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The Charter Choice: Credit Union vs. Bank Presented By: Richard S. Garabedian, Esq. Kent M. Krudys, Esq. Luse Gorman Pomerenk & Schick, PC 5335 Wisconsin.

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Presentation on theme: "The Charter Choice: Credit Union vs. Bank Presented By: Richard S. Garabedian, Esq. Kent M. Krudys, Esq. Luse Gorman Pomerenk & Schick, PC 5335 Wisconsin."— Presentation transcript:

1 The Charter Choice: Credit Union vs. Bank Presented By: Richard S. Garabedian, Esq. Kent M. Krudys, Esq. Luse Gorman Pomerenk & Schick, PC 5335 Wisconsin Avenue, NW, Suite 780 Washington, DC Phone: (202) Fax: (202) CUES Directors Conference December 8, 2009

2 1 Who We Are Luse Gorman Pomerenk & Schick is a Washington, D.C. based law firm that specializes in the areas of financial institutions regulatory and transactional law, as well as employee benefits and taxation. Our practice focuses on regulatory compliance, cooperative business combinations and mergers, charter conversions, capital formation, securities law compliance, corporate governance, executive compensation and employee benefits.

3 2 Charter Conversions Completed By Luse Gorman Pomerenk & Schick Monadnock Community Bank Ohio Central Savings Carolina Federal Savings Bank Kaiser Federal Bank Pacific Trust Bank Atlantic Coast Bank HeritageBank of the South Allied First Bank Roper FCU* Community Plus Savings Bank Beacon Federal Caney Fork Cooperative CU* Salt City Hospitals Employees FCU* Professional Teachers CU* Marcy FCU* Coastway Community Bank ** _________ * Merged with a pre-existing thrift immediately following conversion ** Completed July 1, 2009

4 3 Overview Comparison of the material features of the bank charter with the credit union charter. Case studies of previous charter conversions. Alternative forms of capital.

5 4 What Charter Conversion Means More flexibility to serve members and local community at large Ability to serve customers and local community with expanded products and services and increased customer access Ability to attract board and management from more sources and with expansive multi-product talent Greater ability to compete in an ever increasing competitive environment Increased capacity to generate capital

6 5 What Charter Conversion Does Not Mean Abandoning Members – may retain general credit union philosophy and customer orientation Raising Service Charges and Other Fees Higher Loan Rates and/or Lower Deposit Rates – rates remain market driven Changing Business Strategy – except if need to change loan portfolio composition for regulatory compliance purposes New Management/Board Members Compensation Pressure

7 6 Some Questions to Ponder What is the future of the credit union charter? Should your business plan drive your charter or should your charter drive your business plan? What is your credit unions mission? Are you a credit union for the benefit of your members or the industry? all for one and one for all vs. protecting your own

8 7 Some Questions to Ponder What is the likelihood of increased member business lending authority? NCUA What is the likelihood of secondary capital? No consensus What will be the full financial impact of the corporate credit union crisis and the future failure of retail credit unions? NCUSIF vs. FDIC – pick your poison.

9 Credit Union Credit Union Mutual Bank State Chartered State Chartered Federally Chartered - State- OTS - FDIC or FRB Benefits: Increased lending authority Lower capital requirements Ability to access capital in the future Broader customer base A B (35)

10 9 What is a Mutual Bank? Member owned cooperative Historically – devoted to residential mortgage lending Present – also makes commercial real estate and business loans, as well as consumer loans May be either state or federally chartered

11 10 Mutual Bank and Credit Union Similarities Created to encourage savings Community oriented Serve customers Not for profit Owned by their members One person, one vote Similar balance sheets in many cases

12 Mutual Bank (600) Mutual Bank (600) Stock Bank State Chartered State Chartered Federally Chartered Federally Chartered Savings Bank Commercial Bank Savings Bank Savings Bank Mostly small closely-held community banks (7,000) Mostly small closely-held community banks (7,000) Mega Bank - BOA - Citi Mega Bank - BOA - Citi (17)

13 12 Regulatory Comparisons

14 13 Mutual Bank Charter Overview No FOM Retain mutuality while adding customers Lower capital requirements Ability of members to become true owners Federal pre-emption for federal thrifts Unlimited branching for federal thrifts Capital leverage Broader business loan authority Enhanced diversification Access to secondary capital Charter restraints are virtually eliminated No NCUSIF 1% deposit Board stability Investment earnings enhanced

15 14 Disadvantages of Mutual Bank Charter Taxation Profit motivation Impact on members Loss of Credit Union Philosophy (Stock Bank Only) Community Reinvestment Act (CRA) Compliance burden Lending risk

