California Bid Signals New Conversion Trend
Monterey Credit Union's attempt to convert to a bank signaled the credit union industry could see more taking the same course, some industry participants say.
Monterey executives confirmed July 22 the $209 million California credit union sent ballots to its members asking them to approve a credit union to bank charter change.
Meanwhile, regulators that would have to approve the conversion said they have not yet received an application from the credit union.
Alan Theriault, founder and CEO of the Portland, Maine-based CU Financial Services, said he would not be surprised to see a number of other institutions, both privately insured and federally insured, change charters in the next 12 to 18 months.
“If you see what is going on now, with the NCUA talking about increased capital requirements, I think any reasonable board out there is going to have to examine all its charter options,” Theriault said.
His firm listed 36 credit unions that as of November 2013 have converted to bank charters or merged with banks since 1998. Not all 36 were CU Financial Services clients, but many were, Theriault said.
While not commenting directly on Monterey's situation, Theriault observed that as a privately insured credit union, MCU did not have to apply with any regulators before sending ballots to its members the way federally insured credit unions have to do.
“Credit unions apply to regulators early in the process because that's what they have to do for the NCUA,” Theriault said. “Not because the other regulators necessarily require it.”
He also said that privately insured credit unions would not have to comply with the NCUA's disclosure rules that mandate three sets of disclosures about the pending charter change before members vote on it. Likewise, the credit union would not have to apply for FDIC insurance until later in the process, he said.
Theriault declined to say whether MCU credit union is one of his clients, nor whether the credit union will convert to a federal banking charter or a state of California banking charter.
It is unclear how important the distinction would be because both require the currently privately insured credit union to obtain FDIC insurance; however, there are indications that regulatory requirements for each charter conversion process would be different.
California's Department of Business Oversight, in particular, has not yet clarified whether or how its current regulatory procedures would incorporate a May 13, 2011, opinion letter from the now-defunct California Department of Financial Institutions into the conversion procedures Monterey might have to follow.
The letter said California law permits a state-chartered credit union to convert to a bank charter, but as a purchase and assumption transaction.
This has led some executives to speculate California procedures could require members of a state-chartered credit union be compensated for the conversion as part of the process.
At press time, CDBO had not responded to questions about what procedures Monterey would have to follow to convert to a California-chartered bank.
Whether state or federally chartered, credit union executives told a local media outlet that Monterey's ultimate goal was to convert to a commercial bank charter that could issue stock to raise capital.
Monterey Board Chairman David Laredo and CEO J. Stewart Fuller told the Monterey County Herald on July 24 that the credit union was seeking a commercial bank charter and that the initial conversion to a mutual bank charter was only the first step in a two-step process.
Meanwhile, Theriault acknowledged Monterey's path to any banking charter would have to go through the FDIC and that the bank insurer has taken a conservative approach to new banks in the years since the Great Recession. However, he observed the agency has been looking at all charter applications with a careful eye.
“It's not just credit union applications that have gotten additional scrutiny,” Theriault pointed out.
But Richard Garabedian, a Washington lawyer who also consults with credit unions about converting to bank charters, wondered if FDIC reluctance might prove to be a damper on future conversion attempts, particularly by privately insured credit unions.
Garabedian said nothing in principle would prevent a privately insured credit union from converting to a bank charter and obtaining FDIC insurance. However, he pointed out the FDIC may not be eager to insure an institution that has not had federal insurance in several years.
Federally insured credit unions could provide the FDIC with a greater level of comfort regarding how they have been regulated, Garabedian remarked.
Nevertheless, Garabedian also predicted there would be more attempts at charter conversions in the months ahead.
“I am working with two right now,” Garabedian said, “so I think you are likely to see [charter conversions] come up from time to time.”