STANLEY RAGALEVSKY Investors ‘drooling’ at prospect

For the past three years, Postal Community Credit Union has unsuccessfully lobbied state regulators to approve a charter change that would allow the state-chartered credit union to become a federally chartered savings bank. But now that a former top state regulator who opposed the plan has taken a position at the Federal Deposit Insurance Corp. and said he favors the conversion of some credit unions to banks, Postal Community officials are renewing their efforts to win approval for their petition.

The Massachusetts Division of Banks, then under decade-long Commissioner Thomas J. Curry’s leadership, opposed the conversion plans from the outset, saying the credit union was looking for a quick way to make money and not taking into consideration the best interests of its customers.

Postal Community’s leadership denied that transforming from a credit union into a federal thrift would adversely affect its customers. As a mutual savings bank, Postal Community officials said, the institution would be able to increase the amount of products, services and benefits available to customers and prospective customers.

The battle between Postal Community Credit Union and the Massachusetts Division of Banks has flared even more intensely in the past year, and shifted into the courts. Just over a year ago, a state Superior Court judge ruled that because of state credit union parity statutes, Postal had the right to convert its charter to a federal bank despite the opposition of the Division of Banks. In April 2003, the DoB filed an appeal of that ruling, hoping to block the credit union from converting its charter. In November 2003, an Appeals Court justice granted a stay of the Superior Court’s ruling, halting the conversion because, in the judge’s estimation, the DoB is likely to be successful in its appeal. The appellate court judge, however, allowed Postal to continue with its membership vote on the conversion issue.

A source close to the case said the reason for the credit union wanting to switch its charter was a desire for the institution to go public and raise capital. Conversion to a federal thrift charter could be the first step for an institution that later seeks to go public and raise capital through a stock offering.

“The banking department received information that suggested the credit union was planning to convert to a federal savings bank and some of the people on the [Postal Community Credit Union] board were talking about converting from a mutual to a stock savings bank,” said Stanley Ragalevsky, a partner in the banking and financial services practices at the Boston law firm Kirkpatrick & Lockhart who is not involved directly in the case. “Massachusetts law, as it is, does not allow a state-chartered credit union to convert to a federal savings bank. The DOB issued a cease-and-desist order against the board from proceeding with an action that [was believed to be] in violation of Massachusetts law.”

‘Changed’ Issue

Postal is a state-chartered credit union and its membership is strictly employee-based, offered to postal service employees and families.

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.”

The conversion issue began as an application by Postal Community to expand its membership base to include residents of Essex, Middlesex, Norfolk, Plymouth and Suffolk counties, in addition to postal employees.

In 1996, a federal injunction supported by the banking industry was filed to stop credit unions from signing on new member groups. Two years later, the Credit Union Membership Act was passed, easing the membership restrictions, and Massachusetts passed laws increasing the upper limits allowable for mortgage loans at credit unions.

In the past five years, credit unions have taken the opportunity to file for expansion – and recently, the line of how far credit unions can push their applications for membership expansions with the DOB, the regulatory body that oversees the operating functions of banks and credit unions, has become clearer.

Postal Community filed its application to expand its membership base with the DoB in June 2001, but when its petition had not been approved by the following June, Postal the institution sought permission from the National Credit Union Administration to convert to a federal savings bank – a plan the DoB has been fighting ever since. The issue has been closely watched by credit union and banking leaders as a case that will test the limits of the state agency’s regulatory powers.

Now, Postal Community say Curry has changed his mind about the conversion of credit unions to banks and the credit union wants a quick resolution to the issue.

Curry left the DoB to accept a post as director of the Federal Deposit Insurance Corp. on Jan. 1, and in a March 8 speech at an America’s Community Bankers conference in Washington, D.C., Curry said that it could be a “good thing” if some credit unions converted to bank charters. The banking industry has long held concerns about large credit unions that enjoy favored tax status but compete with smaller banks that do not.

“I am pleased that Mr. Curry has adopted this new point of view,” said William French, PCCU president and chief executive officer. “I would be less than candid if I didn’t add that I wish he had come to this conclusion sometime earlier.”

But that doesn’t change the current status of the PCCU case, which is still in appellate court awaiting a decision from the appeal then-Commissioner Curry posed when the Superior Court granted permission for the conversion.

PCCU is also asking the court to order the commonwealth to award it hundreds of thousands of dollars in legal fees it has expended on the case.

“The issue has changed slightly with former Commissioner Curry’s change in apparent dedication to his former position,” said French. “And we hope that his new position is one that the Massachusetts Division of Banks adopts. As the former head of [the DoB], Curry played a role in the development of the personnel there. It’s curious to us that he took this new stance two weeks after he left his position.”

French said the credit union has spent approximately $400,000 so far to pursue litigation in court, but the credit union remains optimistic on the outcome and is currently preparing for the conversion.

“We continue to work here on infrastructure issues and to prepare ourselves for conversion. We want to be ready for the conversion issues as soon as we can convert,” said French.

As part of the conversion process, Postal Community Credit Union has already held a pre-conversion conference call with the federal Office of Thrift Supervision and is in preparation for converting to new regulatory oversight.

“Our world will change as we will no longer be restricted to doing business with only post office employees and their families. With the Postal Service itself declining with employees, new business opportunities become rare and limited,” said French.

“We have tried not to let our charter limit how we can serve our members – both current and prospective. We want our members to know that we are ready [for conversion] and we plan to offer more and highly competitive-priced products to them,” said French. “We are working toward conversion and it’s taking a lot longer than we hoped. We are going to get there and once we do, our members will be pleased with the additional things we can do and offer.”

PCCU, founded in 1924, is a full-service financial institution with about $133 million in assets. PCCU’s main office is located at Fort Point Station in Boston. It maintains branch locations in Waltham and Lowell, and an administrative office in East Boston.

“At this point we have won at every juncture but we are still waiting for a final determination from the Appeals Court. We are hoping that decision will come any day,” said French.

And if that decision is favorable for Postal Community Credit Union, it will be the first credit union in Massachusetts to convert to a federally charted mutual savings bank, which industry insiders say has investors watching the proceedings closely.

“There is more to this than just a conversion issue,” said Ragalevsky. “A whole bunch of people are drooling over the possibility of getting credit unions to convert to bank charters and, eventually, stock institutions.”