16 15 Disadvantages of Mutual Bank Charter Potential reduction in marketing niche Compensation The greed factor Pressure to increase compensation Federal charter - asset limits on consumer loans other than credit card, educational and account secured loans

17 16 Loan Portfolio Limits Overview Federal Thrift Limits (mutual or stock bank) Residential real estateNo limit Credit cardsNo limit Account securedNo limit EducationalNo limit Consumer35% of assets Commercial real estate4x total capital Commercial & industrial10% of assets plus 10% for small business Auto/equipment leasing10% of assets

18 17 Loan Portfolio Limits Overview Commercial Bank Limits Residential real estateNo limit Credit cardsNo limit Account securedNo limit EducationalNo limit ConsumerNo limit Commercial real estateNo limit Commercial & industrialNo limit Auto/equipment leasingNo limit

19 18 Federal Thrift / Commercial Bank Investments Government and agency securities Generally, investment-grade corporate debt MBS Mutual funds (holding permissible investments) Loans-to-One-Borrower Limits Legal lending limit – generally 15% of unimpaired capital Branching Flexibility Federal thrifts – unrestricted intrastate and interstate Commercial banks – generally unrestricted Federal Preemption Ability to export interest rates to other states OTS takes aggressive position on preempting state law

20 19 Mutual Bank Membership Rights Membership Rights Following Charter Conversion Credit union members become mutual members Mutual members continue to be viewed as owners of equity Mutual members continue to elect directors Voting Rights Mutual members can vote by proxy Continue 1 vote per member or 1 vote per $100 on deposit, up to 1,000 maximum votes Voting rights continue with mutual holding company Members must vote on issuing stock or forming mutual holding company

21 20 Community Reinvestment H.R – would extend CRA to credit unions Chairman Frank has suggested extending CRA to credit unions National Community Reinvestment Coalition Study – banks better serve LMI borrowers, minorities, etc.

22 21 FDIC Capital Requirements Required Ratios Core Capital: 4% of assets Tier 1 Risk-Based Capital: 4% ratio of core capital to risk- weighted assets Risk-Based Capital: 8% ratio of core capital + supplementary capital to risk- weighted assets Well-capitalized Ratios Core Capital:5% of assets Tier 1 Risk-Based Capital:6% ratio of core capital to risk- weighted assets Risk-Based Capital:10% ratio of core capital + supplementary capital to risk weighted assets Risk Weighting of Assets for Regulatory Capital Assigns assets to categories based upon asset risk classification (0% to 100%)

23 22 FDIC Capital Requirements Risk Weighting of Assets 0% - cash, U.S. Government and agency securities (backed by full faith and credit) 20% - U.S. Government sponsored agencies, FHLB stock 50% - qualifying single family and multi- family loans 100% - consumer loans, commercial loans

24 23 FDIC Insurance FDIC Deposit Insurance Premiums generally based on exam rating and capital level – have recently increased. Range from 12 to 45 basis points, subject to decrease for unsecured liabilities and increase for brokered deposits and secured liabilities. Proposed - Prepayment of premiums for 2010 – 2012 and 3 basis point increase No required deposit with insurance fund NCUSIF deposit – currently a non-earning asset No entrance premium at this time Performance is rewarded

25 24 Tax Impact Banks Are Subject to Income Taxation Federal income tax Applicable state income tax and/or franchise taxes Credit Unions Are Subject to Hidden Taxes Higher credit union capital requirements restrict growth potential NCUSIF deposit – currently a non-earning asset NCUA disfavors long-term assets? Exchange Hidden Taxes for Income Taxes in Charter Conversion Excess equity has potential to be fully leveraged (given lower capital requirements) Bank can pursue a broader customer base, an expanded product line and enhanced branching powers to realize such growth

26 25 Tax Impact Illustration Growth and Leveraging Opportunities Favor Banks As a Credit Union7% equity ratio requirement As a Bank 5% equity ratio requirement Greater Size Capacity: With $7 Million Equity - As a Credit Union$100 million maximum assets As a Bank $140 million maximum assets Similar Earnings: Assuming 1% Pre-tax ROA & 34% Income Tax As a Credit UnionEarnings = $1,000,000 (No tax) As a Bank Earnings = $924,000 (After-tax) Illustration Does Not Incorporate Earnings Advantage of Potential for broader product line and customer base Expanded presence through enhanced branching Capital raising capacity to fund expansion and diversification

27 26 Structural Considerations

28 27 Alternative Corporate Structures Structure Options 1. Mutual Form of Ownership 3. Mutual Holding Company <50% Public Stock 4. Stock Holding Company 100% Public Stock 2. Mutual Holding Company No Public Stock

29 28 Form of Ownership Mutual Form of Ownership Members Directors Mutual Bank Advantages: No pressure from stockholders Increased lending authority Increased customer base Lower capital requirements

