Nearly a year after HarborOne Credit Union began preparing to convert to a mutual cooperative bank charter, the Brockton-based CU will finally put the matter to a membership vote next month.
Last March, the $1.8 billion credit union left the Massachusetts Credit Union League and the Credit Union National Association (CUNA), and its board of directors voted unanimously to pursue a charter conversion. But in the months since, little has been heard from HarborOne about the status of its changeover.
“It shouldn’t take that long, but the NCUA [National Credit Union Administration] tends to put credit unions through the ringer as they go through this process,” Keith Leggett, vice president and senior economist at the American Bankers Association, told Banker & Tradesman.
Any credit union wishing to convert to a bank charter must send out a membership packet that has been pored over by the NCUA – the federal agency that regulates credit unions – and must use NCUA-approved language disclosing that a charter conversion may mean a change in rates or a loss of voting membership, Leggett said, comparing the necessary disclosures to the surgeon general’s warning that must appear on a pack of cigarettes.
Conversions from credit unions to bank charters are rare. Since 1995, only 35 credit unions nationwide have converted to bank charters, the NCUA says. There are currently 6,888 credit unions in the United States.
And even if HarborOne’s membership approves the charter change, more hurdles lie ahead at the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency or state chartering agency, when it applies for deposit insurance and a bank charter, respectively.
FDIC spokesman David Barr said the FDIC examines the applicant’s financial history and condition, the capital structure of the institution, the organization’s past, current and projected earnings, the general fitness and character of the management, the risk it may pose to the deposit insurance fund, the needs of its community and whether the organization’s business structure will be consistent with the Federal Deposit Insurance Act.
Those criteria apply not just to credit unions seeking to convert to bank charters, but basically any entity looking to establish a bank, Barr clarified.
And in light of the recent financial crisis, the FDIC has been much more careful about green-lighting any new banks, said Richard Garabedian, a partner at the Washington, D.C. firm Luse Gorman.
The last credit union-to-bank conversion, Garabedian said, was Rhode Island’s Coastway Credit Union, now Coastway Community Bank, in 2009.
Garabedian, who specializes in credit union charter conversions, rattled off a number of reasons why a credit union might pursue a charter change, as HarborOne is doing.
“They may want to enlarge their field of membership, so they don’t have any limitations,” he said, or they may want to be able to make more commercial loans or raise equity capital.
But Mark Wolff, senior vice president of communications at CUNA, said from the consumers’ perspective, member-owned credit unions are a better option than banks.
“All types of surveys show that credit union members are the most satisfied among consumers of financial services. A credit union is all about serving the member because they don’t have to worry about generating a profit for stockholders,” Wolff said, though he did not comment specifically on HarborOne.
HarborOne has rebuffed rumors that it might attempt to convert to a stock institution after it gains approval for conversion to a bank charter. But according to the NCUA, of the 35 credit unions that converted to a mutual bank charter since 1995, 24 subsequently became stock institutions.
“Sometimes people are concerned about these conversions from one mutual to another mutual or member-owned financial institution because historically, credit unions that have converted to mutual banks have then taken the second step of converting in one way or another to being stock-owned,” said Jim Wilcox, a professor of business at University of California, Berkeley. “The members of the mutual who do not participate in the conversion to stock ownership then end up with no ownership in the new bank.”
James Rice, vice president of marketing at HarborOne, declined to comment on the process, other than to say that the required regulatory mailings to members eligible to vote were continuing on schedule.
And that seemed to bear out what Leggett told Banker & Tradesman: “If they say something right now, the NCUA could take that to mean they biased the vote. They could come back and not accept the vote and require them to certify a new vote.”
Email: lalix@thewarrengroup.com
