Postal Community Credit Union should be allowed to convert to a mutual savings bank under the state's parity provision allowing state charters to exercise all the powers of federal credit unions, in the absence of a state law specifically allowing the charter switch, lawyers for the beleaguered Boston credit union argued before the Massachusetts Court of Appeals last week.
The state's parity, or wildcard provision, adopted with the backing of the Department of Banking in 1998, allows state charters to exercise "any power and to engage in any activity that is permissible for a federally chartered credit union," Boston attorney Mark Furman told the three-member panel.
Furman was urging the court to uphold a lower court ruling scrapping an onerous administrative order issued by the Department of Banking, which prohibited PCCU's board from even discussing a conversion to bank. That ruling, issued last February, essentially cleared the way for the contested conversion, which was approved by 68% of voting credit union members in November. That conversion would pave the way for the cash-strapped credit union to go public in an initial public offering sometime down the road.
Not A 'Blanket'
But the appeals court halted completion of the conversion until the Department of Banking was allowed to argue its appeal of the lower court ruling.
A lawyer for the banking regulator told the appeals court last week during oral arguments that the parity provision was never meant to be a blanket approval allowing state charters to do everything, including switch charters. "Unless the (banking) Commissioner acts to expressly approve this kind of activity, it is prohibited," assistant attorney general Thomas Barnico, told the panel. "A state-chartered credit union can't simply elect, without further review by the state, to become a mutual savings bank. A determination by the Commissioner is relevant."
Barnico said in endorsing the parity provision, when the legislature amended the state credit union statute in 1998, the state regulator was considering powers such as mortgage lending, business lending and electronic banking, but not a change in corporate structure.
The use of so-called wildcard provisions has become somewhat of a loophole for the growing number of credit unions converting to mutual savings banks. In Vancouver, Wash., Columbia CU, whose members narrowly approved its conversion bid (by a vote of 52% of those voting) invoked that state's parity clause to enable it to certify the vote under NCUA's simple majority requirement, rather than the state's more stringent two-thirds voting requirement. The three other Washington credit unions that have converted in recent years have also invoked the parity provision.
Postal's lawyer, Furman, insisted the Bay State's parity provision does not limit the powers and activities a state charter may adopt from federal law. "The statute did not specify which powers and activities" a state-chartered credit union may exercise, he argued to the court last week.
After the court hearing, Postal's president and CEO, William French, insisted the switch to a mutual savings bank was the most viable move for his faltering credit union after the banking department dragged its feet on a request to convert to a community charter. The credit union's application to serve as much as half of the Bay State has been languishing for more than two years before the regulator.
A mutual savings bank charter would not only expand the limited markets currently hampering Postal, but also the product and servicing offerings, as well as the credit union's ability to raise capital through a public stock offering, French explained.
CEO Says CU Is Suffering
Postal, formerly known as Boston Post Office Employees CU, has 98% of its membership tied to a shrinking U.S. Postal Service, with more than half of its members more than 50 years old, according to French. The result has been a declining credit union, with assets having shrunk from $135 million to $128 million last year, and membership by almost 2,000, to fewer than 11,000, since 2001. This is in a period when the average credit union has grown by more than 20%.
"This substantially affects how we serve our members," said French.
He said it has made the future dim for the 80-year-old credit union, which reported a mere $500,000 in net income in 2003, all of it due to the sale of loans, and a return-on-average assets of less than 0.40%.
