Decision relative to the conversion of Massachusetts Federal Credit Union to a state charter
By the Division of Banks
Massachusetts Federal Credit Union ("Massachusetts Federal" or the "Credit Union"), Braintree, Massachusetts, a federal credit union chartered by the National Credit Union Administration (the "NCUA"), seeks to convert to a state credit union charter under the name "Bay State Credit Union" (In its initial application, Massachusetts Federal proposed to change its name to "Massachusetts Credit Union" upon its conversion to a state-chartered credit union. It subsequently amended its application, changing its proposed name to "Bay State Credit Union" after an objection by another credit union having a similar name.) pursuant to the provisions of Massachusetts General Laws chapter 171, section 80. It also seeks other related authorities. (Massachusetts Federal has also applied to designate its 333 Longwood Avenue, Boston office as its main office pursuant to G. L.c.171, s.8, and to retain certain nonconforming assets for a limited period of time pursuant to G. L. c.171, s.80.)
Notice of the application was posted and published as required by the Division of Banks (the "Division"). The membership of the Credit Union has voted favorably on the conversion by more than the majority of members present and voting at a Special Membership Meeting held on February 12, 1997. (Massachusetts Federal filed a separate application with the NCUA to convert to a state charter under 12 USC 1771(a). The Credit Union, however, is revising its member information materials at the direction of the NCUA. An additional membership vote on the conversion is anticipated in order to satisfy NCUA conversion requirements.) A public hearing on the application was held on March 24, 1997, to receive oral and written testimony from interested parties. (Several interested parties testified at the public hearing in addition to the petitioning credit union. Testifying in support of Massachusetts Federal's application were: the manager of the South End Federal Credit Union; two credit union trade associations, MassCUNA and the Credit Union League of Massachusetts; a representative of the Boston Teachers Union; and, two taxicab drivers who are select employer group members of the Credit Union. A banking trade association, the Massachusetts Bankers Association, testified in opposition to this application. Adverse comments were also received from the Community Bank League of New England.) The initial and extended deadlines for filing comments and supplementary materials have passed.
Facts
As described in the submitted documents, Massachusetts Federal is an "occupational" credit union whose membership includes approximately 144 "select employer groups" as defined under the NCUA's field of membership regulations. The select employer groups are primarily drawn from the Metropolitan Boston area. The Credit Union was originally chartered on February 27, 1952, as the Boston Teachers Federal Credit Union. It was formed to serve " ... employees of the School Committee of Boston; employees of the Credit Union; members of their immediate families and organizations of such persons." Its current membership consists of approximately 12,250 individuals. The Credit Union's membership is derived primarily from the field of education although it includes unrelated employer groups acquired largely through merger and membership sphere expansions. (The Credit Union's diverse field of membership is one of several factors contributing to the Credit Union's decision to seek a credit union charter from the Commonwealth. Ongoing litigation in the federal courts, commonly referred to as the AT'T Family Federal Credit Union litigation, has clouded whether a federal credit union may lawfully extend membership to multiple employer groups which are unrelated to its original field of membership under the "common bond" provisions of the National Credit Union Act, 12 USC 1759. ( See, First National Bank and Trust Company v. National Credit Union Administration, 90 F.3d 525 (D.C. Cir. July 30,1996)). Certiorari has been granted by the United States Supreme Court.)
As of December 31, 1996, Massachusetts Federal had assets of approximately $59.7 million and shares and deposits of $47.9 million. The Credit Union offers a wide array of deposit services and credit products to its members. Consumer credit products include home mortgages, personal loans, credit cards, car loans, boat loans, and other types of consumer loans. It has also offered limited business or commercial loans to its members to the extent permitted under federal law.
At the time of its application, Massachusetts Federal served its membership from five banking offices located in Boston; Dorchester; Stoneham, as of March 1997; and, Braintree, its current main office. (As part of its charter conversion, the Credit Union will relocate its main office to Boston. See, Supra at 1, note 2.) It does not maintain branch offices outside of the Commonwealth. The Credit Union also maintains a shared branch office with the South End Federal Credit Union, a low income community development credit union serving low to moderate income Hispanic members of Boston's South End neighborhood. Under this arrangement, the Credit Union acts as a mentor to the small, urban credit union. It provides managerial, operational, overhead and financial support to the South End Federal Credit Union. Massachusetts Federal's direct financial support is in the form of a zero interest rate $100,000 non-member share certificate and a monthly rental fee for the use of the shared South End facility.
