Can state charters regain their momentum?

The tide of credit unions converting to state charters has turned.

For years, the industry’s dual-charter system has created a marketplace for regulators to essentially compete for business. But for awhile the number of credit unions converting to state charters was significantly higher than those switching to federal ones.

That seems to be changing as the National Credit Union Administration begins to ease field-of-membership rules for federally chartered credit unions. In addition to that, organizers of de novo institutions seem to prefer federal charters over state ones.

“I certainly believe states should be proactive in comparing their charters against those in other states and the federal charter,” said Michael Bell, an attorney with the law firm of Howard & Howard in Royal Oak, Mich. “I also think NCUA should be proactive in comparing the federal charter versus state charters.”

A number of stakeholders, including regulators, credit unions and various trade associations and state leagues, are constantly comparing state and federal charters, Bell said. Many states have even updated their statutes in recent years to make their charters more attractive, including Kansas and Washington earlier this year, as well as Michigan, Idaho and others in years prior.

At midyear, about 62% of the roughly 5,400 credit unions were federally chartered but state-chartered institutions held approximately 49% of assets, according to the National Association of State Credit Union Supervisors

“[F]or certain purposes, I think you can isolate strengths and weaknesses of charters,” Bell said. “In my main line of business, helping credit unions grow non-organically, some charters are better than others. The federal multiple common bond charter is a very strong charter in this regard, and many states have strong charters — Wisconsin, Michigan, Illinois and Florida come to mind.”

From 2012 to 2019, credit unions seemed to prefer state charters over federal ones. During that time period, 61 federally chartered CUs converted to a state charter, compared with just 43 state-chartered institutions making the switch to federal charters, according to data from NASCUS.

But in the last few years, there has been a change as more credit unions convert from state charters to federal ones. From 2016 through June of this year, 35 institutions converted to a federal charter, compared to 21 FCUs flipping to a state charter. In contrast, from 2012 to 2015, 40 federally chartered credit unions converted to state charters.

That could be partly due to NCUA’s move in 2016 approving a rule to expand fields of membership for federal charters. The rule allows credit unions to consider rural districts with populations up to 1 million people while also counting parts of a combined statistical area of up to 2.5 million people as a well-defined community.

The rule has been tied up in court after the American Bankers Association sued to stop its implementation but an appeals court recently upheld most of NCUA’s changes. The American Bankers Association subsequently appealed that ruling.

The potential expanded field-of-membership opportunities could make federal charters more attractive.

“When NCUA sought to modernize field-of-membership rules there was a slowdown in conversions,” said Lucy Ito, president and CEO of NASCUS. “Now that the rules are pretty much finalized, pending the appeals from the American Bankers Association, we are seeing a pickup in conversions.”

But there is also the issue of what kind of charter organizers of de novo institutions will select. So far, new credit unions have overwhelmingly favored federal charters.

There have been approximately 61 new federal charters and 23 new state charters since 2000, based on information found in the NCUA’s annual reports, Ito said. Superbia Credit Union, which recently got its charter in Michigan, was the first new state charter issued since a de novo was chartered in Texas three years ago.

Ito said the sharp difference in numbers has less to do with the features of the two types of charters than the resources available from NCUA. She noted the regulator’s Office of Credit Union Resources and Expansion gets more requests from federal charters, and can only help federal charters with chartering resources.

Only Washington, Illinois and Nevada have online resources for state chartering, Ito said.

“Another explanation is it is harder for organizers to find information on state charters, as they are more likely to find resources from NCUA regarding the federal credit union charter,” Ito said.

The challenge for those trying to charter a new credit union, using either type of charter, is determining a field of membership that has enough growth potential to sustain the credit union long term, plus building the capital, getting the volunteers and developing a business plan that will meet approval of regulators, said Dennis Dollar, principal partner of the Dollar Associates consultancy in Birmingham, Ala.

“Those are tall hurdles to clear, particularly when the same group can often go out and become part of an existing credit union as a SEG or an association and not have to jump through any of those hurdles,” he said. “The process to charter a de novo credit union can take two to three years at times, when the organizing group can normally become a part of any existing credit union in a matter of days.”

NCUA could let organizers of de novo institutions know they have of a choice when selecting a charter, Ito said. Most states would be eager for new credit unions but don’t have the resources to devote to promoting this.

“I think the consolidation in the system accentuates the difficulty in running a credit union in today’s environment,” Ito added. “There is still potential for underserved populations or communities, but there just are not a lot of new credit unions, and organizers are more likely to see information on a federal charter than a state charter.”