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POINT, Calif. – Anyone who doubted the sensitivity of the issue of credit unions switching to thrift charters only had to listen to the heated Webcast debate on Nov. 6 that pitted the president/CEO of the California Credit Union League against the president of a CU-converted San Diego bank. “Hans, Hans, Hans, where did you go wrong?” chided David Chatfield, president of the California League in a tongue-in-cheek jibe at fellow panelist Hans Ganz, president of Pacific Trust Bank, the former Pacific Trust FCU which converted to a mutual savings bank in February, 2000. Defending Pacific Trust’s switch as one based on sound business strategy to chart growth via real estate loans, Ganz countered in jest that while he took advantage of an opportunity nearly three years ago, “I am not a Communist or a pure capitalist,” nor is he now leading any kind of crusade to sway other CUs to make the switch. “I’m not here to sell anything and it’s none of my business” whether CUs in the League, in the Webcast audience or a CU group assembled in a hotel ballroom here should pursue conversion. “I couldn’t care less,” said Ganz. And yet he said the decision to convert to a mutual and then to stock form earlier this year has proven beneficial in improving the institution’s condition and halting an income slide which created a dire situation for the institution in the late `90′s following aerospace cutbacks in southern California. “It was not a fun time,” recalled Ganz who suggested that other CUs facing similar economic crises today might indeed look at thrift conversion as a possible option. He noted that there might be 1% of the CU population which should “seriously” consider such a move. The setting for the extraordinary live Webcast was a conference sponsored by the newly revamped Southern California/Arizona CUES Council which chose charter conversion as a “timely and relevant topic” to educate its membership on an issue with high visibility. “We wanted to rid some of the mystery surrounding this topic and our goal was to come up with something different” as the new Council takes shape, explained Teresa Freeborn, senior vice president of marketing at Kinecta Federal Credit Union in Manhattan Beach. There were some 60 people in the hotel audience and 150 CUs signed up for the Webcast (at $90 per organization) covering the two-and-a-half hour debate and which drew some 40 questions directed to the panel either from the floor or on instant e-mail. Beside Chatfield and Ganz, also participating on the panel were Joseph S. Melchione, a Glendale, Calif. CU lawyer and partner in Styskal, Wiese & Melchione, and moderator Thomas Glatt, president of Counter Intelligence Associates, of San Juan Capistrano, Calif. CIA, a consulting firm to CUs, provided the Webcast hookup and technology. In his remarks, Melchione, the attorney, warned CUs interested in pursuing a conversion to be wary of various thresholds raised by the Office of Thrift Supervision particularly on the “qualified thrift lender tests” regarding the composition of assets as well as pursuit of a switch “for personal gain.” “You won’t get in the door,” if OTS detects ill-conceived goals, suggested Melchione noting that his firm has in the last two to three years had 10-15 CU clients which have inquired about converting. However, Melchione told Credit Union Times his firm has “none now on the verge of making an application.” In his remarks, Chatfield repeatedly stressed that regulatory and legislative changes since the $472 million Pacific Trust FCU first acted three years ago have reduced the motivation for CUs to switch and that even Ganz might have reconsidered his decision given today’s market conditions. The California League executive said he was glad to see that Ganz and others in Pacific Trust management had apparently personally prospered in the conversion, but he asked “did you have to kill a credit union to do it?”, a remark that drew audience laughter. Citing the “emotional” nature of the conversion issue, Ganz, a Swiss immigrant and former savings & loan executive, fired back that there was nothing wrong with taking advantage of opportunities and “the American way” encourages innovation. “Forget what David said, I am not now a millionaire” as a result of the conversion, added Ganz. In his comments on the changed environment for CUs discouraging conversion, Chatfield cited options now offered the industry including the ability to change from federal to state charter or vice versa, pursuit of a community charter, the addition of SEGS, new business lending and syndication powers as well as greater NCUA flexibility on Regflex and incidental powers. Still, said Chatfield, the League is not standing in the way of any California CU that seeks to switch. Each California