Massachusetts CU to Merge With Local Bank; Do Conversion Regs Apply?
HAVERHILL, Mass. -- Another credit union has decided its members would be better served in the future as bank customers than as credit union members.
The $99 million Northeast Community Credit Union has announced plans to merge with the local Haverhill Bank, which the credit union called the oldest mutual or cooperative bank in the Commonwealth. The Commonwealth of Massachusetts charters both institutions and
provides procedures in its laws for the merger to take place.
Northeast's announcement makes it the 37th credit union in the country to either have changed its charter to a mutual bank or merged with a mutual bank, or to have announced its intention to make the switch, according to CU Financial Services, a consultancy which tracks credit union to bank charter conversions.
CU Financial services shows three other credit unions in the process of converting their charters, but only one of them, $106 million First Priority Credit Union, headquartered in East Boston, has filed paperwork with the Office of Thrift Supervision.
In a joint announcement of their intentions to merge, the two institutions said Haverhill Bank President Thomas R. Faulkner will serve as chairman and chief executive officer and Northeast Community Credit Union Treasurer and Northeast CEO Peter DiBenedetto will serve as president and chief operating officer.
"In this age of national bank mega-mergers, this union of two long-standing and respected local mutual institutions provides the greatest opportunity for improved services and choice for Greater Haverhill residents," said Faulkner
DiBenedetto said, "We've continued to grow steadily since 1934 while maintaining a strong capital base. When we looked at what we wanted to be able to offer our members in the future, it made sense to combine our efforts with an institution that has similar values and is also coming from a position of strength."
The two institutions said that they plan no layoffs after the merger and no branch closings. They also made no mention of any plans to further restructure through either a conversion to a fully stock issuing bank or a mutual holding company and DiBenedetto said the two firms had not made any plans in that direction.
The new bank will have combined assets of approximately $260 million, deposits of $220 million and capital of $30 million, thereby enabling the ability to offer larger loans than either of the separate institutions may now provide, the CU and bank said.
They also pointed out that the two organizations are already fairly similar in structure in terms of their mutuality, particularly in Massachusetts, which DiBenedetto described as significantly different in terms of its laws governing mutual or so called cooperative banks.
"We believe the combined institution will be better able to serve the future financial needs of our customers and the entire Greater Haverhill community," he said.
As of March 31, NCUA reported that Northeast had a net worth ratio of 13.12%, just over one percentage point higher than that of its peer group. But its return on average assets sharply lagged its peers (.13% versus .56%) while the credit union's loan-to-share ratio was higher than its peers (82.64% for the CU, versus 73.12% for the peers).
DiBenedetto almost characterized the merger as a defensive move, portraying it in terms of an attempt by the CU to choose a merger partner from within the community and with which the CU already had a long history of close ties, over a merger partner from outside the community, even if that other merger partner might be a CU and not a bank.
"There has been a lot of cooperation [between the bank and CU] in the past," DiBenedetto said. "And the members of these two boards, some of them, grew up together. We wanted an institution which is firmly rooted in this community and that is what we will have after the merger," he added
The exact procedures Northeast will have to follow in order to make the merger happen, from a regulatory standpoint, are a little bit up in the air.
Although Massachusetts' law allows for the merger of a state chartered credit union with a state chartered mutual bank, DiBenedetto said that the CU's research had not found any other example of one being tried.
When two state chartered credit unions merge, Massachusetts regulations require that 66% of the membership of each CU have to vote to approve the merger and the two institutions have suggested that the state's regulations would be the same in this merger as well, although state regulations do not appear to say this explicitly and no one from the Massachusetts Division of Banks became available as of press time to answer the question.
The question of procedure is significant because DiBenedetto was adamant that this merger should not be considered a charter conversion under NCUA's rules and thus the CU might not have to issue the disclosure notices at 30, 60 and 90 days and other applicable regulations.
"We are not a charter conversion in the strict sense of the word," maintained DiBenedetto. "We're different in Massachusetts; we do things differently up here."
The CU points to a sentence in the commentary to the agency's most recent conversion regulations where NCUA appears to acknowledge that its conversion regulations do not really apply to mergers between CUs and banks. "The FCUA permits credit unions to merge into banks, but a rulemaking specific to those conversions is also beyond the scope of this rulemaking," the agency said in its commentary to the most recent conversion regulation.
For now the agency would only say that it would evaluate Northeast's application "at the appropriate time," noting that the agency had seen nothing formally from the CU yet.
Alan Theriault, CEO of CU Financial Services and a long-time advocate of credit union charter conversion said he would be surprised if the CU had managed to find a loophole in the agency's regulations but acknowledged the possibility.
Should the agency agree that its current charter change regulations do no apply to this case, Theriault estimated that NCUA might decide that the procedures in place before the passage of the Federal Credit Union Act should apply. In that instance, the NCUA Board would have to approve the merger, he said and effectively the credit union would face a sharply different series of disclosure requirements.
For example, if the two institutions follow the existing merger rules the CU and the bank will have to have the Division of Bank's notice of the application published in local media. In addition they will need to publish the notice in their branches as well and the Division will open a public comment period on the application. If need be, the Division can also decide to call a public hearing to take more community input on the question, the Division's regulations said.