Discussion
This is the first petition of a federal credit union to convert to a state credit union charter in this decade. During this same period of 1990 to 1997, fourteen Massachusetts credit unions converted to a federal charter. Recent history suggests that charter conversion "traffic" has been decidedly "one way" within the Massachusetts credit union movement. The Commonwealth's banking and credit union statutes, however, clearly envision and support the "Dual Chartering System," so called, whereby state-chartered financial institutions may convert relatively freely to a federal charter and federally-chartered financial institutions may similarly convert to a state charter. ( See e.g., G.L. c.168, ss. 36-38; G.L. c.170, ss. 28-29; and G.L. c.172, s.36, governing charter conversions by savings banks, co-operative banks and trust companies, respectively.) The Dual Chartering System has been widely credited as the basis for innovation within the banking industry.
The conversion of a federal credit union to a Massachusetts credit union charter is governed by Section 80 of Chapter 171 of the General Laws. The statute establishes the general framework under which a federal credit union may incorporate as a state-chartered credit union. (The statute provides in pertinent part: "Any credit union operating under a charter other than one issued by the commonwealth and having a usual place of business therein may, if authorized by a vote of at least a majority of its members present and voting at a meeting specially called for that purpose, make application to the commissioner for consent for incorporation under this chapter. Said commissioner may grant his consent ... when satisfied that the assets of such credit union qualify for investment by a credit union incorporated under this chapter. If any of the assets of the applicant credit union do not qualify as legal investments ... such consent may nevertheless be given, subject to such terms with respect to the time in which the same shall be disposed of or converted into legal assets as the commissioner may impose..." (Emphasis supplied.) The remainder of the statute details the procedures for the issuance of a charter and its legal effect.) Through the application and approval process the Division has established additional regulatory criteria for the approval of bank and credit union charter conversions. They include an assessment of the regulatory, business or strategic reasons for converting; the applicant's financial and managerial resources; the competitive effects of the proposed transaction; whether the public convenience and advantage will be promoted; the applicant's record of performance or ability to comply with the Massachusetts Community Reinvestment Act (the "CRA"); ( See, G.L. c. 167, s.14, and 209 CMR 46.00, et seq., its implementing regulations.) and, whether other applicable statutory criteria are satisfied.
Under these administrative and statutory charter conversion standards, a converting credit union must specifically demonstrate the following: (1) it is a well capitalized, well managed institution which is not in troubled condition (as evidenced by recent federal and/or state reports of examination or visitation); (2) it is not converting in order to evade informal or formal remedial action by the NCUA, its federal chartering authority; (3) it will be able to continue to serve its members' deposit and credit needs as a state-chartered credit union; (4) its conversion will promote public convenience and advantage; (5) its conversion will not adversely affect competition among banking institutions; (6) it will be able to meet its obligations and responsibilities under the Massachusetts CRA law; (7) its membership has cast the necessary votes to approve the conversion; (8) statutory lending and investment limitations are met or will be met within a reasonable period; and, (9) its proposed charter and bylaws will comply with Chapter 171 of the General Laws.
The Division's review of the complete application and comments received demonstrates that Massachusetts Federal meets the preceding requirements for conversion to a state-chartered credit union.
Massachusetts Federal is a well capitalized and well managed credit union. As of December 31, 1996, the Credit Union had a net capital to assets ratio of 20.2% and a return on average assets of 2.4%. Its financial performance compares quite favorably to its credit union industry peers. Moreover, publicly available financial data, as well as confidential supervisory reports, confirm that the Credit Union has a strong balance sheet and earnings record.