CU, he said, “should be free to make its own decision” just as it would it switching federal/state charters. There are “rare cases” where a CU, finding itself in difficult straits, might now decide that conversion is the best route “but I hope that is near the bottom of the list.” A CU would have to be in a “difficult bind, right up against the wall” or viewing MSB conversion as “the only way out,” said Chatfield. The conversions that have occurred in the past six or seven years, he said, have been triggered by various factors, including field of membership or mortgage limits, the need to raise new capital or sometimes “rocky relationships” with regulators. But Chatfield in warning about “the grass is always greener,” noted the tax burden of MSBs since some “are paying a third of their income in taxes with Pacific Trust running close to 40%.” And a most important weighing against conversion “is the loss of cooperative spirit and the efficiency” that comes with being a CU, he said adding “you don’t see banks sharing branches or collaborating on products.” In response to one Internet question about whether Pacific Trust “is a credit union or a bank,” Ganz conceded that Pacific Trust retains its membership in CU-based networks and the “alliances” and the volume from the services have been “a good deal.” He said he has enjoyed “being with a coop” and that it is always good to “keep the avenues open.” Conditions change “and you never know what happens,” said Ganz who said he “appreciates the membership” of the CU organizations Pacific Trust belongs to. In his remarks, Ganz recalled the difficulties faced by Pacific Trust FCU, headquartered in the San Diego suburb of Chula Vista, in dealing with loan losses and bankruptcies of its members in the old Rohr Industries aerospace firm, now an operating division of B. F. Goodrich. He said the CU had turned to making more real estate loans as a means to “stabilize” the institution and had tried to lobby for new loan powers but the NCUA clamped down on the institution suggesting Pacific “should become a thrift.” He said the CU management went to the membership with the idea and it voted overwhelmingly-seven out of 10-in favor. The Pacific Trust executive denied comments in a Credit Union Times editorial at the time that the members “did not know what they were voting for.” “I have news for you, my members are not stupid,” said Ganz noting these are people who “write the paychecks” for management and do indeed understand the ramifications. Asked how long the process of conversion takes, Ganz said from the time management decided and the application process completed it took about three-and-a-half years. Ganz said he has found his relationship with OTS positive and the agency helpful and “I would do it all over again.” He said OTS as a regulator “is in some ways tougher to work with than the NCUA” noting the OTS has been “extremely concerned and vigilant about consumers getting their fair share.” Asked about the cost of conversion, Ganz estimated it ranged between $200,000 – $250,000 which covered everything from “the decals on the door” to attorney and consultant fees. Ganz also defended director compensation totaling $600 a month in retainers as funds well spent since directors devote countless hours to Pacific Trust oversight. Given tough new legislation in Congress on corporate scrutiny, he said “it’s not easy to be a director” in a bank considering personal liability. He also said with only two retirees the Pacific Board is “the same as it was” before the conversion. Asked by a Credit Union Times reporter about phone calls or reaction from CUs inquiring about conversion, the Pacific Trust CEO said he had received no direct communication so far and that would be unlikely since CUs interested in switching would go to their attorneys or consultants first. “Why would they call me?” he asked. Melchione, the attorney, said he hoped the CUES debate “dispelled some of the myths” about the advantages of MSB conversion particularly on “those CUs looking to OTS to take their problems” and that “that there is a definite cultural change” in making the switch. A spokesman for Pacific Trust said he thought the Internet and floor questions posed to Ganz and Chatfield reflected “some confusion” about the nature of the debate and on stock and mutual formations noting that in the CU to MSB conversion “there is no change of ownership.” Chatfield said he has received “favorable reaction” to his debate remarks so far and that “it was a good subject” for the CUES forum. “One of my main points was that time and circumstances have changed” since Pacific Trust pursued conversion. “There’s still some buzz out there” about the conversion issue “but not as much,” concluded Chatfield. -

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