ALEXANDRIA, Va. – The process through which two credit unions seek to stop being CUs continued to grind on last week as the NCUA's letter to the $331 million Lafayette FCU came to light and the NCUA Board approved the procedures that the $587 million Nationwide FCU will need to use to merge with Nationwide Bank.
Lafayette applied to convert its charter to that of a mutual bank in mid-June of this year. Nationwide announced it was planning to merge with Nationwide Bank, a bank wholly owned by the CU's parent company, Nationwide Insurance, in late June.
NCUA's July 12 letter was the agency's first step in what can be a complicated and lengthy regulatory process through which a converting CU must convince the agency that its proposed disclosure documents and ballot about the proposed conversion are sufficiently clear and easy to understand.
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The general procedure has been that a converting CU submits the proposed disclosure documents to the agency, which then reviews them for accuracy and clarity and usually makes recommendations for what the CU will have to change in the documents in order to gain approval. The CU then makes the changes until the disclosure packet is finally approved to be sent to the CU's members.
The 12-page July 12 letter followed the same sort of format the agency has used with other converting CUs in that it is divided into three sections, the first covering what the agency says the CU must do in order to comply with existing regulations; the second what the agency recommends the CU do in its disclosures and; third, items about which the agency wishes more information. However, the letter also contained some signals that the agency was taking a more careful line with Lafayette's examination than it might have with others.
No one from Lafayette or its law firm, Luse Gorman, Pomerenk and Schick, would comment on the NCUA letter.
In some instances the changes NCUA said the CU must make were more of the technical language variety. For example, the CU apparently referred to its ballots in the conversion vote as a "proxy" and NCUA regulations do not allow FCUs to use proxy voting. But in other areas it became clear that the agency studied the CU's application closely.
For example, in one of the agency's objections to the disclosure packet Edward Dupcak, director of the agency's Region II, noted that the CU claimed it had to become a bank to expand its depositor base, a claim the agency implied the CU made several times. But the agency pointed out that as of March 31 the FCU had just over 16,000 members out of a potential pool of 900,000 potential members.
"Therefore, Lafayette's explanation that MSB conversion is necessary because it needs an expanded depositor base is misleading unless Lafayette further explains why the more than 900,000 potential members within its current field of membership are not a sufficient customer/depositor basis now and in the foreseeable future," Dupcak wrote.
The agency also questioned the CU's assertions that it would invest the money it said it would get back from its deposit in the National Credit Union Share Insurance Fund and that the money would earn it $116,000 when invested. But the agency replied that it believed that Lafayette would have to make premium payments to the FDIC and that those premiums would more than eat up the $116,000 the CU said it would make.
"Accordingly, it is inaccurate and misleading to suggest that Lafayette will have these funds to invest without addressing the likelihood of offsetting.premium assessments," Dupcak wrote.
The regional director also challenged the CU about Lafayette continuing to refer to the organization after a Mutual Holding Company stock issuance, should one be approved, as a mutual bank when in fact it would be a stock bank. The former members of the CU would have a membership claim in the MHC itself as owner of the bank, but not in the bank itself.
"Lafayette's..materials must state clearly that the bank becomes a stock bank upon conversion to the MHC structure and must not continue to reference the bank as a mutual savings bank following conversion to an MHC structure," Dupcak specified.
Finally, last in the required changes section, the NCUA challenged Lafayette's assertion that keeping "well capitalized" was the reason it had been restricting its branching, products and services. But the agency pointed out that the CU's capital is 200 basis points or about $6 million over what it would have to be to be "well capitalized."
Dupcak followed up with this line of questioning in the section of the letter asking for more information. Noting that the CU said that the change to a bank will allow it to make more loans, open new branches and offer different products and services, Dupcak asked that that the CU explain how the federal credit union charter prevented if from branching and what services and products it is expected to be able to offer its members that it could not offer already. In general, the questions and detail that the agency put into the examination of the disclosures indicate that the agency will take great care to make sure CUs that are seeking to convert give full and accurate disclosures of why they seek to convert and what such a conversion will mean to a CU's members. Meanwhile, in the case of Nationwide, in a closed July 20 meeting the NCUA Board approved a set of procedures under its regulations that Nationwide FCU will have to follow in its merger with Nationwide Bank, an NCUA source said.
Because this is not a CU conversion but a merger, a different set of regulations apply. Because the merger is with a mutual bank, the procedures will resemble those for a conversion in that there will be three sets of disclosures and a vote. The NCUA Board also delegated the authority for dealing with the nuts and bolts of the disclosure documents to the region, the source explained. [email protected]
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