Massachusetts credit union suing for permission to become a bank

BOSTON – A $135 million state chartered credit union has sued the Massachusetts Commissioner of Banks for the permission to attempt to convert from a state chartered credit union to a federally chartered mutual savings bank. Commissioner of Banks, Thomas J. Curry, and the NCUA have denied Postal Community CU’s first attempt and the Commissioner has ordered the credit union to cease attempting to move forward with the effort. The Commissioner has contended that the proposed conversion is against Massachusetts’ law. The credit union has countered that the law allows it. So far, the option to convert or not has not been placed before the credit union’s nearly 12,000 members and the suit would overturn the Commissioner’s order and allow the procedure for a vote to move forward. In papers filed in the Massachusetts Superior Court, Postal Community Credit Union, formerly known as Boston Post Office Employees Credit Union, alleged that frustrations with its limited field of membership and the Commissioner’s inaction on its application to move to a community charter led the credit union board to decide in favor of seeking a federal bank charter. However, sources familiar with the credit union who did not wish to be named speculated that the credit union leadership looked forward to the institution becoming a stock-issuing bank and that this motivated the credit union’s action. Curry partially based his order blocking any further movement toward the charter change on a finding that the credit union’s proposed notices to its membership about the charter change mentioned only a shift in insurance from the NCUSIF to the Federal Deposit Insurance Corporation (FDIC), the federal insurer of bank deposits, and did not mention either a change to a federally chartered mutual savings bank nor to an initial public offering for common stock after the charter changes. The Commissioner also charged that the credit union has not “undertaken a complete analysis of [the] financial, tax and member services implications” prior to the Board voting on the change. In a letter responding to Curry’s order, the credit union countered that it had planned to issue a “summary” of the implications of a change from a mutual institution to a stock-issuing one and that this would have adequately informed the credit union members. “While Postal has no immediate plans to conduct a mutual-to-stock conversion, the ability to convert to stock form and to raise capital through an initial public offering are among the advantages of the federal mutual savings bank charter identified by Postal’s management,” the credit union wrote. “It was previously, and continues to be, Postal’s plan to include a discussion of the potential implications and procedures for mutual-to-stock conversion issued to members prior to their vote on the proposed conversion.” The credit union also countered Curry’s allegation that its leadership had not performed sufficient analysis of the move prior to taking a vote on the matter, arguing that the Board had in fact done so. The letter did not mention the credit union submitting additional materials representing that analysis, however. Neither the credit union nor the Commissioner of Banking would comment on the issue, citing the pending legal case, but sources familiar with the case estimate that a confluence of different missteps and personalities conspired to bring the issue to a head. First, several sources off the record, and one on, confirmed that Curry has a generally negative view of charter conversions, particularly those of state chartered institutions to federally chartered ones. “It’s pretty well known that this bank Commissioner doesn’t like institutions changing charters, whether they be banks or credit unions,” said one, adding that he would not speculate on whether or not it was a “turf issue” but agreeing that the Division of Banking would be hurt by financial institutions moving to federal charters. Alan Theriault, CEO of CU Financial Services, confirmed that Curry has a known dislike for charter conversions and added that this attitude would have made any credit union’s attempt to change charter difficult. Theriault specializes in helping credit unions make the conversion to mutual savings banks and has been involved in a number of the 22 that have taken place already. Second, Theriault and other sources observed that the situation may have been exacerbated by missteps the credit union made. Although none of the sources would criticize for the record the law firm the credit union used to prepare the conversion attempt, Theriault and others pointed out where the credit union might have made some mistakes. “Unless they are familiar with it, most credit unions find converting from a credit union to a thrift to be an enormously complicated and often tense shift,” Theriault said. Exacerbating the conversion is the fact that converting from charter to charter within the federal banking system is generally much easier, a matter of filing a document and waiting a period of time, he noted. “Converting from a credit union to a thrift is much more complicated and political and can have many unforeseen snags,” he said. By way of example, Theriault noted that when his firm prepares an application for conversion, it often runs into the hundreds of pages and included detailed spreadsheets depicting the possible financial, tax, capital and other impacts of the proposed change. He also strongly advises credit unions he helps to make sure all the parties, the federal regulators, the state regulator, the credit union boards and officers, gets copies and is fully briefed on what the institution proposes to do. For example, it was a strategic mistake, he suggested, for the credit union not to have included in the documents it provided to the regulators the fact that its Board had discussed an eventual mutual to stock conversion at its meetings. Third, observers have noted that the credit union has likely had a case in citing the field of membership difficulties it faced. According to its court filings, 90% of the credit union’s membership are current and former postal employees and new members can only come from among postal and other federal employees based in Massachusetts. The credit union alleged further that it applied to become a community chartered institution in 2001, but that the Division of Banking had merely kept the application “pending” during that time and had done nothing with it. Further, other observers noted that the nature of the credit union’s lending profile appeared to already have more in common with a savings bank than a typical credit union. According to the NCUA, for example, reports that the $135 million credit union has 81% of its loans in real estate, 7 % in unsecured credit and 13 % in other lending. This is a lending profile, the source noted, that more resembled a thrift institution than a credit union. As press time, the Commissioner of Banking had not responded to the credit union’s suit and would not comment on the case citing the pending court decision. [email protected]