The $963.5-million Lake Michigan Credit Union has become the latest-and the largest-credit union ever to announce plans to convert to a bank charter, citing a need for capital as the primary driver.
Although not affiliated with the Michigan league, the league has met with officials of LMCU and has challenged the legitimacy of the reasons being cited by the credit union in seeking to convert, and is also calling for full disclosure to members who would vote on the conversion. If LMCU converts, it would be the first to do so in Michigan under a law passed in 2001 that set new disclosure standards for a credit union seeking such a charter change.
The credit union said it will not talk about the conversion with the credit union trade press, and will only speak with local media. Separately, it has been rebuked by the state regulator for claims the credit union made that the regulator is forcing it to convert.
LMCU is being advised by Alan Theriault, the Portland, Maine-based attorney who has been involved with other conversions, including the attempt by Columbia CU that is being challenged by members.
The former Grand Rapids Teachers CU changed its name to Lake Michigan CU in March of 2002, at the same time it merged with three other credit unions, leading to 300% asset growth over the past three years. LMCU's Sept. 30, 2003 5300 call report shows a net capital ratio of 8.8%.
In a letter to members, the LMCU board said it is seeking to convert to a thrift charter to raise more capital, expand beyond its current FOM, and to add new products and services.
The Michigan league is suggesting that all of the issues being raised by Lake Michigan CU can be addressed by the credit union as a credit union without converting, according to David Adams, president of MCUL.
"We hope Lake Michigan Credit Union remains a credit union, and we hope to help them address those challenges without the need to convert," Adams told The Credit Union Journal. "Moreover, there is no guarantee that converting will solve some of these issues. Conversion is not a panacea. They may not be able to resolve their growth and capital issues by issuing stock because taxation eats into your ability to build capital."
Capital Options
While credit unions cannot raise secondary capital, there are other ways to handle that issue, Adams suggested. "If the regulators were to apply risk-based standards, that would benefit this credit union immensely," he noted. "I don't think legislation is required for the regulator to adopt risk-based examinations. If risk-based capital standards were used, the credit union's capital would be about 30% higher."
Similarly, if LMCU wishes to expand its field of membership, it could easily do so as a credit union, Adams observed, because the state law allows credit unions to have multiple-county fields of membership without any limit on the number of counties, meaning the CU could create a de facto statewide FOM.
The same goes for adding new products and services: "They have approved significant new authority for credit unions to expand their powers," Adams offered, adding, "particularly through the CUSO structure."
Adams has already met with LMCU CEO Sandra Jelinski to discuss the matter and is sending a letter to the board of directors outlining how each of these issues can be resolved without changing charters.
But the letter will also point out that the board must ensure that it meets all of the disclosure requirements as set out in the 2001 law.
"We acknowledge that conversion is an option for the board and membership to consider, and we simply want to make sure that both the board and the membership are in a position to make a well-informed decision," Adams explained. "We are not going to try to stop the conversion from happening, but we will work with [the state regulator] and NCUA, which will be asked to approve the disclosures the credit union provides to its membership, and make sure that they meet all the standards. In our communication with the board and management, we want to make it clear that the credit union can under disclose and risk a contentious protest by a group of members and the regulators coming in to investigate like what is happening in the Columbia Credit Union case (see related story, page 1). Of course, if they disclose too much they could jeopardize the vote they may be looking for. But the law clearly states that any risk factors associated with the proposal must be disclosed. And I don't feel like all of those risk factors have been disclosed, yet."
For example, the letter to the LMCU membership does point out that as a thrift the institution will be subject to taxes from which it is currently exempt as a credit union. But it doesn't go on to say why that is important. "It's not just that taxation eats into your ability to build capital, which is one of the reasons they cite for wanting to convert," Adams commented. "There's more at risk than that. The rate and fee structure may be adversely affected, too. It has been shown again and again that credit unions offer better rates and fewer fees than banks do."
Adams said LMCU's decision to convert was a surprise to the league, but noted that the credit union disaffiliated from the league and from CUNA two years ago.
Other than trying to work with LMCU to help it find a credit union solution to its issues rather than converting to a bank charter and working with regulators to ensure that LMCU's disclosures to its membership are complete, accurate and not misleading, the league has no other action plan to stave off the conversion.
Whose Opinion Counts
"Everyone has an opinion on this, but the only opinion that counts are the members'," Adams commented. "The credit union CEO has told me that this is 'all about the members' and 'for the benefit of the members,' and I take that at face value. And that is right, this is all about the members because in the end it is their decision. We just want to make sure that the members are aware of all of the implications of this and that they be allowed to make a well-informed decision."
Under the statute passed by Michigan in 2001, LMCU will have to file a conversion plan to be approved by the Office of Financial and Insurance Services (OFIS). Once the regulator has approved the plan, the CU must then call a special meeting of its membership and send out notices of the meeting-which must include a number of disclosures-90, 60 and 30 days prior to the meeting.
The initial letter to the membership sent Jan. 26 outlines how the conversion will affect a variety of aspects of the institution-operating under federal laws and regulations instead of state laws and regulations, ability to issue stock, changing from NCUSIF to FDIC, loss of the tax exemption, change in voting rights and elimination of FOM requirements, among other things.
But Adams questioned whether those disclosures truly meet the state's requirements. For example, LMCU notes that under the bank charter, directors can be compensated, but the credit union doesn't state whether it intends to start paying its board once such compensation is allowed. Adams pointed out that the state law specifically requires disclosing whether the board or management will receive any remuneration as a result of the conversion-not simply that it is possible that they could.
The state law requires two-thirds of the members voting on the conversion to support the charter change, rather than the simple majority required under federal law. The statute also calls for the CU board to give members the opportunity to comment on the plan to convert and that such comments must be taken into consideration before moving forward with the conversion process.
Rebuked By State Regulator
While LMCU has yet to file its conversion plan with OFIS, it is already butting heads with the regulatory agency. Following statements made to the local press indicating that the credit union "had no choice" but to convert because of issues with the state regulator, OFIS issued a statement patently denying that it has had anything to do with LMCU's decision to convert.
"Recent press reports regarding Lake Michigan Credit Union's proposal to convert to a federal mutual savings bank, and eventually to a stock institution, have included statements by credit union officials implying that regulators are forcing the proposed conversion. As the regulator of Michigan state-chartered credit unions, the Office of Financial and Insurance Services takes serious exception to these statements," the agency said. "OFIS has taken no regulatory action against Lake Michigan Credit Union, and none is pending. ...The implication that OFIS, or any other financial institution regulator or insurer, is somehow forcing Lake Michigan Credit Union to change charters is incorrect...OFIS expects officials of all state-chartered financial institutions to act responsibly, and strongly encourages the officials of Lake Michigan Credit Union to correct these incorrect assertions."
