Credit Union Alternative Capital Unlikely - Converts Announce Plans To Tap the Capital Markets Bank Conversions Continue

Credit union leaders continue to underscore the need for alternative forms of capital. However, a legislative solution is unlikely, especially since Congress, in 1998, provided the means for credit unions to access the capital markets by way of conversion to a mutual savings bank charter. In addition, larger banks and mortgage companies are starting to join the fight by smaller banks to slow down credit union growth. Since access to capital would support even faster growth, opposition to such a move will be fierce. The US Treasury Department is also likely to continue to oppose alternative forms of capital for credit unions.

 
 

Credit union leaders continue to underscore the need for alternative forms of capital. However, a legislative solution is unlikely, especially since Congress, in 1998, provided the means for credit unions to access the capital markets by way of conversion to a mutual savings bank charter. In addition, larger banks and mortgage companies are starting to join the fight by smaller banks to slow down credit union growth. Since access to capital would support even faster growth, opposition to such a move will be fierce. The US Treasury Department is also likely to continue to oppose alternative forms of capital for credit unions.

In contrast, six former credit unions have already raised over $100 million in capital from member approved offerings; and several more are expected to tap the capital markets in the near future with offerings exceeding $125 million. The additional capital would support asset growth to over $4.5 billion, making a significant positive impact in the communities served by these institutions.

For example, $530 million Rainier Pacific (WA), which converted from a credit union in 2001 recently announced plans to raise $80 million in a depositor offering. Last August, $500 million Pacific Trust Bank raised over $60 million in an offering, and recently its stock has traded at over a 50% premium. The additional capital will allow these two former credit unions to better serve their communities with asset growth to the $2 billion range. California, Texas, Maryland, Illinois, Washington, New Jersey, and Pennsylvania are states from which former credit unions have successfully raised regulatory capital from depositors.

Banks generate strong interest among depositors and on Wall Street for their capital offerings. In contrast, credit unions, like many business cooperatives, are new and largely unknown and unproven participants in the capital markets. In the unlikely event alternative capital ever becomes an option for credit unions, capital offerings are likely to be difficult to structure and more expensive than bank offerings. Credit unions will be forced to pay premiums for capital, much like the premiums they are forced to pay in order to attract deposits.

Despite liberal state credit union regulations, two credit unions in Washington State ($570 million Columbia Credit Union in Vancouver and $275 million Washington's Credit Union near Seattle) just announced plans to convert to the mutual bank charter, bringing the total to four making the charter switch. In May, $140 million CU of the Pacific completed its conversion to a bank. In a press release addressing the conversions, John Annaloro, Washington Credit Union League President and CEO said, ''these conversions may represent fundamental weaknesses in the overall national credit union charter, which needlessly restricts capital accumulation and business lending.''

The process of going from a credit union to bank and gaining access to capital involves several steps which involve board of director and management education, feasibility assessment, and charter changes. As advisor to the majority of institutions converting to a bank charter (including the recent applicants) and those accessing the capital markets, CU Financial Services and its ''Conversion Network'' is in a unique position to help credit unions make this dynamic transition with strategic, business, CRA, and public relations assessment, modeling and preparation and transition consulting including training, networking opportunities, merger and acquisition help, and growth strategies.

 

 

 

July 14, 2003


Comments

 
 
 
  • When the options are few, what can you do? Appears to be an emerging trend.
    Anonymous
     
     
     
  • What do conversions have to do with alternative capital. This is a self-serving "article" that does nothing but market this consultant's services. These articles don't belong in this forum.
    Anonymous
     
     
     
  • Excellent article with informative and up-to-date data. What is the conference, KBW? It is held in New York ...would like to attend and receive more info. Plus - I really beleive we need to more education for our industry on the implications of not having future options for addtional capital. Those that argue and block our ablitliy to dialgoue and proceed on this subject matter,typically do not really understand that the governance of our CU's will not change, and that we as CU's should have this available for our future. The damage of those that "block" our efforts in my opionion really lack understanding of the possible structure, etc. All they do is come up with threats of taxation, goverance structure change, instead of coming up with solutions or future needs. I really hope that you get this article out to CU Times or publications that have more wide audience,as I support the need of "options" for capital, etc. for our survival. The negative results of the lack of support in this area is what causes good CU's to convert to mutuals. As Chairperson with the National Association of Credit Unions (NACCU), we strongly urge our industry to further our efforts in this arena, and support those that help in opening "options" for us...especially as community credits realize that they have to offer more services (i.e. branch expansion, business lines, etc., which impacts our earnings -capital growth). Thanks for your time, Grace Mayo - Pres./CEO Telesis Community Credit Union
    Anonymous
     
     
     
  • Thank you for listing the converted CU's. It will help CU members make informed decisions by reviewing what happened to other CUs after conversion such as those that subsequently go on to a public stock company and to track what happens to rates after the bank starts paying income tax.
    Anonymous