Massachusetts Federal has also demonstrated that it has legitimate and well thought out regulatory, business and strategic reasons for seeking a state charter. It is not converting to escape remedial supervisory action by its current chartering authority. Legal uncertainty over the ability of occupational federal credit unions with multiple unrelated select employer groups to add new members from existing groups, in the short term, and their ability to retain existing or add new employer groups with an unrelated "common bond" to their original membership, in the long term, presents potentially significant adverse strategic and business implications for Massachusetts Federal. ( See, Supra at 3, note 4, relative to the AT'T Family Federal Credit Union litigation.) Current Massachusetts credit union membership eligibility requirements are separate and distinct from, and more liberal than, comparable provisions of the National Credit Union Act. (G. L. c. 171, ss.9-10, which govern membership by-law provisions for state-chartered credit unions, do not contain limiting express "common bond" membership eligibility requirements. See, Decision Relative to the Application of Pittsfield G.E. Employees' Credit Union, Pittsfield, Massachusetts to Amend its By-laws Governing the Associations Which Qualify Persons for Membership, (August 13, 1992) at 3-5.) Under a state charter, Massachusetts Federal would be able to continue to serve its existing field of membership without legal uncertainty. Moreover, it would avoid the potential prospect of having to divest multiple unrelated select employer groups with its attendant adverse financial consequences.
A charter conversion for the purpose of operating under a more favorable statutory, legislative or regulatory structure and climate is not an impermissible motive. (The ability to engage in expanded member business lending or to establish out of state branches to serve members under the National Credit Union Act have been common business or strategic reasons for state-chartered credit unions to convert to federal charters. For similar business and strategic reasons, two Massachusetts savings banks have converted to federal savings bank charters since 1993, in order to consolidate their interstate operations under the broad and unrestrictive interstate branching authorities accorded federal thrift institutions under federal law. See e.g., Decision Relative to the Petition of Family Mutual Savings Bank, Haverhill, Massachusetts to Convert to a Federally-chartered Savings Bank, (October 26, 1995) at 2-3.) In fact, the Dual Chartering System's "two way street" is designed to promote such flexibility and to encourage charter innovation among the states and the federal government. Financial institutions should be able to choose a charter that assists an institution in attaining strategic business goals or interests.
Failure to convert to a state charter may also deprive existing and potentially eligible members of Massachusetts Federal of access to credit union services until either Congress acts or the United States Supreme Court renders its decision in the AT&T Family Federal Credit Union litigation. This legal uncertainty does not benefit the Credit Union or its members. (In response to a question from the Division at the March 24, 1997 public hearing, Massachusetts Federal's Chairman unequivocally stated that the Credit Union Board's decision to convert was based on long term advantages to the membership and that they would not seek to convert back to a federal charter if the AT'T Family Federal Credit Union litigation was ultimately resolved in favor of the NCUA.) The Division also notes that the generally more restrictive credit union powers under Chapter 171 of the General Laws will not result in a diminution of deposit and credit services available to members. Moreover, the state statutory mandate requiring full insurance for member shares and deposits may result in additional member benefits. (G. L. c. 171, s.30 limits the maximum shares and deposits a credit union may accept. It also requires excess share insurance from the Massachusetts Credit Union Share Insurance Corporation ("MSIC") for shares and deposits in excess of federal share insurance limits. As part of the charter conversion process, Massachusetts Federal is seeking continuation of its share and deposit insurance from the National Credit Union Share Insurance Fund and also has applied for excess insurance from MSIC.)
The public convenience and advantage will be promoted by the continuation of credit union services to Massachusetts Federal's existing and eligible members. It will also preserve the Credit Union's financial strength and enhance its future prospects. Credit Union members, employees, and their communities as well as local businesses, will benefit from the uninterrupted continuation of services, as well as continued and expanded federal and private industry sponsored share insurance coverage, under a state charter.
The impact on competition among financial institutions, including both banks and credit unions, resulting from an approval of this conversion was also the subject of review by the Division. The conversion in and of itself will not directly or negatively impact other financial institutions. Massachusetts Federal is an existing competitor in its market. The Credit Union's charter conversion essentially is a change in corporate form and would not affect competition. Any subsequent expansion of its field of membership, however, would be subject to the membership by-law amendment provisions of Section 10 of Chapter 171 of the General Laws. ( See, Decision Relative to the Application of Pittsfield G.E. Employees' Credit Union, Pittsfield, Massachusetts to Amend its By-laws Governing the Associations Which Qualify Persons for Membership, (August 13, 1992) at 3-5; Decision Relative to the Application of Pittsfield G.E. Employees' Credit Union, Pittsfield, Massachusetts to Amend its By-laws to Change Both the Name of the Credit Union and the Associations Which Qualify Persons for Membership, (February 25, 1995) at 6-9 (setting out the Division's administrative standards for reviewing credit union membership by-law expansion amendments).) Accordingly, the analysis of the competitive effects of this application are not inconsistent with its approval.
