R.I. CU Thinking of Leaving the Fold

Credit Union Times   July 30, 2008
By David Morrison

CRANSTON, R.I. — The $310 million Coastway Credit Union has announced that it is considering changing its charter to a state-chartered mutual bank.

In a July 18 press release and statement to its members, the CU cited increased capacity for business lending and the ability to build more branches as reasons for making the change.

"During our 88-year history serving our members has always been the top priority," said Bill White, president/CEO of Coastway, in a press release announcing the move. "This unanimous recommendation by our board reflects that commitment. We are confident that a charter change will have a positive impact on our members, along with the community as a whole."

"As a Rhode Island-chartered, member-owned mutual savings bank, the board of directors believes that growth will enable Coastway to increase its lending capacity to businesses, as well as to individual members," he said. "We also believe that the conversion will allow Coastway to consider further expansion of the number of branch locations."

"In our view, earnings from the enhanced lending ability will produce net earnings that Coastway will be able to reinvest in serving its members and the local community," White continued.

Sources familiar with the credit union said they were not terribly surprised to hear that its leadership was considering a charter change, since Coastway has been known for going its own way for some time.

According to its filings with NCUA, Coastway does not belong to any CUSOs nor participate in shared branching. The $310 million credit union participates in the SUM network, an ATM network administered as part of the NYCE ATM network, which provides surcharge-free ATM access but is not credit union-owned or managed.

Rob Kimmett, senior vice president with the Credit Union Association of Rhode Island, reported that Coastway has not affiliated with the association "in recent memory."

As a state-chartered credit union, Coastway’s first step in the charter change process was to notify members of the potential move and to invite their comments. Members have until Aug. 20 to comment to the CU; Coastway will have to include the comment letters with its conversion application, according to Michael Marques, director of the Department of Business Regulation, Rhode Island’s banking regulator.

If there are a number of letters opposing the move and the CU continues on its course, Marques said his department has the authority to hold a public hearing to air issues around the conversion.

If Coastway decides to go forward, Marques said, the CU will have to follow the NCUA’s disclosure and balloting procedures as well.

But Coastway differs from many other credit unions that have set off down the same path.

According to Coastway’s filings with NCUA, the credit union has a net worth ratio of 8.27%, compared to an average of 11.52% for its peer group. Many other credit unions that have sought to become banks have carried a significantly higher equity ratio. In previous charter changes that have been followed by secondary conversions to stock issuing organizations, larger pools of equity have helped fuel the stock offering. Coastway has not said whether it plans to convert to a stock issuing bank or not in the future.

Further, Coastway’s return on average assets stands at only 0.46% compared to 0.52% ROA for its peers, and the CU had a much lower ratio of members to potential members than its peers, 2.55% for Coastway compared to 23.66%. Both numbers have generally been higher among credit unions seeking to change charters.

Membership generally appears to be a problem for Coastway as well, as the NCUA data shows the credit union has lost members every quarter for the last year.

Coastway also carries a significantly higher delinquency ratio than its peers; In March 2008, Coastway’s delinquency ratio was 1.53% compared to 0.96% for its peers. As of June 2008, delinquencies jumped to 2.17%, but no peer data was available from NCUA at press time.

The CU’s call reports show that almost $2.5 million of its member business loans are at least one month delinquent, though none are over one year late. As of press time, Coastway had not responded to a request for an interview.

The CU’s member business loan data indicated that Coastway’s CEO did not exaggerate when he cited a need to increase the CU’s ability to make business loans as a reason to favor conversion to a mutual bank in a press release about the potential charter change.

Coastway’s filings with NCUA indicated the CU is right up against the statutory cap on member business lending of 12.25% of its total assets. According to Coastway’s documents, the CU had booked $37.6 million in member business loans as of the end of March 2008 or about 12.13% of its $310 million in total assets.

The credit union’s charter change application also draws attention to a little known tax that Rhode Island’s 11 state chartered credit unions pay but that the state-chartered banks do not.

Rhode Island taxes the deposits of credit unions larger than $150 million in assets at an annual rate of 6.95 cents on every $100 of the daily average of the deposits with the credit union during the calendar year. Credit unions with less than $150 million in assets pay a rate of 6.25 cents.

Based on the money Coastway listed on deposit as of March of this year, the CU would pay just over $132,000 in taxes, but no one from the credit union or its public relations firm was available as of press time to report exactly how much Coastway paid in taxes in 2007.

Banks used to pay the tax as well, but the state repealed the tax on bank deposits in 1998. Thus, White pointed out, while Coastway would pay federal taxes as a bank, it would not have to pay the state deposit tax.

Kimmett explained that Rhode Island credit unions had fought the retention of the tax for credit unions when it was repealed for banks, but budget pressures at the time blocked those efforts. Since then, he explained, the tax has remained in place in part because the credit unions had built the tax into their cost of operations, and it had become more or less "entrenched."