SACRAMENTO, Calif. - A favorable regulatory environment - especially more liberal opportunities to expand fields-of-membership - is continuing to drive California credit unions to convert from federal to state charters. "Given H.R. 1151 and what it had to say, frankly I find it hard to see how they (federal charters) are going to match what's possible with a state charter right now," said Frank Reed, president and chief executive officer of Long Beach Schools Federal Credit Union, which is in the process of converting from a federal to a state charter. Reed said several factors prompted Long Beach Schools to seek a charter change in December 1999, chief among them the field-of-membership issue. "There are actually several things that are driving it (the conversions)," Reed said. "One very clear thing is that the more open field-of-membership that is possible with the state allows us to complement the existing membership in a way that we feel in our business plan will benefit everyone. "That really comes down to the fact that as a school credit union we have always had a very low loan-to-share ratio," he explained. "We think that with the more open field-of-membership there are opportunities to get the loans out. If that happens, that would improve our financial performance and position us to improve dividends and other things so that everybody can benefit." Reed said expanding the field-of-membership "would help attract members that we think would make good borrowers, to complement the school people and their families that have traditionally been members." Long Beach Schools has some 80,000 members and more than $500 million in assets. Competition from both traditional and non-traditional financial service organizations was also helping fuel the move to a state charter, he noted. "I have to be really honest," Reed said. "Just sitting here with a federal charter is putting us in a very awkward position against state-chartered credit unions that are moving in all around us. That did influence us. It's like being a boxer with one hand tied behind your back. He said competition was coming from both banks, credit unions, and non-traditional sources such as insurance companies and on-line banking. "For us to really pursue e-banking as a credit union without a much broader field of membership just doesn't make much sense," he said. Other credit unions agree. In 1999 alone, 18 credit unions in California converted from a federal to a state charter, bringing the year-end total of state-chartered credit unions to 213, according to the California Department of Financial Institutions. The total assets of the credit unions which converted in the past year amounted to $4.76 billion, DFI reported. "We seem to be seeing more conversions," said Jan Owen in an interview shortly before resigning as chief deputy commissioner with DFI. "The conversion activity has not subsided." In a speech before a credit union group in May, she reported there were 16 conversions in process with assets totaling $3.5 billion. "The primary reason cited by most converting credit unions continues to be the ability to seek field-of-membership expansions under California law which provides more liberal opportunity for such expansions," she noted. Owen also said having regulators in Sacramento rather than in Washington also appealed to credit union officials in the state. "I believe that people come to the state charter because they like the way the department does business and they deal with you," she said. "We're here, not in Washington. We are familiar with the economy here. We can help all of our licensees." "We feel strongly that we have much greater influence in Sacramento as credit unions than we will ever have in Washington, D.C.," added Reed, who has been to Sacramento to lobby legislators. "I think we have a very positive environment up there. The state is easier to work with. That helps." David Chatfield, president and chief executive officer of the California/Nevada Credit Union League, said he felt that the friendly regulatory climate in California was driving the charter conversions even more than the field of membership issue. "Certainly field-of-membership is an issue, but I think more important is the attitude of the regulator and the ability (of the credit unions) to interact with and have discussions and reach conclusions with the regulator," he said. "It's pretty difficult to communicate with, let alone reach much agreement with, NCUA at this point. Clearly we have at least a good dialog opportunity with the state regulator." Chatfield agreed that the California charter currently offered provisions that made it more attractive to credit unions than the federal charter. "Clearly H.R. 1151 was a victory because we were facing the (U.S.) Supreme Court decision, but at the same time it resulted in some compromises that were distasteful that at some point hopefully will be changed," he said. "I'm hopeful that over time we'll be able to enhance the value of the federal charter and make that more valuable for credit unions so that they have a true choice." Fred R. Becker, president and chief executive officer of the National Association of Federal Credit Unions (NAFCU), said enhancing the federal charter to make it more attractive to credit unions was a top priority. Becker said the current move toward state charters wasn't of "crisis" proportions. "I don't think it's a crisis," he said. "At the same time, I think it's a matter of significant concern and a matter to which NCUA should devote its attention." Chatfield, Owen, Becker and Reed all agreed that charter conversions tended to ebb and flow. "As in all dual chartering systems, this is cyclical," Owen said of the current trend toward the state charter. "Sometimes people go to federal (charters), and sometimes to the state (charters)." "Credit unions have been shifting out of charters over time," Becker agreed. "I believe NCUA can do more. NCUA needs to help turn things around." "At various times in our history, there have been flows back and forth from state to federal charters or from federal to state, depending on which best met the needs of credit unions at the time," Chatfield added. "As a result, until recently we ended up with about 60 percent federal and 40 percent state credit unions. Now it looks like we're more back to equilibrium. I think that's the result of the state law and the options for a charter at the state level at this point being more advantageous than the federal charter." Reed said he knew of one credit union, which he wouldn't name, which was rather fickle when it came to the charter issue. "It switched from state to federal and now is switching back," he said. -
pjheller@west.net