The Division has considered whether Massachusetts Federal will be able to comply with the Massachusetts CRA Law. The federal CRA law does not apply to federal credit unions. The Credit Union's charter conversion application states that it is aware of and understands the Massachusetts CRA. The Credit Union also expects to be in full compliance with the CRA based on its current record of servicing the credit needs of its members, including low and moderate income persons. Massachusetts Federal's willingness and apparent ability to comply with the CRA support approval of this application. The Division, however, will independently verify the Credit Union's actual record of performance under the CRA, through a visitation within six months of its conversion to a state charter.
The Division also concludes that Massachusetts Federal has met the remaining statutory criteria for approval of this proposed transaction. The Credit Union has obtained the necessary membership vote to approve the conversion; it meets or will meet statutory investment and lending limitations within a reasonable period; (The Credit Union's application identifies its nonconforming assets under Massachusetts law, as of December 31, 1996. They include approximately: 12 residential mortgage loans over $200,000; 42 consolidation loans; 16 business member loans; and a $100,000, zero interest share certificate with the South End Federal Credit Union. The Credit Union has committed to promptly eliminate most nonconforming assets outstanding on the effective date of conversion. Massachusetts Federal also has requested authority under G. L. c.171, s.80, to amortize existing loans according to their terms and hold nonconforming investments until maturity, provided that they are not renewed at maturity or otherwise retained except in conformity with applicable provisions of Massachusetts credit union law. Massachusetts Federal, however, would be permitted to renew its $100,000 share certificate with South End Federal Credit Union if SECTION 14 of House 35, An Act Modernizing the Banking Laws, is enacted into law in the 1997-1998 session of the General Court. This legislative recommendation of the Division would expressly authorize non-member deposits in community development credit unions.)and, its proposed charter and bylaws will comply with Chapter 171 of the General Laws. (The Credit Union's current by-laws and proposed by-laws were reviewed for conformity to Massachusetts credit union law. Certain proposed by-laws concerning internal management or corporate governance of the Credit Union, such as provisions on notice required for and the holding of meetings of the membership, the minimum number of Directors permitted on the Board, the manner of conducting or holding various elections and votes, and the powers afforded the Board of Directors, were inconsistent with state requirements. These matters were brought to the attention of Massachusetts Federal and were addressed during the Division's internal application review process.)
Based upon Massachusetts Federal's application and the full record before the Division, approval is hereby granted pursuant to Section 80 of Chapter 171 of the General Laws for the Credit Union to convert to state charter under the name "Bay State Credit Union;" to maintain and operate all existing banking offices under the provisions of Chapter 171 of the General Laws; (Massachusetts Federal is authorized under state law to retain and operate its shared branch facility with South End Federal Credit Union. State-chartered credit unions, unlike state-chartered banks, are not subject to G. L. c.167C, s.5, which prohibits shared facilities. But see, House 34 An Act Relative to the Agency Powers of Banks to Provide Certain Banking Transactions and Share Office Locations (A 1997-1998 legislative recommendation of the Division which would repeal G. L. c.167C, s.5).) and, to designate 333 Longwood Avenue, Boston, as its main office pursuant to Section 8 of Chapter 171 of the General Laws.
The approvals granted herein are subject to the following conditions:
- that the Credit Union's final by-laws and amended and rstated charter are filed with, and approved by, the Division and that said amended charter is also filed with the Secretary of State;
- that the Credit Union obtain confirmation of the continuation of insurance of its shares and deposits from the NCUA;
- that the Credit Union obtain and maintain full insurance of all share and deposit accounts as required under Section 30 of Chapter 171 of the General Laws;
- that all of the Credit Union's nonconforming assets and other investments are disposed of or converted into legal investments for a Massachusetts state-chartered credit union no later than two years from the date of this Decision; provided, however, that the Credit Union may amortize existing loans according to their terms and retain investments until their maturity, and provided further, that such loans and investments are not renewed at maturity or otherwise retained except in conformity with applicable provisions of Massachusetts credit union law; and,
- that the proposed charter conversion be completed within six months of the date of this Decision unless otherwise extended for cause.
| August 8, 1997 Date | Thomas J. Curry Commissioner of Banks |