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NORTHVILLE, Mich. – What regulatory and economic factors make a credit union decide to convert to a mutual bank charter or for a federal credit union to convert to a state charter or vice versa? After witnessing one of the fiercest and most public fights last year by Lake Michigan CU in what culminated in the board’s narrowly defeated attempt to convert the $1 billion CU to a mutual bank charter, the Michigan Credit Union League set up a fund and contributed $750,000 to the Michigan Credit Union Foundation to provide capital for various research projects the first of which is its newly released study on “The Credit Union Charter in the 21st Century.” Michigan League President David Adams who made no bones during the Lake Michigan CU conversion battle about the League’s concerns about the charter conversion process, said the MCUF identified this study as its first because of the League’s awareness that some credit union boards “are looking at” the mutual savings bank charter. He noted though that the study has relevance in any market and state, not just from the Michigan perspective. Stressing that the study also looked at federal vs. state credit union charter comparisons and didn’t exclusively focus on the CU vs. bank charter, Adams said the objective of the study was “to provide information that contrasted the differences between the three charter types so credit union decision makers have good objective information when making their decisions.” For those credit unions considering converting to mutual savings bank charters, Adams added that, “If they’re getting their information from consultants like Alan Theriault (CU Financial Services president) who are earning fees helping credit unions convert to a bank, then they have a personal financial interest in the outcome. It’s difficult to see how that kind of helping can be objective. “We wanted to go outside that environment and have an independent consultant look at the hard data and facts that pertain to each charter type,” said Adams. The 120-page study co-authored by University Financial Associates LLC’s Thomas W. Bishop, Ph.D. and Dennis R. Capozza, PhD, took about four to six months to complete. Adams said there “weren’t any real surprises” in the study findings and said Bishop and Capozza “documented and affirmed things we suspected. The financial comparisons confirmed what many us knew intuitively.” For example, Adams explained the League felt there were certain financial benefits in being a credit union because of the tax exemption, and the research data supported that. “It was also interesting to see the contrast in power between credit unions and mutual savings banks which have limitations on the amount of consumer loans they can make. That’s a compelling piece of information since consumer loans are credit unions’ bread and butter,” he said. “For credit union boards that have been focused for years on serving the needs of their members, it’s hard to see why they’d opt to be a mutual savings bank where those types of loans are limited,” said Adams. Among the findings of “The Credit Union Charter in the 21st Century”: * from 1994-2003, the number of credit unions in the U.S. and Michigan decreased substantially, while the average and median number of members at CUs have increased. In addition, average measures of assets and liabilities have grown during this time, both for Michigan CUs and nationwide, and for both federal and state charters. * capital requirements are generally more stringent for credit unions, but minimum regulatory fees are generally lower when compared with taxes and fees that savings banks have to pay. However, commercial loan restrictions are stricter for CUs – up to 20% of assets of a savings bank can be invested in commercial loans, compared to the 12.25% of assets ceiling for CUs. Credit unions are also not required to adhere to the federal Sarbanes/Oxley Act regarding transparency and independent auditing, nor are they required to adhere to the Federal Reserve Reg O limiting loans to executive officers and directors. Lastly, savings banks can only invest up to 5% of assets or 75% of capital in service organizations. Michigan SCCUs can invest up to 12% of assets in subsidiary service organizations. * as for charter switching, the study findings suggest that the CU charter has not become significantly less attractive or that CUs are converting their charters in large numbers, both nationwide and in Michigan. In addition, out of a total approximately 10,000 credit unions nationwide, between 100 and 220 FCUs and between 80-184 SCCUs have left the industry each year from 1994-2003 either by merging with another CU, adopting a bank or savings & loan charter, or by going out of business. Since 1995 only 20 CUs in the U.S. have switched or applied to change to savings banks charters. This indicates, the study says, that credit unions still see value in the credit union charter but are interested in remaining competitive with banks. The study also looked into the areas of: services, economies of scale and scope and the benefits of consolidation, fees and taxes, “complex” credit unions, investment powers, derivatives and volatility of investment income, and prohibited assets. Just how influential will findings of “The Credit Union Charter in the 21st Century” be in influencing CUs considering converting to a mutual savings bank charter, Adams said he realizes “there are certain boards that have made up their minds about converting and just want to find ways to justify their actions. If there’s a board of directors bent on becoming a bank, then this type of research won’t do them any good.” However, he added, “We believe there are a number of boards which over time as part of a planning exercise, will find value in this research.” -

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