The board of directors of $1.5 billion Technology Credit Unionhas written the CU's  74,000 members that they may bebetter served by converting the credit union to a bank.

In a letter posted Oct. 3 on the CU's website, the board of theSan Jose, Calif.-based credit union laid out its reasons forconsidering the option and invited member comments before making afinal decision at a meeting slated for Nov. 2. Under current NCUAregulations, the letter and the invitation for member comment areconsidered the first step in the agency's charter changeprocess.

“Tech CU's board of directors believes that, as a mutual savingsbank, Tech CU will be able to significantly expand its commerciallending business,” the credit union board wrote in the letter.“While we will continue to be primarily a residential and consumerlender, we will seek to diversify our loan portfolio by increasingsecured commercial and industrial lending to small and mid-sizebusinesses in our market area.

“Tech CU's board of directors believes that this should improveour earnings since commercial loans generally carry higher interestrates and origination fees than typical residential mortgage andconsumer loans. The additional revenues that Tech CU's board ofdirectors believes will be generated by this type of lending wouldbe used to support and enhance our existing products and servicesand provide our current and future members with the valuedfinancial products and services and cutting-edge technology theywant and expect.”

The CU's board also cited expanded capital opportunities as areason for considering charter change, as well as the ability toserve the broader community without field of membershiprestrictions.

As per the NCUA's regulations, the CU also invited membercomment on the possible change, and the board indicated it willconsider adopting the charter change proposal on Nov. 2.

“Tech CU will be able to achieve the growth needed to remaincompetitive, continue to enhance and expand our current product andservice offerings such as business banking and commercial lendingprograms and justify adding branch locations,” Barbara Kamm, CEO ofTechnology Credit Union, was quoted by The San FranciscoBusiness Times in an Oct. 3 article. The CU had not returnedcalls for comment from Credit Union Times as of presstime.

Reaction to the announcement has been swift and, compared toprevious charter changes and charter change attempts, morevigorous.

The California Credit Union League and CUNA CEO Bill Cheney bothexpressed concern that Technology CU members be completely informedabout the effects of a move to a mutual bank charter.

“Charter conversions should be approached from the viewpoint ofthe members-owners of the credit union,” stated league CEO DianaDykstra. “While a credit union's management may experience theoperational advantages of a bank charter, the benefit does notnecessarily extend to the credit union's members. In the end, thosemembers could be left with a financial institution that no longerstrives to put their interests first.”

The league pointed to the difference in governance between acredit union and stock-issuing bank but did not mention that theTechnology CU board is considering a switch to a mutualinstitution, which would have similar, though not identical,governance rules.

The association also pointed out that research shows CUstypically offer better rates on loans than do banks and thatconsumers save money by using a credit union instead of a bank. “InCalifornia, that savings amounts to about $930 million, or $183 permember household,” the league said.

Cheney expressed similar skepticism that a bank charter wouldserve Technology members better than a CU charter.

“We continue to believe that the credit union charter remainsthe best option for serving the interests of consumers,” Cheneysaid. “That point was made acutely over the last several days whenBank of America announced a monthly debit card fee–which wasfollowed by a resounding and sharp outcry from across the nation byconsumers and the news media alike that credit union membership isthe natural haven from such high fees, typically charged bybanks.”

He also pointed out that, in terms of deposit insurancepremiums, changing charters might lead Technology from a lessexpensive option in the NCUSIF to a more expensive one with theFDIC.

“All credit unions should recognize that estimates of theirshares of the costs of the corporate credit union resolution havebeen dropping,” Cheney observed. “As result of recent announcementsby the NCUA–which are likely to affect credit unions over the nextseveral years–credit unions will likely pay less in the combinedcosts of NCUSIF premiums and corporate resolution than similarlysized banks will pay in their premiums to the FDIC over the comingdecade,” he suggested.

If the $1.5 billion Technology Credit Union decides to moveforward in its effort to convert to a mutual bank, it is new groundfor the California Department of Financial Institutions.

A spokesman for the California DFI confirmed that the state hasnever had a credit union to bank charter change attempt before andthat the state's credit union regulations are silent on thetopic.

California's financial code explicitly provides forstate-chartered credit unions to convert to federally charteredinstitutions and how to do that. Likewise, it provides forfederally chartered CUs to adopt the state charter. But it issilent on state-chartered credit unions conversion to mutualbanks.

Technology CU, in its letter to members introducing the idea,listed a desire to make more commercial loans as a reason for theconversion. Credit unions are under a legislatively mandated cap of12.25% of assets on member business loans. According to the mostrecent report to NCUA, the CU has booked 144 member business loansworth just over $81.3 million, representing more than 5% of thecredit union's assets. To reach the cap at their current assetlevel, the credit union would have book more than $184 million inmember business loans.

According to CU Financial Services, a Portland, Maine,consultancy that helps credit unions change to bank charters, ifTechnology Credit Union succeeds in moving to a bank, it willbecome the 37th credit union to change charters since 1995.