30 29 Form of Ownership Private Mutual Holding Company Members Directors Mutual Holding Company Subsidiary Holding Company Bank 100 % Advantages: Create maximum flexibility for mergers and accessing capital Can raise capital incrementally in future, as needed Can raise equity without public stockholders (trust preferred securities)

31 30 Form of Ownership Public Mutual Holding Company Members Directors Mutual Holding Company Subsidiary Holding Company Bank Public Stockholders: - Members - Employees - Management/directors - Community - Others 45% 55 % 100 % Advantages: Control remains with MHC Raise capital Equity ownership for employees, management and directors Stock based benefit plans to reward, attract and retain employees/management/ directors Disadvantages: Public stockholders

32 31 Form of Ownership Fully Stock Bank Public Stockholders - Depositors - Employees - Management/Directors - Community - Others Bank 100% Advantages: Maximize capital raised Disadvantages: Potential loss of control Holding Company

33 32 Mutual Holding Company Stock Issuance Member Subscription Rights Mutual members have priority subscription rights to purchase stock Directors and officers have no greater right to buy stock than the members In most cases the members buy all the stock that is offered Benefits to Employees Stock should provide employees with real ownership incentive An Employee Stock Ownership Plan (ESOP) provides an additional retirement plan Benefit plans such as stock options and restricted stock can also be used These stock benefit plans are heavily regulated by the bank regulators

34 33 Strategic Acquisition Opportunities Acquisition Opportunities as a Mutual Bank Credit unions Mutual banks MHCs Stock banks and commercial banks Acquisition Opportunities as a Bank in MHC Form Credit unions Mutual banks MHCs Stock banks and commercial banks Acquisition Opportunities as a Stock Bank Credit unions, mutual banks or MHCs Other stock banks and commercial banks

35 34 What Lies Ahead

36 35 Future of Thrift Charter The Administrations Regulatory Reform Proposal would eliminate the federal thrift charter The Proposal does not affect the state thrift charter The Proposal does not address the mutual federal thrift charter Likely that a mutual national bank charter would be created to cover existing mutual federal thrift charter Federal thrifts would become national banks through a transition period National Credit Union Act would need amendment to allow conversion to the mutual national bank charter

37 36 Dispelling Myths FDIC is not granting federal deposit insurance Bank regulators not accepting new charters Conversions not possible due to recapitalization of NCUSIF

38 37 Due Diligence Deciding whether to convert or remain a credit union is a process, not a snap decision Do your homework, talk with advisors, other converted institutions, engage in a financial analysis Your duty is to your members, not the industry

39 38 Key Regulatory Issues with Conversion Capital is King At least 8% equity Control growth if necessary Asset Quality Trends are very important Exam Rating Business Plan BSA Move forward when strong

40 39 Conversion Business Plan Business Plan Requirements Must comply with interagency business plan guidelines Should follow this plan for first 3 years following conversion New FDIC policy – extends to 7 years for its supervised banks Must receive prior approval to materially deviate from plan Financial Projections: 3+ years, prepared quarterly Generally consistent with quarterly regulatory financial reports Include balance sheet, income statement, capital, key ratios Demonstrate ability to meet growth, diversification, profitability objectives and strategies

41 40 Conversions Completed to Date 8 mutuals 11 full stock conversions plus Omni 5 MHCs with public stock outstanding 10 mergers (mutual to mutual, mutual into stock) 2 in process

42 41 Coastway Credit Union Converted to a Rhode Island mutual savings bank in July 2009 Main reason for conversion – member business lending Conversion will allow more growth and public presence 80% of the membership voted in favor

43 42 Allied Pilots Association FCU In 2001 converted to an Illinois mutual savings bank – Allied First Bank Main reason for conversion – capital Converted to stock in 2001 to raise capital Grew 110% in eight years Continues to have a strong pilots base

44 43 Beacon FCU Converted to Beacon Federal in 1999 Main reason for conversion – membership growth Acquired four credit unions from 2000 to 2006 Converted to stock in 2008 and raised $74 million in new capital Grew 600% in ten years Branches in four states

45 44 Kaiser Permanente FCU Converted to Kaiser Federal Bank, a federal thrift, in 1999 Main reason for conversion – membership growth Formed a mutual holding company and raised $56 million in new capital in 2004 Grew 600% in ten years Continues to have a strong Kaiser Healthcare base

46 45 LUSE GORMAN POMERENK & SCHICK A PROFESSIONAL CORPORATION ATTORNEYS AT LAW 5335 Wisconsin Avenue, N.W., Suite 780 Washington, D.C TELEPHONE (202) FACSIMILE (202)


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