switch its charter was a desire for the institution to go public and raise capital.
Postal is a state-chartered credit union and its membership is strictly employee-based, offered to postal service employees and families, said the source.
Citing a struggling economy and flat membership, Postal had not hired additional employees in five years and was facing financial difficulties when it filed the application to switch charters on June 8, 2001.
According to the credit union source, Postal considered options to convert to a Massachusetts-chartered savings bank or a federally chartered savings bank, and opted for the federal charter because it had a “wider audience base.”
Currently, Massachusetts has no written or binding authorization that permits or denies a credit union from choosing a state or federal charter if it seeks to become a bank.
Not having a final decision from the DOB on switching charters, Postal Community Credit Union asked the National Credit Union Administration for permission to convert to a federal savings bank on June 26, 2002.
However, the DOB maintained that Postal Community Credit Union was not acting in its members’ best interest in seeking a federal thrift charter and the division declined the credit union’s request to expand its membership to include residents of Essex, Middlesex, Norfolk, Plymouth and Suffolk counties.
As the case is still pending in the courts, the Division of Banks declined to comment on the case or any actions the commissioner has taken to this point.
However, members of the credit union and banking industry are watching closely the case that could ultimately weaken the state’s authority over credit unions.
“This has been happening nationally, but it’s the first time it’s happening in Massachusetts,” said Daniel J. Forte, president and chief executive officer of the Massachusetts Bankers Association. “We’ve begun to see the conversion of credit unions to bank charters. In many ways, we see that as a natural progression. No one denies that they are in the banking business, despite the fact that NCUA has greatly liberalized the charter, but the bank charter offers more flexibility. [However], it’s a riskier line of business and there are higher capital needs.”
Switching a charter from a credit union to a state or federal savings bank requires additional taxes to be paid to the state, but also allows for an expanded membership base with the potential to bring in more revenue for the institution.
But according to the Massachusetts Credit Union League, switching a charter from a credit union to a savings bank diminishes the principles a credit union exists on.
“The credit unions know who they are and what they are and are happy to be that, and there are credit unions [that] are very successful and operating as general financial services [institutions],” said Robert B. Kimmett, senior vice president of public relations and marketing at the Massachusetts Credit Union League. “We feel that a credit union charter is the best charter for a financial institution and we like to see credit unions continue to function as credit unions.”
At a public hearing on April 10 – nine days after the DOB filed an appeal to the court’s ruling in the Postal case – the Joint Committee on Banks and Banking heard testimony in support of House Bill No. 11, an act relative to the conversion of a Massachusetts-chartered bank or credit union to a federal charter.
H. 11 seeks to establish one consistent process for a state-chartered financial institution to convert to a federal charter. It also provides new authority for a conversion by a state-chartered bank to a charter from another state in recognition of interstate banking laws on both the federal and state level.
The purpose of the legislation is to have the proposed conversion approved by the “voting body” of the organization.
The bill requires the plan of conversion and a notice to the applicable voting body to be submitted to the Division of Banks. The recommendation authorizes the division to require changes to the plan.
According to the DOB, which asked the committee for favorable consideration of the bill, H. 11 is necessary to address a “significant inconsistency in state law, which creates a burden on certain financial institutions as well as the division while in certain transactions not providing for regulatory oversight in other similar transactions. The recommendation will eliminate uncertainty in some transactions while providing consistent disclosures to the voting body of the institution.”
‘National Phenomenon’
The credit union source claimed the division is trying to deal with future conversion issues in this particular legislation by “introducing emergency regulations that go in effect right away.” State credit unions don’t have parity with federal credit unions, the source said, making more requests for charter switches likely in the future.
Forte said all credit unions must have a rational for converting to a state or federal chartered bank, and that decision should be left to bank management and the board of directions at the institution. But, he added, it is necessary for full disclosure to be submitted to the DOB.
“It’s important to allow banks and credit unions to disclose what their business plan is and why the conversion [is being requested], but not have any provisions that can potentially trap them into a specific charter,” said Forte. “That decision should be left up to the bank management and the board. However, if you make [the plan] so stringent, it will serve as a deterrent for a national, federal savings bank [to become] a state-chartered savings bank. The key is remaining as flexible as possible, but ensuring there is full disclosure.”
Forte said credit unions seeking a state or federal bank charter is becoming a “national phenomenon” and it is the larger credit unions that are slowly making their way into the banking industry.
“Clearly, when you look at some of the top credit unions – those over $100 million in assets – that line of business is truly a banking business,” said Forte. “As they get further into commercial lending, the bank charter will make even more sense.”
But industry officials at the MCUL said most state credit unions are quite happy with their current charters.
“There is no substantial movement on the part of credit unions to convert their charters,” said Kimmett. “There have been approximately 24 conversions in the past 10 years and most have been sparked by a particular business-related [situation] or issue related to capital. Federal credit unions have had the authority or legal option for conversion for a while and it’s not happening.”
Kimmett said credit unions “explore the opportunities that are available to them and serve their members the best way they know how.”
In the continuing case of the Postal Community Credit Union vs. the Massachusetts Division of Banks, one source said the filing will remain at the NCUA and will proceed forward.
“Postal Credit Union wants to raise capital and go public,” said the source. “When you become a savings union, you pay federal and state taxes. If you can get over paying taxes, it’s a better charter. This would make Postal Credit Union a member of MBA and also require them to pay taxes to the state.”
In a recent Division of Banks activity report for the month of May, the status of the Postal Community Credit Union case, which “requests permission to amend its by-laws to expand the associations which qualify persons for membership,” is still listed as “pending.”
Melanie Nayer may be reached at mnayer@thewarrengroup.com.
