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Letters to Regulators

Proposals Regarding Conversion of Insured Credit Unions to Mutual Savings Banks

December 1, 2003

Becky Baker, Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3248

Re: 12 CFR Part 708a; Conversion of Insured Credit Unions to Mutual Savings Banks

Dear Ms. Baker:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to offer the following comments on the National Credit Union Administration's (NCUA) proposals to revise its rules regarding the conversion of insured credit unions to mutual savings banks.

The NCUA proposals would require a converting credit union to disclose certain information in the notice to members of its intent to convert. Specifically, the converting credit union would have to disclose its intention to convert to a stock institution after becoming a mutual savings bank and whether the directors or senior management officials would receive any increased compensation or other conversion related benefits, including stock related benefits. The proposal also would require the converting credit union to disclose that conversion to a mutual savings bank could lead to members having diminished voting rights and losing their ownership interests in the credit union if the mutual savings bank subsequently converted to a stock institution and the members do not become stockholders.

These proposals originated out of the concerns by NCUA that a high percentage of credit unions that convert to mutual savings banks often undertake a second conversion to become a stock institution. According to the NCUA, it is possible under OTS regulations for a credit union that converts to a federal mutual savings bank to attempt to convert to a stock institution in less than two years. In the opinion of NCUA, the converting credit unions do not adequately discuss in the notice to credit union members the likelihood and ramifications of a second conversion to s stock institution. In most cases, a conversion from a mutual savings bank to a stock institution will result in a loss of ownership interest for a majority of its members because most members do not purchase stock in the institution. NCUA believes that full and proper disclosure to members that they could potentially lose their ownership interest in their credit union if it ultimately becomes a stock institution is key to describing the purpose and subject matter of the member vote adequately.

ICBA opposes any attempt by regulators to obstruct the right of a credit union to convert to a mutual savings bank. While the NCUA proposals only require a converting credit union to make additional disclosures to credit union members at the time of conversion, they are unnecessary disclosures and an additional legal hurdle that converting credit unions must meet prior to conversion.

When a mutual savings bank converts to a stock institution, FDIC rules require that the converting bank's stock be offered first to the depositors prior to being sold to the public. Depositors will have the opportunity to become stockholders or lose their ownership interests and will know in each case the ramifications of their choice. It is therefore unnecessary for a converting credit union to disclose to its members that if the mutual savings bank subsequently converts to a stock ownership, the members may lose their ownership interests and may not become stockholders. This will be fully disclosed to them if and when the mutual savings bank converts to a stock institution.

It is also an imposition on converting credit unions and their management to require disclosure of their future intention as to whether their will seek to convert to a stock institution and, if they do, whether directors and senior management officials will receive any increase in compensation and any stock related benefits. Converting to a stock institution is always an option for a mutual savings bank and one that management should always consider if additional capital is needed. Management of a converting credit union often will not know whether the institution will convert to a stock institution at some future time or what compensation arrangements for directors and management would be if the institution did convert. Even if they are interested in converting to a stock institution, management may not want to disclose their intention for fear that that disclosure will adversely influence the market for the institution's stock. Furthermore, when a conversion to a stock institution takes place, FDIC rules require that appropriate disclosures must be made to the mutual institution's stakeholders as to the consequences of conversion and whether senior management officials and directors will be receiving any additional compensation as a result of the conversion.

In conclusion, a credit union should have the right to convert to mutual savings bank without the obstacle of making unnecessary disclosures to its members about its intention to convert to a stock institution. If you have any questions or need any additional information, please contact Chris Cole, ICBA's regulatory counsel at 202-659-8111 or Chris.Cole@icba.org.


C.R. Cloutier

1 About ICBA: ICBA is the nation's leading voice for community banks and the only national trade association dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. ICBA has nearly 5,000 members with 17,000 locations nationwide. Our members hold more than $526 billion in insured deposits, $643 billion in assets and more than $405 billion in loans to consumers, small businesses and farms. For more information, visit www.icba.org.

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