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WARWICK, R.I. – Should there be a legislative path for state-chartered credit unions that want to convert to thrift charters? At least one credit union in Rhode Island thinks there should be and put its thoughts into action by beginning the process that ultimately resulted in the passage of a bill by the state legislature that makes it possible for a credit union to convert to a financial institution charter (the word `thrift’ isn’t used in Rhode Island. The “Credit Union Conversion Act of 2001″ (S. 0641) was passed by the Rhode Island state legislature on the last day of the session, June 28 and is effective July 13, without Gov. Lincoln Almond’s signature. Among the provisions of the law, it allows for: * any credit union chartered under the laws of Rhode Island to convert to and become a financial institution chartered under the laws of Rhode Island or another financial services entity chartered under U.S. laws; * The conversion does not require the prior liquidation of the subject CU; * To convert, a plan of conversion must be adopted by a two-thirds vote of the board of directors. There must also be approval of the plan by the director or a designated person and a majority vote of those members of the CU who are present in person or by proxy. * If the plan of conversion calls for the issuance of capital stock, the converting CU “shall issue and sell the stock issued in connection with the conversion at a price that represents its pro forma market value.and shall offer its stock initially in a subscription offering to the members of the credit union on an eligibility record date established by the board of directors.” * The converted CU must also create a liquidation account for the benefit of its members on the eligibility record date, in an amount representing the total equity of the credit union at the time. Prior to passage of S. 0641, there was no Rhode Island law that allowed for a state chartered credit union to convert to a financial institution/thrift charter. That’s why Ray McConaghy Jr., president/CEO of Greenwood Credit Union said he took the steps he did to secure passage of the bill. McConaghy defended his decision to approach state Sen. John Revens (D-18) to introduce the Credit Union Conversion Act of 2001. “Credit unions are great, but the one big disadvantage of the credit union charter is it doesn’t allow credit unions to access capital markets. This is limiting Greenwood Credit Union’s growth opportunities, especially in our ability to make indirect car loans. Now we’re making more loans than our balance sheet can absorb. We’re involved in participation loans which are acceptable for now, but sometime in the future we may want to keep the entire loans ourselves.” McConaghy would not comment on what percentage of GCU’s loan portfolio auto loans comprised, nor the CU’s loan-to-asset ratio. McConaghy has been with GCU for the past five years. Prior to that he was president of an area bank. McConaghy denied there are plans for Greenwood Credit Union to convert to a financial institution charter in the immediate future, “but we want to make sure we have something in the quiver in case we want to be able to access capital in the future.” With approximately $101 million in assets and more than 27,000 members, Greenwood CU is the seventh largest credit union in Rhode Island. According to Dan Egan, president/CEO of the Massachusetts and Rhode Island Credit Union Leagues, while the wording in the state’s Credit Union Conversion Act in its current form is non-specific to any one credit union, there are plans to introduce an amendment in the next legislative session that would make the bill specific to Greenwood CU only. Asked if he was aware such an amendment, McConaghy said he was “not aware” of it, and added, “It would be inappropriate for me to comment on that at this time.” Egan said when S. 0641 was introduced, the league consulted with its legislative counsel and opposed the bill “on public policy grounds.” Until the alleged amendment is passed, Egan acknowledged there is nothing in the law that prohibits any state-chartered credit union in Rhode Island from converting to a financial institution charter. McConaghy emphasized that the successful passage of the bill was not influenced by the fact that his wife – Marilyn Shannon McConaghy – is the director of the Rhode island Department of Business Regulations which oversees all financial institutions and credit unions in the state. He said she recused herself from discussions on the bill and from anything having to do with Greenwood CU. Dennis Zivoli, associate director and superintendent of banking for the Department of Business Regulations confirmed that “Ms. McConaghy has built a Chinese wall around her from anything having to do with that legislation and involvement with Greenwood.” As for the department’s position on S. 0641, Zivoli said the department had to remain impartial on the measure since it regulates all financial institutions and credit unions in the state. Zivoli however did send a series of letters to Sen. Revens and other members of the state Senate and General Assembly such as Rep. Brian Kennedy (D-16), chairman of the House Corporations Committee, and Sen. John Tassoni (D-29), chairman of the Senate Corporation Committee, objecting to some of the wording in the original bill that would have required the converting to create a liquidation account for its members in an amount representing “the undivided profits and funds” of the CU at the time. That phrase was later changed to “total equity.” If Greenwood CU plans to convert to a financial institution charter, Zivoli said the “standard to convert is so high it would be difficult for any credit union to convert.” Among the prerequisites the CU would have to complete, it would have to file a conversion application and plan with the deputy director of the Department of Business Regulations; have at least $3 million in capitalization; and meet FDIC standards. “It’s no easy task, but at least the standard is on the books,” said Zivoli. The availability of a path for a state-chartered CU to convert to a thrift charter is critical for state-chartered credit unions looking to expand their powers and lending authority, said Alan Theriault, president/CEO, CU Financial Services which consults with state-chartered CUs interested in converting to thrift charters. “It may be that a state charter doesn’t meet a credit union’s mission anymore. State-chartered credit unions need the flexibility to be able to convert to a thrift charter if that’s what they want to do,” said Theriault. Theriault does not see his role as convincing a credit union to convert to a thrift charter. Instead, he said, “my skills are in strategic planning, to help the credit union identify its mission and the needs of its members, and explore with them the charter options. “I am aware that the trend is for federal credit unions to convert to state charters, and that may sound like the smart thing for them to do at the time because it seems that they’ll have more flexibility. But they’re actually trapping themselves into a corner. Once they expand their field-of-membership and product offering, there will be no way for them to reverse that if they decide down the road that the state-charter doesn’t work for them.” Theriault was instrumental in the mid-1990s in the passage of a law in New Hampshire that allowed Awane Credit Union to convert to a thrift charter. At the time the credit union decided to convert, there was no law on the state books that provided a path for SCCUs to take if they wanted to convert charters. He eventually became Awane Bank’s first president. Theriault would not comment on whether he has consulted with Greenwood CU on conversion plans. He offered though that he hopes other states that currently do not have laws allowing for CU-to-thrift conversions will mimic Rhode Island. -

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